2018 Healthcare Sector Outlook - gfgroup.com.hk · Prefer big pharma, TCM and CRO players over healthcare service providers. Key themes ... Inner Mongolia Sep 1: implemented Dec:

2018 Healthcare Sector Outlook

Nov 17, 2017 Equity Research | Healthcare

Favorable structural changes to drive earnings growth in 2018

Natalie Chiu SFC CE No. AVH029 [email protected] +852 3760 2030 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Sector view Positive

The healthcare industry has seen sustained market growth, despite increased policy headwinds.

Differentiation among players in each subsector is becoming increasingly significant.

Prefer big pharma, TCM and CRO players over healthcare service providers.

Key themes

Healthcare sector lagging other cyclical sectors The sector has been seen as a laggard

play vs cyclical stocks in 2017, gaining about 30% in 4Q17. The valuation gap with the MSCI China index is narrowing. We believe there is a good chance the sector will outperform in early 2018.

China pharmaceutical end-market should see high single-digit growth in FY17 Amid

industry transformation and a demand upgrade, the healthcare sector is likely to post steady growth for the 2016-20 period.

More positives than negatives in the short term Positive impacts on earnings have been

seen on the P&L of pharma companies that have differentiated products, and the Shanghai- and Shenzhen-Hong Kong stock connects now allow investors to buy related healthcare stocks and subsectors that had previously been out of reach.

Valuation analysis

The MSCI China healthcare index is trading at a forward P/E of 20.1x, above its five-year average of 18.1x. Although sector valuations look rich, we note that the valuation gap over the MSCI China index is narrowing and is now almost at the historical low of 30-45% seen at end-2012.

Investment strategy

Pharmas (including chemical drugs and biologics) We see upside for companies with

high NDRL exposure, although there is uncertainty surrounding the impact of volume gains and pricing trade-offs in the near term.

Traditional Chinese medicines (TCM) Stocks are trading at a 20% discount to their

pharma peers; government policy should spur a demand upgrade.

Contract research organizations (CRO) Companies in the segment have a competitive

advantage in terms of economies of scale and scope, and will benefit from government policy to accelerate drug approvals.

Top picks

CSPC Pharma (1093 HK, Accumulate) Continued solid growth in 3Q17; new generics

launches to underpin growth. Wuxi Biologics (2268 HK, Buy) Beneficiary of pharma technology upgrades; backlog mix

shifted towards post-IND services. CTCM (570 HK, Buy) Margin expansion through new acquisitions; 3Q17 sales momentum on

track. CR Pharma (3320 HK, Buy) New distribution agreement could be accretive for its P/E

valuation.

Risks

Upside risks: Faster-than-expected drug/R&D approvals; more favorable government

policies Downside risks: Larger-than-expected price cuts; unfavorable government policies.

mailto:[email protected]

Nov 17, 2017

2

2018 Sector Outlook

Pharmaceutical industry saw sustained market growth in 2017

China pharmaceutical end-market to see high single-digit growth in FY17 The industry has

been growing at mid- to high-teens between 2010-15, almost double China’s GDP growth. This

was at a time when the sector was backed by favorable demographics and government support,

and the state insurance fund had lower funding pressure. As the economy has slowed in recent

years, given the constraints on reimbursement, sector growth has also slowed, although still

higher than the overall GDP growth. Amid industry transformation and a demand upgrade, the

healthcare sector is likely to grow steadily in 2016 through 2020.

Medical insurance payment growth was slower than expense growth in FY16 Total funding

in 2016 by the three medical insurance programs was Rmb1448bn and payment was Rmb1231bn,

implying a surplus of 15%. This compares to a surplus of 19% in 2011. As expense growth was

slightly slower than funding growth in the past 2 years due to budget controls, we believe pressure

to control insurance funding is lower than before. Moreover, the inclusion of more critical illness

drugs into the new NRDL will also better allocate resources and avoid redundancies in the system.

Healthcare sector lagging other cyclical sectors The MSCI China healthcare index is trading

at a forward P/E of 20.1x, above its 5-year average of 18.1x. Although sector valuations look rich,

we note that the valuation gap over MSCI China index is narrowing and is now almost at the

historical low of 30-45% seen at end-2012. We thus believe there is a good chance it can

outperform in 2018 if leaders continue to deliver solid results amid a moderating industry growth

outlook.

