Healthcare Sector Sector to outperform in 2014, but being selective is key

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1 11 December 2013 Sector report Healthcare Sector Sector to outperform in 2014, but being selective is key Valuation summary Mkt cap P/E EPS CAGR PEG P/B ROE Company Ticker Rating Currency TP Px (USD) '13E '14E '15E ('12E-'15E) '13E '14E '15E '13E '14E '15E '13E '14E '15E China Shineway Pharmaceutical 2877-HK Group Buy Limited HKD , x 10.8x 10.5x 2% 4.5x 4.6x 4.5x 1.9x 1.8x 1.7x 15.7% 14.3% 13.5% CSPC Pharmaceutical Group 1093-HK Ltd. Buy HKD , x 23.8x 18.7x 30% 1.0x 0.8x 0.6x 4.4x 4.0x 3.5x 12.6% 14.8% 16.2% Lee's Pharmaceutical Holdings 950-HK LimitedBuy HKD x 21.5x 18.2x 21% 1.2x 1.0x 0.9x 5.1x 4.3x 3.7x 21.3% 21.6% 21.2% United Laboratories International 3933-HK Holdings LT Buy Ltd. HKD x 11.3x 29% 1.1x 0.4x 2.7x 3.8x 4.7x 3.1% 8.0% China Traditional Chinese Medicine 570-HK Co. LT Limited Buy HKD , x 22.0x 17.9x 15% 2.3x 1.5x 1.2x 2.2x 2.5x 2.3x 5.9% 10.1% 11.2% estimates (Priced on 12/5/2013) We are initiating coverage on the healthcare sector at Outperform. This report features 3 chemical drug and 2 traditional Chinese medicine (TCM) companies. We like companies such as Shineway Pharma (2877.HK) which is a TCM injectables leader with high net cash and minimal anti-corruption risks. We are expecting more from the healthcare sector in 2014: Our China healthcare index has outperformed HSI by over 30% 2013 YTD, trading at a trailing P/E of 17.8x (+15% higher than the 10-year average of 15.5x). Anticipating more upside than downside risks in 2014, we expect more outperformance from the sector. We see ST beneficiaries of the latest reform guidelines include: 1) TCM companies to be supported by the government on pricing strategies (less price cut risk than chemical drugs); and 2) pediatric focused companies to get help from relaxed one-child policy. LT beneficiaries include: 1) SOEs to improve operating efficiencies in the long run; and 2) healthcare services companies (e.g. hospitals) to improve/benefit with more private money inflow (improved quality leads to higher patient traffic). We have BUYs on Shineway, CSPC Pharm and Lee s Pharm: Our analyses shows that Shineway Pharmaceutical (2877.HK) has the highest upside potential thanks to its low valuation, intact recovery story and readiness to acquire companies and/or products before the upcoming new GMP deadline by year end The stock is currently trading at our ex-cash 2014E P/E of 6.8x. Our probability weighted average DCF-derived TP of HK$18.0 implies our 2014E P/E of 17.8x and ex-cash P/E of 13.8x. This is followed by CSPC Pharm (1093.HK), which should remain one of the leading chemical drug players in the long run for its innovative drugs and strong R&D pipeline. Our DCF-derived TP for the company is HK$6.5 implying our 2014E P/E of 29.9x. The high P/E is justified by its 13E- 15E EPS CAGR of 30% and industry PEG ratio of 1x. We expect Lee s Pharm (950.HK) to trade to our DCF-derived TP of HK$8.8, implying a target 2014E P/E of 26.1x and a PEG ratio of 1.2x. The higher PEG ratio should be justified by the company s high earnings visibility and sustainability thanks to its unique dual R&D business model. The United Labs (3933.HK), a sustainable cost saving story, could surprise the street on the upside as early as 2H14, despite the high net gearing ratio. We expect the company to trade to our normalized 2015E P/E of 13.9x. We also like CTCM Pharma (570.HK), a serious TCM contender in the long run, but we believe near term prospects have been largely priced in as the stock is trading at our 2014E P/E of 22.0x versus our target P/E of 23.4x. Healthcare Sector Initiation of coverage We expect the sector to trade higher in 2014 as we see more positive than negative risks ahead: (+) Recently released reform guidelines prompt ST/ LT healthcare beneficiaries, (+) industry consolidation, (-) ongoing anti-corruption could curb sales in 1H14. BUYs: Shineway (2877.HK), CSPC Pharma (1093.HK) and Lee s Pharm (950.HK) LT Buys: The United Labs (3933.HK), CTCM (570.HK) Healthcare sector forward P/E Off-shore healthcare hist P/E band +1 stdev mean Source: Bloomberg, Factset, BOCOM Int l 1 Year Sector Performance Jan UP MP OP 1-Feb 1-Mar 1-Apr Offshore healthcare index Hang Seng Index 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov Source: Bloomberg, Factset, BOCOM Int l Christopher Lui Christopher.lui@bocomgroup.com Tel: (852) Catalysts: 1) Earnings release, 2) M&As in the space, and 3) drug inclusions/price cuts on the next version of NDRL/EDL.

2 Healthcare Sector 11 December 2013 TABLE OF CONTENTS Our view on the healthcare sector in Shineway Pharma (2877.HK) - Market not giving Shineway any credit for future growth CSPC Pharma (1093.HK) - Innovative drugs to drive growth Lee s Pharm (950.HK) - Dual R&D platforms provide visibility and sustainable growth The United Labs (3933.HK) - Market share gain and cost saving starting 2H China Traditional Chinese Medicines (570.HK) - Emerging TCM contender

3 Healthcare Sector 11 December 2013 Figure 1: SWOT analysis of the healthcare sector Strengths: Large population and higher economic growth Industry is defensive Healthcare demand remains solid driven by 1) aging population, 2) chronic disease prevalence, and 3) rising healthcare awareness Government is very supportive (from R&D subsidiaries to paying patients medical bills) More R&D efforts are in place, which support a sector re-rating in the long run Opportunities: Industry is fragmented and to see increased consolidation More critical illness drugs likely to be placed in the next version of NDRL Ongoing anti-corruption campaign may drive domestic drugs to gain market share from imported drugs Increase in private investment in healthcare including hospitals Growing middle class Increasing insurance coverage and commercial insurance Source: BOCOM Int l Weaknesses: Threats: Hospital reform a hurdle, e.g. high drug sales dependency in hospitals Multiple layers of distributors have made end-user drug costs very high Lack of IT systems and shortage of skilled staff in rural areas reduce efficiencies Healthcare expenditure as a % of GDP is low compared with other countries Enforcement of patent protection Drugs in the NDRL/EDL could see price cuts from time to time Multinationals are still on the upper hand in terms of market share and market perception in terms of safety and quality Top-tier cities growth is slowing down 3

