Johnson Sun 孙 凤 强 公 司 报 告 : 国 药 控 股 (01099 HK) +852 25097589 johnson.sun@gtjas.com.hk

GTJA Research 国 泰 君 安 研 究 Company Report: Sinopharm (01099 HK) Johnson Sun 孙 凤 强 公 司 报 告 : 国 药 控 股 (01099 HK) +852 25097589 johnson.sun@gtjas.com.hk 16 April 2013 Dilemma of Fast Growth or Healthy Operating Cash Flow, Sell 高 增 长 和 经 营 现 金 流 的 两 难 抉 择, 卖 出 2012 results are very disappointing with 1) 24.2% YoY net profit growth, after removing the one-off gains from PPE disposal, 2) -RMB4.1bn operating cash flow after removing influences of A/R and A/P factoring (reported: RMB4.0 bn). Our A/R calculation model indicates actual A/R days increased from 97.4 days to 102.9 days in 2012 (reported: 86 days). Share placement in Mar. 2013 is as per our expectation in our previous reports. Growth is slowing down. M&A-driven growth is slowing down due to 1) fewer acquisitions in 2012, and 2) Completion of VAM for most 2011 acquisitions. Industry growth is also slowing down. With 22.9% of the total A/R overdue and worsening operating cash flows, Sinopharm faces a dilemma in revenue expansion and healthy operating cash flow. We may have over-estimated the role of pharmaceutical distributors in the supply chain. Re-evaluation of the business model and pharmaceutical supply chain could explain and estimate the trend of 1) pressures in gross margin, 2) increasing A/R days and stable A/P days, and 3) fiercer competition among nation-wide distributors and provincial distributors. Our 2013-15 EPS estimates are 12%, 18% and 20% lower than consensus. We think the market has largely under-estimated operating cash flow pressures of Sinopharm caused by revenue expansion and under-estimated the heavy financial costs, especially for A/R factorings. Maintain Sell and cut TP to HK$17.60, reflecting 15.7x 2013 PE and 1.3x 2012-15 PEG. Short-sell is not recommended. 2012 业 绩 令 人 失 望 :1) 扣 除 处 置 资 产 获 得 的 一 次 性 收 益, 公 司 净 利 润 同 比 增 长 24.2%, 2) 扣 除 应 收 账 款 和 应 付 账 款 保 理, 公 司 经 营 现 金 流 出 RMB41 亿 元 ( 未 扣 除 前 : 经 营 现 金 流 入 40 亿 元 ) 我 们 对 应 收 账 款 保 理 的 计 算 显 示, 公 司 实 际 应 收 账 款 天 数 从 2011 年 的 97.4 天 上 升 至 2012 年 的 102.9 天 ( 年 报 :86 天 ) 公 司 2013 年 3 月 配 股, 符 合 我 们 之 前 的 预 期 增 速 放 缓 并 购 推 动 的 增 速 放 缓, 因 为 1)2012 年 的 收 购 减 少,2)2011 年 收 购 的 企 业 对 赌 协 议 基 本 结 束 行 业 增 长 也 放 缓 公 司 22.9% 的 应 收 账 款 已 经 过 期, 现 金 流 将 会 更 差 公 司 面 临 收 入 扩 张 还 是 健 康 现 金 流 的 两 难 抉 择 我 们 可 能 高 估 了 医 药 流 通 企 业 在 供 应 链 中 的 角 色 对 流 通 企 业 商 业 模 式 和 供 应 链 的 重 新 评 估, 可 能 会 更 好 的 解 释 及 预 测 1) 毛 利 率 下 跌 的 压 力,2) 应 收 账 款 天 数 不 断 延 长, 但 应 付 账 款 天 数 基 本 不 变,3) 全 国 性 及 省 级 分 销 企 业 之 前 加 剧 的 竞 争 我 们 对 公 司 2013-15 年 的 EPS 预 测 分 别 低 于 市 场 预 期 12% 18% 和 20% 我 们 认 为 市 场 可 能 大 幅 低 估 了 在 收 入 增 长 时 其 现 金 流 的 压 力, 及 低 估 了 主 要 由 于 应 收 账 款 保 理 带 来 的 财 务 费 用 压 力 维 持 卖 出 评 级, 下 调 目 标 价 至 17.60 港 元, 相 当 于 15.7x 2013 PE 和 1.3x 2012-15 PEG. 但 不 建 议 做 空 Rating: Sell Maintained 评 级 : 卖 出 ( 维 持 ) 6-18m TP 目 标 价 : HK$17.60 Revised from 原 目 标 价 HK$21.60 Share price 股 价 : Stock performance 股 价 表 现 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) % of return HK$24.750 (30.0) Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Change in Share Price 股 价 变 动 HSI Index Sinopharm 1 M 1 个 月 3 M 3 个 月 1 Y 1 年 Abs. % 绝 对 变 动 % (4.6) (4.1) 20.1 Rel. % to HS index 相 对 恒 指 变 动 % (0.8) 3.1 15.0 Avg. share price(hk$) 25.51 24.90 23.27 平 均 股 价 ( 港 元 ) Source: Bloomberg, Guotai Junan International Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年 结 收 入 股 东 净 利 每 股 净 利 每 股 净 利 变 动 市 盈 率 每 股 净 资 产 市 净 率 