Figure 1: Pharmaceutical growth to sustain at 8% in FY17 Figure 2: Medical insurance fund income growth has been faster than expense growth since 2015

Sources: CFDA Southern Medicine Economic Institute, GF Securities (Hong Kong) Sources: MOHRSS, GF Securities (Hong Kong)

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Nov 17, 2017

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2018 Sector Outlook

Figure 3: MSCI China Healthcare index forward P/E Figure 4: MSCI China Healthcare index forward P/E premium over MSCI China index

Sources: Bloomberg, GF Securities (Hong Kong) Sources: Bloomberg, GF Securities (Hong Kong)

More positives than negatives in the near term Although the industry has experienced more

policy headwinds in 2017, marked by reimbursement control, market growth has so far sustained

at a level similar to 2016. Positive impacts on earnings were seen on the P&L of pharma

companies that have differentiated products and are preferred by doctors. We expect only

positives for the companies with drugs that are newly included in the revised NDRL. Moreover, the

government has implemented the two-invoice system to weed out the smaller distributors that are

less competitive. This drives industry consolidation and benefits larger players with extensive

networks at the provincial level. Lastly, the Shanghai- and Shenzhen-Hong Kong stock connects

allow investors to invest in stocks and subsectors that markets lacks, and narrows the valuation

gap between the A and H-share healthcare sector.

Figure 5: Timeline of events on a forward P/E chart

Sources: Bloomberg, GF Securities (Hong Kong)

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MSCI China healthcare index (x) MSCI China index (x) Premium (LHS)

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1/2013 4/2013 7/2013 10/2013 1/2014 4/2014 7/2014 10/2014 1/2015 4/2015 7/2015 10/2015 1/2016 4/2016 7/2016 10/2016 1/2017 4/2017 7/2017 10/2017

GSK was fined US$500m in bribery case

New EDL implemented

CFDA notice on self-examination of clinical trials

Shanghai-Hong Kong Connect

Shenzhen-Hong Kong Connect

• CFDA notice on BE testing

• State Council notice on two-invoice system

x

State Council opinion on improving drug review and promoting R&D

New NDRL issued (2017 version)

Concerns on tender delays

New EDL issued (2012 version)

New NDRL implemented

Nov 17, 2017

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2018 Sector Outlook

Several negative catalysts to be aware of One of the biggest risks in the sector is that price

cuts from tenders have been more severe than expected, as local provinces adopted their own

tendering policies to put more pricing pressure on drug companies. The magnitude of the price

cuts has been about 20-30% in recent new tenders compared with 10-15% during previous cycles,

and it could be higher for generics and less so for exclusive drugs.

Figure 6: Revised NDRL implementation timeline

Sources: GF Securities Development & Research Center, GF Securities (Hong Kong)

Figure 7: Revised NDRL implementation progress

Sources: GF Securities Development & Research Center, GF Securities (Hong Kong)

Pharmas, TCM and CRO companies could outperform Although the overall sector saw

moderate market growth with more policy headwinds, we see large pharma, TCM and CRO

companies as direct beneficiaries of the ongoing healthcare reforms, through which the

government intends to support more R&D by paying patients’ medical bills and accelerating drug

approvals. We see less positives for healthcare services providers (hospitals) and distributors.

Sept 30, 2016: MOHRSS released NDRL draft for

comments

Feb 23, 2017: MOHRSS launched the new NDRL July 31, 2017: Provincial DRL

launchesAug 31, 2017: Implementation

of new NDRL

Expert reviews on the revised NDRL36 high-priced drugs under independent negotiation

Implementation

Province2017 2018

May Jun Jul Aug Sep Oct Nov Dec Jan

Hubei Sep 1: implemented

Yunnan Sep 1: implemented

Hebei Sep 1: implemented

Anhui Sep 1: implemented

Jilin Sep 1: implemented Jan 1: implement

Jiangsu Sep 1: implemented

Liaoning Sep 1: implemented

Henan Sep 1: implemented Jan 1: implement

Xinjiang Sep 1: implemented

Shandong Sep 1: implemented

Inner Mongolia Sep 1: implemented Dec: Release

Fujian May 1: implemented

Zhejiang Sep 1: implemented

Hunan Sep 1: implemented

Jiangxi Sep 1: implemented

Tianjin Sep 1: implemented

Hainan Dec: Release

Heilongjiang Dec 1: implement

Qinghai Jul: Released

Ningxia Sep: Released

Sichuan* Jul: Released

Guizhou* Sep 1: implemented

Beijing Sep 1: implemented

Shanxi* Aug: Released Dec 1: Release

* Draft for commentsYellow: implement NDRL’s timeline; Orange: implement provincial DRL’s timeline; Green: cannot complete within the given timeline