4 Healthcare Sector 11 December 2013 Our view on the healthcare sector in 2014 Sector should start to trade higher in 2014: Current historical P/E for the sector is 17.8x, 15% higher than the 10-year historical average of 15.5x. Given our belief of more upside than downside risks in 2014, we expect the sector to trade above the current levels. We like companies such as Shineway Pharma (2877.HK) which is a TCM injectables leader with high net cash and minimal anti-corruption risks. Our China healthcare index has outperformed HSI by over 30% 2013 YTD. Anticipating more upside than downside risks in 2014, we expect more outperformance from the sector. Healthcare companies should regain traction from the recently released favorable reform guidelines, of which we anticipate positive industry implications. Latest reform guidelines prompt beneficiaries: We see ST beneficiaries of the latest reform guidelines include: 1) TCM companies to be supported by the government on pricing strategies (less price cut risk than chemical drugs), and 2) pediatric-focused companies to get help from relaxed one-child policy. LT beneficiaries include: 1) SOEs to improve operating efficiencies in the long run, 2) healthcare services companies (e.g. hospitals) to improve/benefit with more private money inflow (improved quality leads to higher patient traffic). Upcoming new GMP approval deadlines to drive industry consolidation: We expect companies with high net cash levels to pick up the low hanging fruit (e.g. companies with good products that cannot afford to meet its GMP standards). Since deadlines for sterile drugs (YE 2013) and non-sterile drugs (YE2015) are coming, M&A activities should increase. Listed companies will have an upper hand given most of them are already new GMP approved. Furthermore, listed companies have more resources to consolidate the industry. Being selective is key during the anti-corruption campaign: We expect the sector to trade in-line or slightly better than HSI in 1H14 as the ongoing anti-corruption campaign may curb sales, though offset by domestic drugs gaining market share from imports. We expect sales growth to re-accelerate in 2H14 as the campaign fades. Selectivity is key during 1H14 with bias towards those companies with a lower risk in terms of anti-corruption. 4

5 Healthcare Sector 11 December 2013 ST and LT healthcare reform beneficiaries Figure 2: China healthcare reform snapshot Key Targets Establish a universal healthcare scheme Expanding the coverage of the three Aiming to integrate urban and rural Continuously increasing the amount of to meet the essential medical needs of 95% of the population medical insurance programs resident insurance programs funding and expanding healthcare coverage Create and implement the national Implementing EDL system at primary Increasing the number of drugs Continuously optimizing EDL essential drug list (EDL) system healthcare service level covered in EDL from 307 to 520 Achieving zero margin on EDL drugs Procurement through public bidding Increasing EDL adoption by various healthcare institutions Improve professional medical expertise, especially at the primary healthcare service level Public hospital reform Source: MOH, BOCOM Int l Establishing urban community healthcare centers and rural medical institutions, including county hospitals and township clinics Separating sponsership and operations of the public hospitals Reducing revenue dependency on pharmaceutical sales Focusing on strengthening expertise of the professionals at various primary healthcare service levels Encouraging private capital to invest in healthcare services industry Further upgrading medical facilities Focusing on prevention and early detection of diseases Large scale privitization or publicprivate partnership Latest reform guidelines prompt beneficiaries: ST beneficiaries include: TCM companies and pediatric focused companies. TCM companies are supported by the government in terms of pricing strategies (less price cut risk than chemical drugs): We believe TCM companies such as Shineway (2877.HK) and CTCM (formerly known as Winteam, 570.HK) should benefit from less price cut risk, cleared from one of the major industry concerns. Pediatric focused companies to see help from relaxed one-child policy: Pediatric focused companies include China Cord Blood (umbilical cord blood collection/storage, CO.US), Sinovac (private Chinese vaccine company, SVA.US), and Mindray (diagnostic company, MR.US) LT beneficiaries include: SOEs and healthcare services companies. SOEs to improve efficiencies in the long run: SOEs have been perceived as less efficient and less driven than private companies. With the new government initiatives to improve efficiencies, larger medical conglomerates such as Shanghai Pharm (2607.HK) and Guangzhou Baiyunshan (874.HK) and larger distributors such as Sinopharm (1099.HK) could benefit in the long run. Healthcare services companies (e.g. hospitals) to benefit from more private money inflow (improved quality leads to higher patient traffic): Companies including private hospital players such as Chindex (CHDX) could see an increase in patient volume and sales. 5

6 Healthcare Sector 11 December 2013 New GMP deadlines to drive industry consolidation We expect companies with high net cash to pick up the low-hanging fruit (e.g. companies with good products that cannot afford to meet the GMP standards). Since the deadlines for sterile drugs (year-end 2013) and non-sterile drugs (YE2015) are coming, there should be an increase in M&A activities. Listed companies should have an upper hand given most of them are already new GMP approved. Furthermore, listed companies have more resources to consolidate the industry. By the end of August 2013, the China Food and Drug Administration (CFDA) has given new GMP approvals to 365 sterile drug manufacturers (29% of total) and 690 non-sterile drug manufacturers (18% of total). We note production must be suspended if new GMP approvals are not granted by the end of 2013 for the sterile drug manufacturers and the end of 2015 for the rest of the drug manufacturers. Recall CFDA started to enforce the new GMP regulations on March 1 st, The regulations stated: 1) All new plants, modifications and expansions to manufacturing plants must comply with the new GMP after March 1 st, ) Current manufacturing plants for non-bacterial drugs, including hematology drugs, vaccines, and injections, must reach new GMP standards before December 31 st, 2013 or else the manufacturing must be suspended. 3) Other drug manufacturing plants (ex-non-bacterial drugs) must receive new GMP approvals before December 31 st, We believe most of the listed companies are new GMP approved, unlike the smaller private ones facing resource limitations. We anticipate more M&A activities as some small companies might choose to sell themselves instead of having their production plants suspended. Therefore, we prefer healthcare companies with healthy net cash ready to pick up the low-hanging fruit. In the table below, we highlight companies such as Mindray (device player), Sihuan, Sinobiopharm, Shineway and Shanghai Pharm with net cash of over US$300mn. Figure 3: Cash rich healthcare companies (> US$300mn highlighted in blue) Source: Factset, BOCOM Int l 6

7 Healthcare Sector 11 December 2013 More capex to be spent and higher inventories Since the deadline to receive the new GMP approvals for sterile drug manufacturers is the end of 2013, we believe companies that produce sterile drugs (largely biotech drugs) could see more capex needs to upgrade their facilities to comply with the new GMP. Some companies may increase their production capacity for an extra quarter or two on top of their regular inventory levels just in case there are delays in getting the approval. Therefore, we expect higher capex and higher working capital (inventories) for companies which make sterile drugs in 4Q13/1Q14. Low approval rate explained We believe the reasons for the low approval rate are: 1) relatively weak operations of some enterprises some companies do not have enough resources to bear the increase in capex, the spike in working capital and downtime of the company caused by the new GMP; 2) attitude of the companies some prefer to wait and see as some think the regulation is more lenient; and 3) in-progress those that are upgrading their facilities at the moment and planning to seek approval before EDL drugs may be given priority There could be a surge of approval requests. As the volume could be quite significant, there could be delays in giving out GMP approvals on time (before 12/31/2013). Although CFDA has stated there will be no exceptions, we think that depending on the volume of new GMP applications, there could be a grace period of a quarter or two especially for those which manufacture EDL drugs. This is because EDL drugs are high in demand. 7