每 股 股 息 股 息 率 净 资 产 收 益 率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) 2011A 102,225 1,561 0.662 24.1 30.6 9.003 2.3 0.190 0.9 13.7 2012A 135,787 1,974 0.822 24.0 23.8 9.653 2.0 0.250 1.3 14.5 2013F 163,663 2,268 0.883 7.5 22.1 10.951 1.8 0.265 1.4 16.4 2014F 200,781 2,598 1.012 14.6 19.3 11.532 1.7 0.304 1.6 17.0 2015F 244,509 3,047 1.186 17.3 16.5 13.057 1.5 0.356 1.8 17.7 Shares in issue (m) 总 股 数 (m) 2,568.3 Major shareholder 大 股 东 CNPGC 33.4% Market cap. (HK$ m) 市 值 (HK$ m) 63,565.3 Free float (%) 自 由 流 通 比 率 (%) 25.98 3 month average vol. 3 个 月 平 均 成 交 股 数 ( 000) 4,573.3 FY13 Net gearing (%) FY13 净 负 债 / 股 东 资 金 (%) 18.1 52 Weeks high/low (HK$) 52 周 高 / 低 28.100 / 16.760 Source..the Company, Guotai Junan International. See the last page for disclaimer Page 1 of 8

2012 Results Review Revenue grew by 32.8% YoY to RMB135.7 bn in 2012. The growth is consisted of 1)4.6ppt (~RMB6.2 bn) from acquisitions in 2012, 2)9ppt (~RMB27.7 bn) from the growth of 2011 s acquired business, 3)19.2ppt from the existed business since 2010. Organic growth is slowing down. Organic growth of the Company was 19.2% YoY in 2012, slower than 21%-22% YoY in 2011. (Note: in order to eliminating influences of consolidation timing, the 2012 organic growth refers to the growth of existing business since 2011 without the acquisitions of 2011 and 2012, and the 2011 organic growth refers to the growth of existing business since 2010 without the acquisitions of 2010 and 2011). EBIT grew by 33.7% YoY, slightly improved EBIT margin from 3.56% to 3.58%, due to 1) erosion of gross margin, 2) reduced SG&A ratios thanks to business scale expansion. Recurring net profit grew by 24.2% YoY to RMB1,687 mn, if excluding the non-recurring gains (RMB287 mn in 2012 and RMB202 mn in 2011, mainly from gains of PPE disposals). Net profit grew by 26.5% YoY to RMB1.97 bn. Net profit growth was greatly affected by the 56% YoY increased financial costs, slightly affected by the 31.4% YoY increased minority shareholders interest. Significant improvement of operating cash flows by accounting techniques. In 2012, operating cash flow of the Company was RMB4.0 bn, 3 times higher than 2011. We attribute the improvement to 2 accounting techniques: 1) A/R factoring (including note receivables factoring, +3.2 bn in operating cash flow) and 2) A/P factoring (+5.0 bn in operating cash flow). Excluding the above 2 accounting techniques, actual operating cash flow of the Company was estimated to be -RMB4.1bn. A/R factoring and financial costs. Account receivables and note receivables factoring are used widely by the Company because 1) it helps improve operating cash flows and relieves pressures of working capital, 2) according to the management, note factoring rate is sometimes lower than short borrowing interest rate. Based on assumption of average factoring rate of 6.0% in 2012, we estimated around RMB22.34 bn receivables were factored, accounting for 16.5% of its total revenue in the year. Actual A/R days increased from 97.4 days in 2011 to 102.9 days in 2012, according to our A/R factoring calculation model. It is much longer than the reported A/R days of 79.2 in 2011 and 86.0 in 2012, respectively. According to our estimates, one-day increase in A/R days in 2012 need ~RMB750 mn increase in working capital, and as a result, the Company increased its working capital by RMB4,125 mn due to increase in A/R days. Table-1: A/R factoring & financial costs calculations (RMB mn) RMB mn 2010A 2011A 2012A 2013F 2014F 2014F Financial costs from discount receivables (reported) 231 358 441 564 821 1,192 Average factoring rate (assumption) 7.0% 7.0% 6.0% 6.0% 6.0% 6.0% Discounted receivables in the year 12,568 19,146 22,340 31,181 43,425 60,438 Discounted receivables to revenue ratio 18.2% 18.7% 16.5% 18.5% 21.0% 24.0% Actual A/R days 95.8 97.4 102.9 110.0 115.0 120.0 Reported A/R days 78.4 79.2 86.0 89.7 90.9 91.2 Sources: the Company, Guotai Junan International. Note: our A/R factoring calculation model is available upon request. A/P factoring of RMB4,962 mn: pressure or new choice? A/P factoring, or A/P financing program is a new banking service in 2012, according to the management. Certain banks repaid A/P on behalf of the Company, with an equivalent sum See the last page for disclaimer Page 2 of 8

drawn as borrowings. In 2012, the Company totaled A/P factoring of RMB4,962 mn, and as a result, the RMB4,962 mn flow out was accounted as financial cash flow, instead of operating cash flow. We think this a new technique for the Company to present a less ugly operating cash flow, and it may reflect the great payment pressures. Essentially, we think the Company could not meet the payment date and has to ask for short credit borrowings for some bills, and it is different from A/R factoring, because A/R factoring is a kind of borrowing with pledged A/R (with lower interest rate). Conclusion: we think 2012 results are very disappointing with 1) 24.2% YoY net profit growth, after removing the one-off gains from PPE disposal, 2) -RMB4.1bn operating cash flow after removing influences of A/R and A/P factoring. We are more worried about its growth slowdown and worsening operating cash flow. Expectations with Worries M&A-driven growth is slowing down. Although revenue growth contribution of 2012 s M&A was only 4.6ppt, its growth from 2011 s acquisition was 9.0ppt, mainly due to 1) incentive to the newly acquired subsidiaries with the Value-Adjustment-Mechanism (VAM, 对 赌 协 议 ), 2) consolidation timing of these acquisitions. In 2013, contributions from acquisitions will be much less due to 1) few acquisitions in 2012, and 2) finish of VAM for most 2011 acquisitions. Industry growth is also slowing down. In March 2013, China s medicine sales grew by only 19.1% YoY, much lower than the 24.0% YoY growth of Jan-Feb 2013, the 29.5% YoY growth of 2012, the 29.0% CAGR of 2009-2012, or the 23.1% CAGR of 2005-2012. The slowdown is due to 1) government s medical insurance cost control, 2) destocking of distributors with expectations of price drug cut in future tendering. We expect the slowdown of industry growth to last for 2013. Figure-1: Medicine sales growth in China 40.0% 30.0% 20.0% 10.0% 0.0% 0.8% 14.3% 6.6% 22.1% 9.7% 12.2% 10.4% 5.2% 19.2% 7.3% 29.7% 32.9% 29.5% 25.1% 24.7% 24.0% 19.1% 14.8% -10.0% -20.0% -18.2% -30.0% Source: National Bureau of Statistics of China, Guotai Junan International Operating cash flow is worsening. Based on the 2012 revenue, a 1-day increase in A/R days will need RMB750 mn more working capital, and a 1 bn growth in revenue will need RMB200 mn more working capital. About 22.9% of the total A/R was over-due. In 2012 year end, the Company had RMB8.6 bn A/R that were past due, accounting for 22.9% of its total A/R. As listed in table-2, 95.1%, 99.1% and 63.2% of it s A/R aged 3-6 months, 6-12 months and over 12 months was past due. Although these over-due bills are still collectable and not considered impaired because most of them are from public hospitals, we are concerned of the cash flow situation of these clients. See the last page for disclaimer Page 3 of 8