Nov 17, 2017

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2018 Sector Outlook

Pharmas (including chemical drugs and biologics) Depending on a company’s product

portfolio, drugs that are listed in the NDRL often see a boost in sales volume despite higher risks

from government price controls. The revised NDRL has expanded from 2196 drugs in 2009, an

increase of 15%. Companies with high NDRL exposure have potential upside, although there is

uncertainty surrounding the impact of volume gains and pricing trade-offs before the system is

fully established. We expect large pharma companies to continue to outperform the overall

healthcare sector before price cuts arrive in late 1H18 or 2H18.

Traditional Chinese Medicines (TCM) China TCM companies are currently trading at a 20%

discount to their pharma peers. We believe this is not justified given the sector’s improving

fundamentals and government policy to spur a demand upgrade in TCM. In particular, some

branded over-the-counter (OTC) products could benefit as consumers become more health

conscious and prefer products with safety and quality. Moreover, concentrated TCM granules are

categorized as TCM decoction pieces and have less price control risks and are better positioned

for industry reforms.

Figure 8: Market growth (pharmaceutical manufacturing) Figure 9: Market growth (chemical drugs)

Sources: NBS, GF Securities (Hong Kong) Sources: MIIT, GF Securities (Hong Kong)

Figure 10: Market growth (biopharmaceuticals) Figure 11: Market growth (TCM decoction pieces)

Sources: MIIT, GF Securities (Hong Kong) Sources: MIIT, GF Securities (Hong Kong)

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Nov 17, 2017

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2018 Sector Outlook

Contract research organizations (CRO) We see plenty of low hanging fruit in the CRO sector,

even though most Chinese CROs are not listed. CROs in China (vs US/Europe) have the

competitive advantage of economies of scale and scope. Since 2015, the government has

launched a series of guidelines and policies (such as bioequivalence testing and a green channel

for foreign innovative drugs that are manufactured locally in China), aimed at R&D and a quality

upgrade. This would benefit CROs with strong clinical and analytical support. We believe the CRO

sector will outperform the overall healthcare sector.

Figure 12: China CRO market Figure 13: Clinical trial density in selected countries (2016)

Sources: Frost & Sullivan, GF Securities (Hong Kong)

Distributors As reforms continue, distributors should also benefit, but with a mixed outlook.

Industry consolidation remains the key theme, with the government committed to rolling out the

two-invoice policy nationwide in 2018 to further squeeze profit out of the drug distribution process.

The industry will also continue to see more M&A to boost revenue growth for leading distributors.

While industry consolidation will favor larger players with wide distribution networks, their margins

will come under pressure due to more indirect sales to hospitals.

Figure 14: Policies streamlining the distribution process

Sources: Wind, GF Securities (Hong Kong)

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iaPolicy Type Description

Two invoice system• Issuances of only two invoices between hospital and drug manufacturers and between drug manufacturers to distributors• Central procurement of drugs by all public hospitals and establish a trace mechanism to identify drug’s ex-factory price, thereby

increasing the transparency of the drug distribution chain

Business tax to Value-added tax• Drug distributors Business Tax of 5% is now converted to VAT of 11%, increasing the tax burden of drug distributors, thereby

preventing mechanisms such as: the dominance of low invoicing cost drug distributors and transfer of invoicing

Prescription drugs outflow • Allowing the outflow of prescription drugs from hospitals to retailers

Nov 17, 2017

7

2018 Sector Outlook

Figure 15: Policies encouraging drug R&D

Sources: Wind, GF Securities (Hong Kong)

Figure 16: China healthcare reform progress

Sources: GF Securities (Hong Kong)

Limited room for upward earnings revisions and/or surprises in the near term The

healthcare sector’s forward P/E is currently at a high level as 1) corporate earnings YTD are

growing 5-10% faster than market expectation, and 2) consensus is expecting one-year forward

earnings growth of about 20% YoY in 2018. While a 20% YoY growth target may not seem too

aggressive for quality leaders, any negative news such as earlier than expected price cuts may

increase risks to maintain such a high valuation. The last time consensus had forward earnings

expectations of 20% YoY and a similar P/E profile was in early 2014 after strong earnings

surprises. We believe further re-rating will be mainly driven by forward P/E expansion based on

the currently improving market sentiment.