8 Healthcare Sector 11 December 2013 Selectivity is key during the anti-corruption campaign We expect the sector to trade in-line or slightly better than HSI in 1H14 as the ongoing anti-corruption campaign may curb sales. However, this could be offset by domestic drugs gaining market share from imports. We expect sales growth to re-accelerate in 2H14 as the campaign fades. Therefore, we believe selectivity is key during 1H14. We highlight several companies with minimal risks during the anti-corruption campaign: 1) China Shineway (2877.HK) Most of the products Shineway carries are listed in the NDRL/EDL. This fits the criteria of low priced drugs. Moreover, hospital sales only account for 20% of the company s total sales. The rest goes to second/third-tier medical institutions such as clinics (60% of sales) and OTC (20% of sales). 2) The United Labs (3933.HK) The United Labs sells its premium priced antibiotics to hospitals. We believe doctors may use more of TUL s antibiotics vs. MNCs given TUL s quality is decent though priced higher than the other generic versions. Doctors can also avoid the heat from excessively prescribing MNC drugs. 3) Lee s Pharm (0950.HK) Lee s is an R&D-driven drug manufacturer and also a drug promoter for foreign small/mid-sized drug manufacturers. Its original producer drugs are not MNC drugs and have only 10-20% premium to other generics. Therefore, they should not be the targets for the government. 4) China Biologic Products (CBPO) CBPO is a Chinese plasma-based biotech company listed in the US. Its products, including human albumin and human immunoglobulin, are usually used in emergencies and/or surgeries. Therefore, the products are high in demand in hospitals where minimal, if any, marketing activities are needed. It is unlikely that bribery is needed to push up ASP/volume. 5) Shandong Weigao (1066.HK) - Weigao is one of the top medical consumable companies with consumables accounting for 85% of sales. With lower revenues/incentives from drugs, doctors could increase service usage (e.g. diagnostics and tests) to increase hospital revenues. This could benefit consumable players such as Weigao. 6) Kingworld Medicines (1110.HK) - Kingworld is an OTC drug/supplement promoter. Over 90% of its sales come from drugstores. Since it is a player with low exposure to hospitals, the company should not be affected. 8

9 Healthcare Sector 11 December 2013 Recall the anti-corruption topic started in July with GSK under the spotlight. We believe this serves as a warning to other companies that have conducted such activities. Under such stringent environment, both companies and doctors have become cautious as no one wants to make the headlines as GSK did. As tender activities will be under the microscope, we expect marketing activities from manufacturers to decline throughout 4Q13 and possibly in 1Q14. Although less marketing activities may affect top-line sales growth, we believe this may not be a bad thing because companies may be able to optimize the marketing strategies for their products under the new and fairer environment. Impact: We believe the earnings impact would be -7%YOY at worst, and the duration could be three quarters or so. We attempt to quantify potential earnings impact using the data collected during the 2006 anti-bribery period. The data used and assumptions include: 1) We used the sales, operating expense and operating profit data from 70 A-share companies that have reported quarterly financials since ) We assume the worst case of this anti-bribery exercise to mirror that in Figure 4: Assuming 2006 was the worst case scenario, earnings could be hit by -7% YOY% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Sales 15% 12% 24% 7% -3% -7% -7% 5% 7% 18% 30% 42% 31% SG&A 12% 10% 13% -0.4% -2% -10% -7% -0.4% 2% 33% 9% 57% 29% Operating income 17% 13% 28% 10% -4% -6% -7% 7% 8% 14% 36% 37% 32% Source: Factset, BOCOM Int l Data suggested SG&A spending remained low over five quarters (4Q05 through 4Q06) in the range of -0.4%YOY to -10%YOY. This led to three quarters of operating income decrease (1Q06 through 3Q06) and the magnitude ranged from -4%YOY to -7%YOY. We believe tendering activities will re-accelerate in 1Q14 as inventories in hospital could be low after the slow 2H13 tendering activities. If that is the case, sales could improve in 2Q14 while SG&A spending would remain low. This could provide an upside surprise for 2Q14/3Q14. Figure 5: SG&A growth vs. operating income growth 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% SG&A (YOY%) Operating income (YOY%) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Factset, BOCOM Int l 9

10 Healthcare Sector 11 December 2013 Figure 6: SG&A growth vs. sales growth 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% SG&A (YOY%) Sales (YOY%) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Factset, BOCOM Int l We believe tenders will be biased towards domestic drug manufacturers and lower-priced drugs compared with previous tenders. We also believe the mix of generic drugs could go up slightly compared with the previous quarters. We think the GSK investigation is just an early warning from the government to MNCs indicating the government is looking into the high drug prices. This has also set the stage for the next round of price cuts. We believe there is nothing to lose for the Chinese government to take such action given it may indirectly 1) lower the government s healthcare bill and 2) improve reputation by reducing bribery and other corruption activities in the space. Patent is really over: Recall in 1993, when China negotiated with WTO, the country amended the patent law to include pharmaceutical substance patent (vs. only process patent previously) and prolonged the term of protection for patent for invention from 15 to 20 years. China later also gave off-patented MNC drugs premium pricing for the original producer status, likely to 1) compensate for the IP lost in China before 1993, 2) encourage more MNC innovative drugs to enter China and 3) have MNCs invest in China. However, after 20 years (coincidentally, 20 years is the number of years it takes for a drug to be off patent in China), the Chinese government made a move to curb bribery activities which, in our view, could lead to the next step of reducing prices of these premium-priced drugs. This could signal the 20 years of premium pricing for off-patented drugs are largely over. This also implies China wants to give fewer privileges to MNCs going forward, and go along with global industry practices. The next version of NDRL is coming in 2014: Every 5 years, the government will provide a revision of its NDRL (National Drug Reimbursement List), a list of drugs for which the Chinese government will provide either full or partial reimbursement. The next revision is expected to come in 2H