Table-2 : Past-due A/R ratio for different groups of A/R of Sinopharm 2010 2011 2012 3-6 months 94.3% 95.2% 95.1% 6-12 months 88.9% 98.3% 99.1% over 12 months 24.6% 44.8% 63.2% Total 17.5% 22.7% 22.9% Sources: the Company, Guotai Junan International. A/R days is expected to increase from 102.9 days in 2012 to 110 days in 2013, according to our estimates. The increase is mainly due to worsening cash flow situation of hospitals. The increase will make Sinopharm need ~6 bn more working capital (as operating cash outflow). Dilemma in expansion and cash flow problems. Sinopharm is given the mission to seize more market shares in pharmaceutical distribution industry, in order to meet the requirement of ongoing healthcare reform of China. However, such expansion needs great working capitals. Our 20.5% YoY top-line growth projection in 2013 makes it need ~5.6bn more working capitals, according to our estimates. As a result, we think it may have to slow down revenue expansion mainly due to cash flow stress. Continuous financing is needed. Sinopharm finances by 1) short borrowing (including A/P factoring), 2) bond issuance, 3) A/R factoring, and 4) share placement. As we expected in the report on Nov 2012 and in the report of Sep 2012, it did placed new share for HK$4 bn in Mar 2013. Financial costs will increase largely (by 21% YoY and 33% YoY in 2013 and 2014) and erode its profit, and the placement will dilute its EPS. Business Model and Supply Chain Re-evaluation Pharmaceutical distributors are simply transporters? In pharmaceutical supply chain, hospitals are not the ultimate end-users, but they decide which drugs to use. Manufacturers try to promote their pharmaceutical products in hospitals, and distributors simply transport these products to hospitals. Although distributors also provide value-added services including bills collection, we think their core competence is still help to reduce transportation costs for their large transportation scales. Without controls on the manufacturing and sales of the products they carry, pharmaceutical distributors may be more specialized transporters (It is different from pharmaceutical promoters such as CMS (00867 HK)). Pharmaceutical distributors provide indistinctive products? The products of pharmaceutical distributors are transportation services and some value-added services along the transportation, instead of the medicine products which are provided by manufacturers. Simply, we think the products are indistinctive among these large distributors, including Sinopharm, Shanghai Pharm (02607 HK), CR Pharm, and other provincial competitors. Limited economies of scale? Different from telecommunication networks owned by China Mobile, large nation-wide pharmaceutical distributors may be not more competitive than provincial distributors in certain provinces. After the construction of distribution centers of provincial pharmaceutical distributors, competition may be fiercer and large distributors may face margin erosions. We think we may have over-estimated value of pharmaceutical distributors in the supply chain. Re-evaluation of the business model and pharmaceutical supply chain could explain and estimate the trend of 1) pressures in gross margin, 2) increasing A/R days and stable A/P days, and 3) fiercer competitions among nation-wide distributors and provincial distributors. (This is our primary viewpoint for discussion instead of conclusion.) See the last page for disclaimer Page 4 of 8