11 Healthcare Sector 11 December 2013 We note sales of NDRL reimbursable drugs account for 80-90% of the top ten MNCs drug sales in China. This means the Chinese government is contributing to a large portion of MNCs sales in China. Figure 7: Reimbursable drugs account for 80-90% of MNCs drug sales in China 2004 NDRL 2009 NDRL Top 10 MNC's # of reimbursable drugs Sales contribution of reimbursable drugs # of reimbursable drugs Sales contribution of reimbursable drugs AZ 20 91% 22 93% Pfizer 33 86% 44 95% Bayer 22 89% 25 92% Sanofi-Aventis 36 88% 39 98% Roche 18 63% 20 74% Novartis 39 77% 46 89% GSK 39 84% 41 86% Novo Nordisk 9 75% 15 98% MSD 17 90% 15 99% J&J 27 73% 32 82% Average 26 81% 30 91% Source: IMS, BOCOM Int l Bargaining power back to China: MNCs need the Chinese market. According to the IMS, the pharmaceutical market in China recorded sales of RMB516bn (US$82bn) in 2012 and is expected to grow at a CAGR of +17% until 2015 to reach RMB836bn (US$133bn), surpassing Japan to occupy the #2 spot globally and surpassing the US to be the top pharma market globally by The double-digit growth in China compares favorably with the weaker growth in the US and EU of less than +1% YoY in recent years. We note the top ten MNCs have enjoyed double-digit growth in China for the past 20 years and for more years ahead. It is likely that MNCs will stay in the Chinese market. In 2011, the top MNCs recorded an average sales growth of +28% YoY in China. Price cuts to be the next focus: We believe the gap between prices for the same drug for MNCs and domestic will narrow in the long run. Marketing activities could also slow down in the next few months as the spotlight fades. We expect the next NDRL revision to be in 2014 and the next round of NDRL price cuts to be in 2015/16. Another déjà vu of 2006? We think not. Some investors believe the anti-bribery case involving GSK will lead to similar aftermath of the anti-bribery case in 2006; we think otherwise. In 2006, the head of CFDA was beheaded due to taking bribes for approving six untested drugs. The anti-bribery act was internal and was for drug safety. Having drugs approved without going through the correct procedures puts the nation at risk, in terms of both health and reputation. In 2013, it is a completely different story. The idea is to reduce costs, and to create a more fair platform in the industry for both MNCs and domestic players. The chart below also shows the slowdown in sales growth in the industry during the anti-bribery campaign in

12 Healthcare Sector 11 December 2013 Figure 8: China industry sales slowed down in 2006 and ,500,000 Sales (RMB mn) YoY% 50.0% 40.0% 1,000, % 500, % 10.0% % Source: CEIC, BOCOM Int l Figure 9: Net profit growth fell in 2006 but rebounded in ,000 Sales (RMB mn) YoY% 50.0% 40.0% 100, % 50, % 10.0% % Source: CEIC, BOCOM Int l Figure 10: Net margin was weak in % Net margin (%) 18% 16% 14% 12% 10% Source: CEIC, BOCOM Int l 12

13 Healthcare Sector 11 December 2013 Impact to MNCs GSK reported its 3Q13 China sales declined by -61% YOY, worse than the -30% YOY the market had expected. However, our calculation (excluding vaccine pharmacopeia and possible distributor de-stocking) of -46% showed the decline might not be as bad as it looks. On the other hand, Roche, Novartis and Lilly reported positive China sales growth. Roche s China sales grew +23% YOY in 9M13 (first nine months of 2013), while Novartis booked China sales growth of +18% YOY in 3Q13 (+21% YOY in 9M13) and Lilly recorded +11% YOY growth in China sales in 3Q13. Although GSK s 3Q13 China sales declined by -61% YOY, we note part of the decline (-15%) was due to the change of vaccine pharmacopeia in China, which had nothing to do with the anti-bribery impact. Moreover, there might be some de-stocking activities from distributors given GSK products might be something they or their customers (hospitals) have tried to avoid. Therefore, the actual sales decline relating to anti-bribery might be better than -46% YOY. GSK management stated the sales decline in July and August was worse than that in September. However, we believe such data points might not be enough to indicate any improving/recovery trends. We await GSK s 4Q13 China sales data to make further conclusions. The driver for Roche s 3Q13 China sales growth largely came from the specialty cancer drugs of the company. Many of these cancer drugs are sold in the private market (and therefore, less regulated in terms of government price control and anti-bribery risks). This led to a more favorable product mix for Roche, helping the company offset any sales slowdown due to the bribery crackdown in China. Figure 11: MNC China sales growth 1Q13 2Q13 3Q13 GSK 19% 14% -61% Lilly 11% 18% 11% Roche 20% 34% 16% Novartis 20% 25% 18% Source: Company data, Industry associations, BOCOM Int l 13