Earnings and investment suggestions Cut ESP estimates by 12% to RMB0.883 for 2013, and by 22% to RMB1.012 for 2014, due to 1) revised-down top-line growth estimates, 2) dilution of new share placement. We introduce 2015 EPS estimates of RMB1.186. Our estimates reflect 7.5%/14.6%/17.3% YoY growth in 2013-15, much lower than the CAGR of 24.1% in 2010-12, and 2011-15 EPS CAGR is estimated to be 15.7%. Our 2013-15 EPS estimates are 12%, 18% and 20% lower than consensus, respectively. We think the market has underestimated operating cash flow pressures of Sinopharm caused by revenue expansion and underestimated the heavy financial costs, especially for A/R factorings. Maintain Sell and cut TP to HK$17.60 for Sinopharm, reflecting 15.7x 2013PE and 1.3x 2012-15 PEG. We had expected its 2012 results to be very disappointing due to 1) slowdown growth of newly acquired subsidiaries after VAM finished, and 2) bad operating cash flow, and we recommended Sell with TP of HK$21.60 in our report in Nov 2012. We had expected a good Buy opportunity after 2012 results announcement. Although its share price declined by 6% since our last report, we think it is still not attractive because we think the market may re-evaluate its real cash flow status as well as its business model, and it may deserve a de-rating. Short-sell is not recommended, because the Company will be still in good operation and it is very difficult to predict the timing of de-rating. Future research focus 1) We will have to further analyze Sinopharm s competitors in each provincial market; 2) We will further evaluate our primary thoughts of Sinopharm s roles in the supply chain; 3) We will track the growth slowdown trend of China s drug sales and analyze Sinopharm s industry opportunities. See the last page for disclaimer Page 5 of 8

Peers Comparison Company Stock Code Currency Share Price Mkt Cap PER PBR ROE (%) (million) 13F 14F 15F 13F 14F 15F 13F 14F Sinopharm Group Co-H 01099 HK HK$ 24.75 63,565 22.1 19.3 16.5 1.8 1.7 1.5 16.4 17.0 HK listed health care peers Shanghai Pharmaceuticals-H 02607 HK HK$ 16.52 42,421 17.5 15.5 14.0 1.6 1.5 1.2 9.7 10.0 Shandong Weigao Gp Medical-H 01066 HK HK$ 6.68 29,902 17.5 15.5 14.0 1.6 1.5 2.0 9.7 14.6 Sihuan Pharmaceutical Hldgs 00460 HK HK$ 4.28 22,149 16.1 13.7 11.7 2.3 2.1 1.9 14.9 16.4 Sino Biopharmaceutical 01177 HK HK$ 5.31 26,239 24.5 19.5 16.9 4.6 4.0 3.1 24.4 25.3 Guangzhou Pharmaceutical-H 00874 HK HK$ 25.50 28,950 29.2 23.2 17.4 4.2 4.3 2.7 13.7 14.8 China Shineway Pharmaceutica 02877 HK HK$ 14.66 12,124 13.0 11.1 9.9 2.1 1.9 1.7 17.4 18.0 China Medical System Holding 00867 HK HK$ 7.74 18,690 21.7 16.9 13.5 4.8 4.1 3.3 22.8 25.1 Microport Scientific Corp 00853 HK HK$ 5.09 7,163 15.7 13.9 12.2 2.2 2.0 1.7 13.8 15.4 The United Laboratories Inte 03933 HK HK$ 3.33 5,417 19.4 13.5 14.6 0.9 0.8 0.8 5.8 8.4 Tong Ren Tang Technologies-H 01666 HK HK$ 27.10 15,935 30.5 24.5 17.5 5.3 4.6 4.4 20.6 23.0 Kingworld Medicines Group 01110 HK HK$ 1.24 772 7.1 7.6 n.a. 1.3 1.1 n.a. 12.0 13.5 Total Simple Average 19.3 15.9 14.2 2.8 2.5 2.3 15.0 16.8 Total Weighted Average 20.9 17.3 14.5 3.0 2.7 2.3 