14 Healthcare Sector 11 December 2013 Figure 12: Historical P/E band (current: 17.8x, vs. 10-yr historical average of 15.5x +/- 1 standard deviation of 4.6x) 35 Off-shore healthcare hist P/E band +1 stdev mean -1 stdev Source: Bloomberg, Factset, BOCOM Int l Figure 13: Comp table Company Ticker Currency Px Mkt cap EV/EBITDA P/E EPS CAGR PEG P/B ROE (USD) '13E '14E '15E '13E '14E '15E ('12E-'15E) '13E '14E '15E '13E '14E '15E '13E '14E '15E Chemical drugs Chemical drugs Sihuan Pharmaceutical Holdings 460-HK Group Ltd. HKD , x 13.2x 10.9x 21.4x 17.3x 14.2x 23% 0.9x 0.8x 0.6x 3.3x 2.8x 2.4x 14.4% 15.0% 16.2% Sino Biopharmaceutical Limited1177-HK HKD , x 10.7x 9.6x 27.0x 22.0x 17.9x 21% 1.3x 1.1x 0.9x 5.3x 4.5x 3.6x 19.4% 20.1% 19.9% CSPC Pharmaceutical Group Ltd HK HKD , x 12.0x 9.2x 29.5x 22.4x 17.7x 29% 1.0x 0.8x 0.6x 3.3x 3.1x 2.8x 11.4% 13.8% 15.7% Shanghai Fosun Pharmaceutical 2196-HK (Group) Co., HKD Ltd. Class H x 24.4x 20.3x 19.7x 17.3x 15.4x 7% 2.9x 2.6x 2.3x 2.4x 2.1x 1.9x 11.9% 12.0% 12.1% Lijun International Pharmaceutical 2005-HK (Holding) Co., HKDLtd x 11.8x 9.8x 20% 0.7x 0.6x 0.5x 2.3x 15.9% United Laboratories International 3933-HK Holdings Ltd. HKD x 7.5x 7.1x 25.4x 15.3x 16.6x 16% 1.6x 0.9x 1.0x 0.8x 0.8x 0.8x 3.4% 5.5% 4.9% Lee's Pharmaceutical Holdings 950-HK Limited HKD x 12.1x 10.5x 22.6x 16.3x 16.9x 16% 1.4x 1.0x 1.1x 4.9x 4.0x 3.6x 22.2% 25.2% 21.9% Average 17.0x 13.3x 11.3x 22.8x 17.5x 15.5x 19% 1.4x 1.1x 1.0x 3.2x 2.9x 2.5x 14.1% 15.3% 15.1% TCM TCM Beijing Tong Ren Tang Chinese 8138-HK Medicine Co., HKD Ltd , x 13.6x 9.2x 44.5x 22.3x 16.1x 66% 0.7x 0.3x 0.2x 5.8x 5.1x 3.8x 13.8% 24.4% 25.4% China Shineway Pharmaceutical 2877-HK Group Limited HKD , x 4.2x 3.5x 9.9x 8.9x 8.1x 10% 1.0x 0.9x 0.8x 1.6x 1.4x 1.3x 16.3% 16.3% 15.8% China Traditional Chinese Medicine 570-HK Co. Limited HKD , x 16.7x 13.4x 28% 0.8x 0.6x 0.5x 2.9x 2.8x 2.5x 12.6% 16.0% 18.2% Tong Ren Tang Technologies 1666-HK Co., Ltd. Class HKD H x 13.0x 11.2x 27.2x 22.0x 17.4x 25% 1.1x 0.9x 0.7x 3.8x 3.7x 3.3x 14.0% 16.9% 19.1% Guangzhou Baiyunshan Pharmaceutical 874-HK Holdings HKD Company Limited 872 Class H30.4x 21.4x 16.8x 28.8x 21.5x 17.5x 29% 1.0x 0.7x 0.6x 4.5x 3.7x 3.1x 15.7% 17.4% 17.5% Average 20.9x 13.0x 10.2x 26.5x 18.3x 14.5x 32% 0.9x 0.7x 0.6x 3.7x 3.4x 2.8x 14.5% 18.2% 19.2% Biotech Biotech Bloomage Biotechnology Corp. 963-HK Ltd. HKD x 14.6x 10.1x 32.5x 22.6x 14.2x 51% 0.6x 0.4x 0.3x 8.4x 6.5x 4.4x 27.0% 29.9% 32.2% Sinovac Biotech Ltd. SVA-US USD x 65.2x 23.5x 35.5x 183% 0.0x 0.0x 0.2x 2.7x 2.6x 2.6x 1.0% -2.1% 7.3% Average 35.0x 39.9x 16.8x 32.5x 22.6x 24.8x 117% 0.3x 0.2x 0.2x 5.6x 4.5x 3.5x 14.0% 13.9% 19.8% Devices Devices Mindray Medical International MR-US Ltd. Sponsored USD ADR Class A 3, x 13.4x 11.9x 20.5x 18.8x 16.6x 19% 1.1x 1.0x 0.9x 3.3x 2.9x 2.6x 15.5% 14.9% 15.1% Shandong Weigao Group Medical 1066-HK Polymer Co. HKDLtd. Class H 2, x 21.9x 18.0x 33.1x 27.3x 22.5x 21% 1.6x 1.3x 1.1x 3.8x 3.5x 3.1x 11.1% 12.3% 13.3% MicroPort Scientific Corp. 853-HK HKD x 10.8x 9.6x 28.9x 19.7x 16.1x 34% 0.8x 0.6x 0.5x 2.6x 2.5x 2.3x 9.3% 12.7% 14.4% China Cord Blood CorporationCO-US USD x 15.0x Average 19.1x 15.4x 13.2x 24.7x 20.2x 18.4x 25% 1.2x 1.0x 0.8x 3.2x 2.9x 2.7x 12.0% 13.3% 14.3% Distributor Distributor Sinopharm Group Co., Ltd. Class 1099-HK H HKD , x 6.7x 5.8x 20.0x 16.9x 14.4x 14% 1.4x 1.2x 1.0x 2.2x 1.9x 1.7x 10.3% 10.8% 11.3% China Medical System Holdings 867-HK Ltd. HKD , x 14.5x 11.3x 22.4x 17.0x 14.0x 22% 1.0x 0.8x 0.6x 4.5x 3.9x 3.1x 19.1% 21.9% 21.2% Shanghai Pharmaceuticals Holding 2607-HK Co. Ltd. Class HKD H , x 8.8x 8.0x 17.5x 15.6x 14.1x 14% 1.2x 1.1x 1.0x 1.5x 1.4x 1.3x 8.5% 8.8% 9.1% Kingworld Medicines Group Ltd HK HKD Average 12.3x 10.0x 8.4x 20.0x 16.5x 14.1x 17% 1.2x 1.0x 0.9x 2.7x 2.4x 2.0x 12.6% 13.8% 13.9% Hospital Hospital Concord Medical Services Holding CCM-US Ltd. ADRUSD x 5.7x 5.4x 14.2x 12.0x 11.4x 12% 1.2x 1.0x 1.0x 0.8x 0.7x 0.7x 5.2% 5.9% 5.8% Drugstore Drugstore China Nepstar Chain Drugstore NPD-US Ltd. Sponsored USDADR x 13.0x 132.5x 52.7x 39.5x 97.5x -26% -2.0x -1.5x -3.7x 1.8x 1.8x 1.8x 3.1% 4.1% 1.6% Contract Research Organization Contract Research Organization Wuxi PharmaTech (Cayman) WX-US Inc. Sponsored USD ADR , x 12.1x 10.2x 18.6x 17.4x 15.3x 13% 1.4x 1.3x 1.2x 3.8x 3.2x 2.6x 20.3% 18.0% 16.8% *Average of above off-shore healthcare excluded Sinovac and Nepstar Source: Bloomberg, Factset, BOCOM Int l Average of above 17.1x 12.7x 10.5x 23.5x 18.0x 15.2x 23% 1.2x 0.9x 0.8x 3.4x 3.0x 2.5x 14.2% 15.9% 16.3% 14

15 Healthcare Sector 11 December 2013 Industry overview Payers Total healthcare expenditure Total healthcare expenditure in China was almost RMB3,000bn in 2012 and is expected to grow at a 5-year CAGR of 13.2% to over RMB5,000bn in 2017E. Figure 14: Total healthcare expenditure is expected to grow over 10% YOY in the next few years 6,000 5,000 4,000 3,000 2,000 Total China healthcare expenditure (RMB bn) 22% 21% 19% 16% 14% 12% 14% YOY% 12% 12% 25% 20% 15% 10% 1,000 1,454 1,754 1,998 2,436 2,891 3,351 3,763 4,290 4,792 5, E 2014E 2015E 2016E 2017E Source: NHFPC, Frost and Sullivan, BOCOM Int l 5% 0% Part of the ongoing healthcare reform involves lowering out-of-pocket healthcare spending. The total healthcare expenditure breakdown by payers below shows that individual spending as a % of total healthcare expenditure has decreased by 700 bps from five years ago in 2008 to 33.4% in Figure 15: China s total healthcare expenditure by payers 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Individuals Employers and social organizations Government 40.4% 38.2% 34.9% 34.6% 24.7% 27.2% 32.9% 34.9% 33.4% 33.6% 34.7% 35.2% 33.6% 30.4% 31.3% Source: Frost and Sullivan, BOCOM Int l According to WHO, China ranked fourth in terms of the highest total healthcare expenditure, but it only ranked 11 th in terms of per-capita healthcare expenditure. 15