15.1 16.9 Weighted Average Excluding Sinopharm 21.8 17.8 14.6 3.4 3.1 2.6 16.5 18.6 China listed pharmaceutical distributors Jointown Pharmaceutical-A 600998 CH RMB 10.18 14,461 25.8 20.4 n.a. n.a. n.a. n.a. 10.9 13.3 Shanghai Pharmaceuticals-A 000963 CH RMB 12.33 33,789 17.5 15.5 14.0 1.6 1.5 1.1 9.7 8.9 China National Medicines-A 600511 CH RMB 16.26 7,785 n.a. n.a. n.a. 3.7 3.2 2.5 19.8 20.6 China National Accord Medi-A 000028 CH RMB 31.89 8,826 16.0 13.5 n.a. 3.9 3.1 2.5 24.7 23.4 Nanjing Pharmaceutical Co-A 600713 CH RMB 4.65 3,225 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Cachet Pharmaceutical Co-A 002462 CH RMB 7.91 1,898 18.8 15.5 n.a. n.a. n.a. n.a. 8.5 9.9 Zhejiang Zhenyuan Co Ltd-A 000705 CH RMB 13.66 2,282 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Simple Average 19.5 16.2 14.0 3.1 2.6 2.0 14.7 15.2 Weighted Average 15.8 13.4 6.5 1.6 1.4 1.1 12.1 12.2 US pharmaceutical distributors Mckesson Corp MCK US US$ 106.93 24,903 17.5 15.5 14.0 1.6 1.5 2.4 9.7 21.2 Cardinal Health Inc CAH US US$ 43.01 14,660 12.3 11.9 11.0 2.2 2.0 1.7 19.2 18.4 Amerisourcebergen Corp ABC US US$ 54.04 12,439 17.6 14.7 12.5 4.6 4.2 3.8 25.2 30.2 Simple Average 15.8 14.0 12.5 2.8 2.6 2.7 18.0 23.3 Weighted Average 16.1 14.3 12.8 2.5 2.3 2.6 16.1 22.5 Japanese pharmaceutical distributors Suzuken Co Ltd 9987 JP JPY 3,790.00 356,067 17.5 15.5 14.0 1.6 1.5 1.1 9.7 5.8 Medipal Holdings Corp 7459 JP JPY 1,502.00 367,276 n.a. 17.4 16.5 1.1 1.0 1.0 6.0 6.1 Alfresa Holdings Corp 2784 JP JPY 5,520.00 324,324 18.5 19.9 18.5 1.3 1.2 1.2 6.8 6.4 Toho Holdings Co Ltd 8129 JP JPY 2,213.00 173,212 14.7 13.7 13.2 1.3 1.2 1.1 9.0 9.4 Simple Average 16.9 16.6 15.5 1.3 1.2 1.1 7.9 6.9 Weighted Average 12.1 17.0 15.8 1.3 1.2 1.1 7.7 6.6 Source: the Companies, Bloomberg, Guotai Junan International. See the last page for disclaimer Page 6 of 8

Financial Statements and Ratios P&L (RMB m) 2011A 2012A 2013F 2014F 2015F Cash Flow (RMB m) 2011A 2012A 2013F 2014F 2015F Revenue 102,225 135,787 163,663 200,781 244,509 PBT 3,128 4,014 4,763 5,601 6,666 Cost of sales (93,870) (124,844) (150,505) (184,679) (224,948) Ajustment 1,047 1,146 1,828 2,433 3,064 Change in working capital (2,327) (5,217) (6,161) (6,871) (5,954) Gross Profit 8,355 10,943 13,159 16,103 19,561 Income tax paid and others (828) (887) (1,090) (1,281) (1,525) Other income 169 219 272 333 406 Net cash from operating activities 1,019 4,017 (660) (119) 2,251 Distribution expenses (2,923) (3,730) (4,630) (5,680) (6,917) Administrative expenses (1,965) (2,568) (3,077) (3,755) (4,548) Capex (2,731) (1,282) (1,158) (1,047) (947) Others (99) 0 (194) (515) (515) EBIT 3,636 4,863 6,025 7,371 8,951 Net cash from investing activities (2,830) (2,209) (1,352) (1,562) (1,462) Net finance costs (818) (1,272) (1,537) (2,043) (2,556) Share of profit of associates 107 136 164 201 245 Issues of shares 2,835 0 3,200 0 0 Taxiation (725) (934) (1,147) (1,349) (1,605) Net changes of bank accounts 5,674 1,839 4,771 2,654 1,962 Dividends and Interest Paid (1,320) (2,249) (2,584) (3,189) (3,860) PAT 2,403 3,080 3,616 4,252 5,061 Others 240 (4,768) 22 45 45 Minority Interest 842 1,106 1,388 1,703 2,074 Net cash from financing activities 7,428 (5,178) 5,409 (489) (1,852) Net Profit 1,561 1,974 2,268 2,598 3,047 Recurring Net Profit 1,359 1,687 1,981 2,311 2,760 Net increase in cash 5,617 (3,369) 3,396 (2,170) (1,063) EPS (RMB) 0.662 0.822 0.883 1.012 1.186 Cash at bgn