16 Healthcare Sector 11 December 2013 Figure 16: Total and per capita healthcare expenditure of the 12 countries with the highest healthcare expenditure Ranking of Ranking of total healthcare per capita healthcare Country expenditure (2011) US$bn expenditure (2011) US$ United States 1 2,699 United States 1 8,627 Japan Canada 2 5,782 Germany France 3 4,958 China Germany 4 4,895 France Japan 5 4,291 United Kingdom United Kingdom 6 3,630 Brazil Italy 7 3,437 Italy Spain 8 3,010 Canada Brazil 9 1,163 Spain Russia Russia China India India Source: WHO, Frost and Sullivan, BOCOM Int l China s healthcare expenditure as a % of GDP has increased gradually from 4.6% in 2008 to 5.2% in Figure 17: China healthcare expenditure as a % of GDP is second lowest amongst the top 12 highest GDP countries (2011) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 3.9% 5.2% 6.2% 8.9% 9.3% 9.3% 9.4% 9.5% India China Russia Brazil Japan United Kingdom Source: WHO, Frost and Sullivan, BOCOM Int l Spain 11.1% 11.2% 11.6% 17.9% Italy Germany Canada France United States Driven by 1) aging population, 2) higher chronic disease prevalence, 3) urbanization and 4) increasing government spending, the healthcare services industry has been growing at a 20% CAGR for and is expected to grow above +15% YOY for the next few years. Government insurance programs One of the key payers is the set of medical insurance programs from the government. The table below shows how each program is being financed. Figure 18: Insurance programs Program Funding source Per capita funding in 2012 (RMB) Financing Urban employee Employers and employees 2,619 Employee 2% and employer 6% of monthly salary into insurance fund every month. Retirees exempted. Urban resident Urban residents and gov't 320 Varies among cities; urban resident pays ~20-40% of the funding and local gov't pays the balance Rural Cooperative Rural residents and gov't 308 Varies among rural areas; rural resident pays ~20-40% of the funding and local govn't pays the balance Source: NHFPC, MOHRSS, Frost and Sullivan, BOCOM Int l 16

17 Healthcare Sector 11 December 2013 The three medical insurance programs have largely covered all of the China population by the end of Figure 19: Insurance programs and coverage rate Urban Employee Basic Medical Insurance Program New Rural Cooperative Medical Program 1,600 1,400 1,200 1, Urban Resident Basic Medical Insuranace Program Coverage rate 105% 100% 95% 90% 85% 80% Source: NHFPC, MOHRSS, Frost and Sullivan, BOCOM Int l 75% The three charts below depict total funding, total payments and their differences (funding less payment) from the three medical insurance programs. Figure 20: Total funding from the three insurance programs (RMB bn) 3,000 2,500 2,000 1,500 26% Total funding (RMB bn) 35% 24% 22% 20% 28% 24% YOY% 21% 23% 40% 35% 30% 25% 20% 1, ,129 1,445 1,797 2,183 2, E 2014E 2015E 2016E 2017E 15% 10% 5% 0% Source: NHFPC, MOHRSS, Frost and Sullivan, BOCOM Int l Figure 21: Total payments from the three insurance programs (RMB bn) Total payment (RMB bn) YOY% 3,000 39% 2,500 30% 29% 29% 2,000 27% 27% 25% 24% 23% 1,500 1, ,008 1,302 1,634 2,002 2, E 2014E 2015E 2016E 2017E Source: NHFPC, MOHRSS, Frost and Sullivan, BOCOM Int l 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 17

18 Healthcare Sector 11 December 2013 Figure 22: Total funding less payment from the three insurance programs (RMB bn) Surplus (funding less payment, RMB bn) Surplus as % of funding % 30% % 16% 19% 16% 11% 10% 9% 8% 7% 25% 20% 15% 10% E 2014E 2015E 2016E 2017E Source: NHFPC, MOHRSS, Frost and Sullivan, BOCOM Int l 5% 0% Upstream: Drugs (chemical drugs, TCM, biotech drugs) and medical devices Figure 23: Healthcare industry data M13 Sales (RMB mn) Overall industry 156, , , , , , , , ,349 1,047,868 1,244,279 1,065,699 Chemical drug 72,284 87,293 96, , , , , , , , , ,921 Biotech 18,378 22,337 24,895 30,313 39,056 46,837 79, , , , , ,780 TCM 49,420 57,748 70,937 95, , , , , , , , ,554 Device 16,036 18,913 22,892 32,503 42,771 56,808 78,972 93, , , , ,444 Net profit (RMB mn) Overall industry 21,100 25,354 29,464 35,451 41,265 57,629 78,781 98, , , , ,625 Chemical drug 6,476 8,627 9,665 10,792 11,505 17,109 27,228 32,834 42,415 46,337 55,603 44,880 Biotech 3,176 3,758 3,953 4,984 6,144 9,129 13,830 18,381 24,416 30,481 31,394 27,751 TCM 10,175 11,322 13,406 16,793 19,448 25,340 29,593 35,923 47,142 58,106 69,068 55,844 Device 1,273 1,646 2,440 2,882 4,168 6,051 8,129 11,182 12,525 15,323 16,905 13,150 YOY% M13 Sales Overall industry 19% 15% 26% 23% 21% 34% 23% 25% 26% 19% 22% Chemical drug 21% 10% 17% 23% 23% 32% 23% 24% 21% 21% 13% Biotech 22% 11% 22% 29% 20% 70% 29% 23% 33% 6% 35% TCM 17% 23% 35% 19% 15% 20% 24% 28% 34% 23% 27% Device 18% 21% 42% 32% 33% 39% 18% 22% 17% 17% 21% Net income Overall industry 20% 16% 20% 16% 40% 37% 25% 29% 19% 15% 20% Chemical drug 33% 12% 12% 7% 49% 59% 21% 29% 9% 20% 15% Biotech 18% 5% 26% 23% 49% 51% 33% 33% 25% 3% 31% TCM 11% 18% 25% 16% 30% 17% 21% 31% 23% 19% 21% Device 29% 48% 18% 45% 45% 34% 38% 12% 22% 10% 15% Margin M13 Overall industry 13.5% 13.6% 13.7% 13.1% 12.4% 14.3% 14.6% 14.8% 15.2% 14.3% 13.9% 13.3% Chemical drug 9.0% 9.9% 10.0% 9.6% 8.3% 10.1% 12.1% 11.9% 12.4% 11.2% 11.1% 10.9% Biotech 17.3% 16.8% 15.9% 16.4% 15.7% 19.5% 17.4% 17.9% 19.4% 18.1% 17.7% 16.4% TCM 20.6% 19.6% 18.9% 17.6% 17.1% 19.4% 18.9% 18.6% 19.1% 17.5% 16.9% 15.8% Device 7.9% 8.7% 10.7% 8.9% 9.7% 10.7% 10.3% 12.0% 11.0% 11.5% 10.8% 10.0% Source: CEIC, BOCOM Int l 18

19 Healthcare Sector 11 December 2013 Figure 24: Pharmaceutical market in China 2,500 2,000 1,500 1, Pharmaceutical market (RMB bn) YOY% E 2014E 2015E 2016E 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: NFS, BOCOM Int l Distributors Distribution industry Figure 25: Distribution industry in China 2,000 1,800 1,600 1,400 1,200 1, Distribution market (RMB bn) YOY% E 2014E 2015E 2016E 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: NFS, BOCOM Int l 19

20 Healthcare Sector 11 December 2013 Hospitals China healthcare services market Much of the revenue generated from healthcare services came from hospitals. Figure 26: Healthcare services growing (RMB bn) Hospitals Primary healthcare clinics Others Total YOY% 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, E 2014E 2015E 2016E 2017E 25% 20% 15% 10% 5% 0% Source: Frost and Sullivan, BOCOM Int l Figure 27: Hospitals accounted for 76% of all medical institution sales (2012) 2012 Sales of medical institutions: RMB 1966bn Hospitals 76% Primary healthcare clinics 16% Others 8% Source: NHFPC, Frost and Sullivan, BOCOM Int l 20

21 Healthcare Sector 11 December 2013 Figure 28: Patient visit breakdown by medical institutions (2012) Outpatient visits (6.9bn visits) Inpatient visits (0.2bn visits) Primary healthcare clinics 60% Others 3% Primary healthcare clinics 24% Hospitals 71% Hospitals 37% Others 5% Source: NHFPC, Frost and Sullivan, BOCOM Int l Figure 29: Hospital data (# of hospitals by grades, beds in operation and patient visits) (2012) Hospitals Total number Total beds in operation (mn) Total patient visits received (bn) Grade I 5, Grade II 6, Grade III (highest grade) 1, Unclassified 9, Total 23, Source: NHFPC, Frost and Sullivan, BOCOM Int l Figure 30: Public hospitals vs. private hospitals (2012) Public Private Total revenue (RMB bn) 1, Number of hospitals 13,384 9,786 Total beds in operation (mn) Total patient visits (bn) Inpatient visits (mn) Outpatient visits (bn) Source: NHFPC, Frost and Sullivan, BOCOM Int l Patient visits to medical institutions in China Patient traffic increased about +10% YOY, reaching 7bn visits in Outpatients accounted for most of the total patient visits (97.5%) in 2012 although the number of inpatient visits has been gaining traction (2008: 2.2% vs. 2012: 2.5%). 21

22 Healthcare Sector 11 December 2013 Figure 31: Patient visits in China (bn) 14 Inpatient Outpatient YOY% 14% % 10% 8% 6% 4% 2% E 2014E 2015E 2016E 2017E Source: NHFPC, Frost and Sullivan, BOCOM Int l 0% Although inpatient visits accounted for only 2.5% of the total number of patient visits in 2012, the average spending per visit is much higher for inpatients (average: RMB5,896) vs. outpatients (average: RMB143). Figure 32: Average spending per patient visit (RMB) - outpatients vs. inpatients Outpatient Inpatient Hospitals Average Urban primary healthcare clinics Rural primary healthcare clinics Source: Frost and Sullivan, BOCOM Int l 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Hospitals Average Urban primary healthcare clinics Rural primary healthcare clinics 5, , , , ,

23 Healthcare Sector 11 December 2013 Drugstores Figure 33: Retail drugstore market in China Retail (drugstores) market (RMB bn) YOY% E 2014E 2015E 2016E 25% 20% 15% 10% 5% 0% Source: NFS, BOCOM Int l Figure 34: Product breakdown for the retail drugstore market (2012) OTC 33% RMB 227bn (2012) Food/healthcare products 12% Chinese herbal extracts 10% Others 6% Rx 33% Medical devices 6% Source: NFS, BOCOM Int l Figure 35: Per capita annual disposable income (Rural) 14,000 12,000 Rural (RMB) Rural YOY% 10,000 8,000 6,000 4,000 2, E 2014E 2015E 2016E Source: NFS, BOCOM Int l 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 23

24 Healthcare Sector 11 December 2013 Figure 36: Per capita annual disposable income (Urban) Urban (RMB) Urban YOY% 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, E 2014E 2015E 2016E Source: NFS, BOCOM Int l 16% 14% 12% 10% 8% 6% 4% 2% 0% Figure 37: Per capita spending on medicine 1,800 1,600 1,400 1,200 1, Per capita spending on medicine (RMB) YOY% E 2014E 2015E 2016E 25% 20% 15% 10% 5% 0% Source: NFS, BOCOM Int l 24