of Yr 7,475 13,091 11,108 15,215 14,019 Recurring EPS (RMB) 0.577 0.702 0.771 0.900 1.075 Cash at end of Yr 13,092 9,722 14,505 13,045 12,956 Dividend 456 601 680 779 914 Growth (%) 2011A 2012A 2013F 2014F 2015F DPS (RMB) 0.190 0.250 0.265 0.304 0.356 Revenue 47.7 32.8 20.5 22.7 21.8 Dividend Yield (%) 0.9 1.3 1.4 1.6 1.8 Gross profit 43.2 31.0 20.3 22.4 21.5 EBIT 51.0 33.7 20.3 22.3 21.4 Balance Sheet (RMB m) 2011A 2012A 2013F 2014F 2015F Net Profit 29.1 26.5 14.9 14.6 17.3 PP&E 4,431 5,382 6,459 7,428 8,319 Recurring Net Profit 31.0 24.2 17.4 16.7 19.4 Other noncurrent assets 6,964 8,448 8,636 9,088 9,568 EPS 24.1 24.0 7.5 14.6 17.3 Total noncurrent assets 11,395 13,831 15,095 16,515 17,887 Recurring EPS 25.9 21.8 9.9 16.7 19.4 Cash and cash equivalents 13,091 9,722 14,505 13,045 12,956 Efficiency (as reported) 2011A 2012A 2013F 2014F 2015F Inventories 12,214 13,618 16,783 20,513 24,905 Inventory Days 34.4 33.9 33.9 33.9 33.9 Trade receivables 26,592 37,401 42,996 56,955 65,233 Trade Receivable Days 79.2 86.0 89.7 90.9 91.2 Other current assets 4,336 5,275 6,699 8,517 10,843 Account Payable Days 91.2 90.3 90.0 89.5 89.0 Total current assets 56,233 66,016 80,982 99,030 113,938 Operating Cycle Days 113.5 119.9 123.6 124.8 125.1 Total assets 67,628 79,847 96,078 115,545 131,825 Margins and ratios 2011A 2012A 2013F 2014F 2015F Long-term debts 5,182 5,192 9,192 11,030 12,133 Gross Margin (%) 8.17 8.06 8.04 8.02 8.00 Other non-current liabilities 1,766 1,807 5,608 6,393 7,650 Selling Expenses Ratio (%) (2.86) (2.75) (2.75) (2.75) (2.75) Total non-current liabilities 6,948 6,998 14,800 17,422 19,783 Administrative Expenses Ratio (%) (1.92) (1.89) (1.88) (1.87) (1.86) EBIT Margin (%) 3.56 3.58 3.57 3.56 3.55 Short-term debts 8,667 10,888 11,977 13,175 14,492 Net Profit Margin (%) 1.53 1.45 1.39 1.29 1.25 Trade payables 27,054 34,685 39,536 51,032 58,668 Other current liabilities 4,571 4,532 3,455 4,297 5,346 Operating cash flow margin (%) 1.0 3.0 (0.4) (0.1) 0.9 Total current liabilities 40,292 50,105 54,968 68,504 78,507 Interest Coverage (x) 4.4 3.8 3.9 3.6 3.5 Long-term Debts to Total Debts (%) 37.4 32.3 43.4 45.6 45.6 Share capital 2,403 2,403 2,568 2,568 2,568 Debt to Equity Ratio (%) 67.9 70.7 80.5 81.7 79.4 Reserves 13,271 14,676 16,944 18,892 21,178 Net Gearing (%) Net cash 21.0 18.1 29.9 32.6 Shareholders' equity 15,674 17,078 19,512 21,461 23,746 ROA (%) 3.8 4.2 4.7 4.6 4.8 Minority interests 4,714 5,665 6,798 8,157 9,789 ROE (%) 13.7 14.5 16.4 17.0 17.7 Total equity 20,388 22,743 26,310 29,618 33,535 Valuation 2011A 2012A 2013F 2014F 2015F Total equity and liabilities 67,628 79,847 96,078 115,545 131,825 P/B (x) 2.3 2.0 1.8 1.7 1.5 BPS (RMB) 9.00 9.65 10.95 11.53 13.06 P/E (x) 30.6 23.8 22.1 19.3 16.5 Source: the Company, Guotai Junan International. See the last page for disclaimer Page 7 of 8

Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance>15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance>5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance<-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for Shandong Chenming Paper Holdings Limited-H shares (01812) and China City Railway Transportation Technology Holdings Company Limited (08240), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. 2013 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) 2509-9118 Fax: (852) 2509-7793 Website: www.gtja.com.hk See the last page for disclaimer Page 8 of 8