25 Healthcare Sector 11 December 2013 Operating metrics comparison Figure 38: Comparison Mkt Cap Sales (US$mn) Gross margin Operating margin Net margin Capex as % of sales R&D as % of sales Ticker Company (US$mn) '12 CAGR '10-'12 '10 '11 '12 '10 '11 '12 '10 '11 '12 '10 '11 '12 '10 '11 ' HK China Shineway Pharmaceutical Group 1,195 Limited 338 6% 70.4% 67.4% 66.1% 42.5% 38.3% 30.4% 40.3% 38.1% 30.4% 18.1% 20.0% 17.3% 1.1% 2.9% 3.2% 3933-HK United Laboratories International Holdings 682 Ltd % 39.5% 28.6% 30.2% 18.4% 3.8% 4.8% 15.0% 1.6% 2.3% 16.7% 18.7% 41.2% 0.0% 1.1% 0.9% 950-HK Lee'S Pharmaceutical Holdings Limited % 69.8% 73.2% 71.4% 25.2% 21.6% 22.8% 22.7% 21.0% 21.3% 14.0% 15.7% 27.4% 2.2% 3.0% 3.1% 1093-HK Cspc Pharmaceutical Group Ltd. 2, % 29.2% 20.1% 43.6% 13.1% 3.4% 17.5% 9.7% 3.2% 52.1% 11.2% 12.5% 4.9% 1.3% 1.4% 1.9% 570-HK China Traditional Chinese Medicine Co. Limited % 55.8% 10.3% 8.8% 20.4% 6.5% 7.1% 16.3% 19.2% 10.3% 9.7% 0.0% 4.1% 3.4% Chemical drugs 2196-HK Shanghai Fosun Pharmaceutical (Group) 5,779 Co., Ltd. 1,162 Class H 31% 33.5% 39.6% 43.5% 3.2% 5.2% 7.9% 19.0% 18.0% 21.3% 7.5% 12.3% 15.8% 2.6% 2.9% 4.2% 460-HK Sihuan Pharmaceutical Holdings Group 4,098 Ltd % 70.1% 78.5% 76.2% 53.9% 39.3% 25.7% 50.3% 36.8% 29.7% 13.8% 11.7% 26.1% 1.7% 1.5% 0.5% 1177-HK Sino Biopharmaceutical Limited 3,887 1,073 43% 80.7% 78.7% 79.4% 21.0% 19.4% 19.9% 13.9% 8.0% 10.7% 10.7% 5.2% 4.9% 5.6% 6.2% 6.8% 1093-HK Cspc Pharmaceutical Group Ltd. 2, % 29.2% 20.1% 43.6% 13.1% 3.4% 17.5% 9.7% 3.2% 52.1% 11.2% 12.5% 4.9% 1.3% 1.4% 1.9% 2005-HK Lijun International Pharmaceutical (Holding) 801Co., Ltd % 49.0% 42.5% 16.0% 10.7% 13.7% 13.2% 11.6% 9.6% 19.7% 16.9% 0.0% 0.8% 3933-HK United Laboratories International Holdings 682 Ltd % 39.5% 28.6% 30.2% 18.4% 3.8% 4.8% 15.0% 1.6% 2.3% 16.7% 18.7% 41.2% 0.0% 1.1% 0.9% 950-HK Lee'S Pharmaceutical Holdings Limited % 69.8% 73.2% 71.4% 25.2% 21.6% 22.8% 22.7% 21.0% 21.3% 14.0% 15.7% 27.4% 2.2% 3.0% 3.1% Average of above chemical drugs 26% 53.1% 51.6% 57.4% 21.5% 14.8% 16.0% 20.5% 14.8% 21.3% 11.9% 13.7% 19.6% 1.9% 2.4% 2.9% TCM 874-HK Guangzhou Baiyunshan Pharmaceutical 5,121 Holdings 1,303 Company Limited 40% Class H27.8% 26.4% 28.0% 4.0% 2.9% 3.0% 6.0% 5.3% 4.8% 1.9% 1.1% 0.6% 1.6% 1.7% 1.1% 1666-HK Tong Ren Tang Technologies Co., Ltd. 1,820 Class H % 47.5% 49.7% 51.5% 17.2% 18.6% 19.7% 12.6% 13.2% 13.5% 3.6% 8.6% 5.0% 0.8% 8138-HK Beijing Tong Ren Tang Chinese Medicine 1,240 Co., Ltd % 35.0% 1.7% 24.8% 31.6% 20.7% 2877-HK China Shineway Pharmaceutical Group 1,195 Limited 338 6% 70.4% 67.4% 66.1% 42.5% 38.3% 30.4% 40.3% 38.1% 30.4% 18.1% 20.0% 17.3% 1.1% 2.9% 3.2% 570-HK China Traditional Chinese Medicine Co. Limited % 55.8% 10.3% 8.8% 20.4% 6.5% 7.1% 16.3% 19.2% 10.3% 9.7% 0.0% 4.1% 3.4% Average of above TCM 17% 57.9% 58.5% 58.8% 23.3% 21.6% 26.3% 19.8% 15.0% 21.2% 13.6% 17.6% 13.2% 0.6% 3.5% 3.3% Biotech 963-HK Bloomage Biotechnology Corp. Ltd % 78.5% 70.3% 51.4% 48.8% 40.8% 39.3% 35.2% 32.5% 14.6% 7.0% 35.8% 5.1% 4.3% 3.5% SVA-US Sinovac Biotech Ltd % 45.7% 62.8% 4.2% 76.0% 27.2% 32.8% 25.9% 17.1% 34.9% Average of above biotech 30% 62.1% 62.8% 70.3% 51.4% 26.5% 40.8% 39.3% 35.2% 32.5% 45.3% 17.1% 34.3% 15.5% 10.7% 19.2% Devices 1066-HK Shandong Weigao Group Medical Polymer 5,865Co. Ltd. 585 Class H 27% 55.1% 56.8% 58.0% 24.2% 26.4% 23.2% 32.4% 108.9% 27.0% 14.2% 41.7% 27.8% 4.1% 4.5% 4.6% MR-US Mindray Medical International Ltd. Sponsored 3,543 Adr 1,060 Class A 23% 56.9% 55.2% 57.2% 22.1% 19.0% 18.0% 22.1% 18.9% 17.0% 9.4% 10.2% 6.2% 8.6% 9.3% 9.8% 853-HK Microport Scientific Corp % 86.5% 86.0% 84.6% 40.4% 34.9% 37.6% 33.0% 38.2% 38.0% 13.3% 18.5% 36.8% 16.2% 18.2% 15.7% CO-US China Cord Blood Corporation % 74.2% 77.8% 80.7% 36.5% 35.4% 39.8% 27.0% 34.7% 21.4% 6.1% 32.4% 43.0% 1.2% 1.2% 1.2% Average of above devices 24% 68.2% 68.9% 70.1% 30.8% 28.9% 29.6% 28.6% 50.2% 25.9% 10.7% 25.7% 28.4% 7.5% 8.3% 7.8% Distributor 1099-HK Sinopharm Group Co., Ltd. Class H 7,883 21,520 45% 8.2% 8.4% 8.2% 3.4% 3.4% 3.4% 1.7% 1.5% 1.5% 2.2% 1.1% 1.1% 2607-HK Shanghai Pharmaceuticals Holding Co. 6,450 Ltd. Class 10,786 H 40% 13.8% 14.7% 13.5% 4.8% 4.3% 3.8% 3.7% 3.7% 3.0% 1.5% 0.8% 1.0% 867-HK China Medical System Holdings Ltd. 2, % 59.1% 56.6% 58.8% 26.3% 28.9% 31.7% 23.1% 29.6% 30.2% 2.8% 6.6% 3.9% 1110-HK Kingworld Medicines Group Ltd % 22.0% 24.1% 7.1% 7.6% 6.9% 6.7% 7.4% 6.9% 0.3% 2.4% 8.7% Average of above distributor 35% 25.7% 26.0% 26.8% 10.4% 11.1% 11.5% 8.8% 10.6% 10.4% 1.7% 2.7% 3.7% Hospital CCM-US Concord Medical Services Holding Ltd. Adr % 68.5% 66.2% 51.3% 46.1% 38.4% 30.1% 33.2% 19.8% 104.0% 4.1% 10.0% Drugstore NPD-US China Nepstar Chain Drugstore Ltd. Sponsored 193 Adr 405 8% 46.6% 1.0% 2.1% 2.1% 0.7% 1.4% 3.5% 2.4% 1.1% 1.4% Supplements 2010-HK Real Nutriceutical Group Limited % 71.0% 73.4% 39.2% 42.9% 37.0% 26.0% 30.8% 26.5% 20.9% 28.4% 25.3% 0.1% 0.0% 926-HK Besunyen Holdings Co. Ltd % 89.6% 30.1% 6.8% 17.7% 53.9% 18.9% 0.0% 2.3% 3.2% Average of above supplements -3% 80.3% 73.4% 34.6% 42.9% 37.0% 16.4% 30.8% 26.5% 19.3% 41.2% 22.1% 0.1% 1.2% 3.2% Contract Research Organization WX-US Wuxi Pharmatech (Cayman) Inc. Sponsored 2,331 Adr % 38.2% 39.7% 37.8% 21.4% 20.6% 17.9% 27.2% 19.9% 17.3% 14.8% 19.6% 13.6% 0.0% 1.6% Source: Bloomberg Factset, BOCOM Int l 25