Healthcare sector to become more structurally defensive The China healthcare sector has

been underweight by investors as more fund allocations were placed in cyclical names.

Considering that China is going through an economic rebalancing phase, with a shift from

investment to consumption, we expect an expanding premium vs MSCI China index, supported by

improving earnings in 4Q17 and 1H18 earnings. We recommend investors stay selective and

consider stocks that either have less exposure to uncertainties or would benefit most from reforms.

Policy Type Description

Prioritized review and approval system

Projects with major innovation can obtain prioritized approval via the green channel

Product registration Marketing Authorization Holder Pilot Program

Medical insurance support Medical insurance independent negotiation system; Development in commercial insurance, etc.

Increased clinical trial monitoring Clinical data self-examination and verification etc.

Period Key Policies Healthcare Reforms

2007 to 2010

1. Comments on county level hospitals pilot reform 2. Comments on strengthening and improving the essential drugs system3. Comments on developing critical illness insurance for urban and rural

residents

Accessibility:• Universal health insurance, promoting the unification of 3 government

insurances• Establish a basic medical system and a system for all general practitioners• Promote the use of NDRL

2011 to 2013

1. Proposal on deepening healthcare reform during twelve 5-year plan2. Accelerating public hospital reforms3. Promoting private participation in healthcare4. Pilot program of critical illness insurance5. Accelerating reform progress of county level hospitals

Payable:• Pricing, bidding and medical insurance jointly control medical costs• Speed up public hospital and county-level hospital’s deep reform• Abolishing the system of providing compensation to doctors via high drug

costs

2014 to 2015

1. Facilitating pharmaceutical price reform2. Strengthening and improving tiered health care system3. Deepening healthcare reform at grassroots medical institutions4. Opinions on carrying out the two invoice system for drug procurement5. Conducting self-examination by drug clinical trial institutions

Quality and efficiency:• Strengthen the industry standard, eliminate distribution channel profits• Payer reform, develop business insurance• Encourage the society to develop hospitals, in particular, medical centers

within the primary market• Improve quality standards to promote industry consolidation

2016 to 2017

1. Evaluation of the quality and efficacy of generic drugs2. Pilot program plan for the system of the drug marketing authorization

authorisation holders3. Deepening reform on the system for review and examination and

approval of drugs and medical devices

Drug quality and innovation:• Establish priority review system based on clinical value of drugs• Accelerate import drugs approval• Resolve registration backlog of chemical drugs

Nov 17, 2017

8

2018 Sector Outlook

Figure 16: Top 10 outperformers (% chg YTD as of Nov 10) Figure 17: Top 10 Underperformers (% chg YTD as of Nov 10)


Figure 28: Valuation summary (as of Nov 16)


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Mkt Cap EPS CAGR PEG (x)

Ticker (HK$ m) Price YTD FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY17-19E FY18E

H-Pharmaceuticals

Fosun Pharma 2196 HK 118,255 40.25 69 28.5 25.7 21.5 18.4 16 20 19 16 14 14 21 17 13.9 13.7 15.1 15.6 16% 1.4

CSPC Pharm 1093 HK 101,137 16.20 96 46.0 36.2 28.6 23.3 9 18 18 16 26 29 28 23 22.3 23.6 25.2 25.7 25% 1.1

Sino Biopharm 1177 HK 83,313 11.22 105 43.5 34.7 30.2 26.3 15 10 12 13 14 24 15 16 23.0 22.0 20.4 20.0 18% 1.7

China Medical System 867 HK 38,801 15.60 27 24.1 19.8 17.0 14.7 38 20 15 13 38 23 17 16 23.9 24.0 23.5 23.4 18% 0.9

3SBio 1530 HK 39,047 15.38 104 47.0 37.5 28.6 23.0 (2) 34 38 18 35 25 32 24 11.7 12.7 na 16.1 27% 1.1

Sihuan Pharm 460 HK 25,288 2.66 25 13.5 12.5 11.3 10.1 1 4 9 10 (17) 1 10 11 15.5 15.1 14.1 14.0 10% 1.1

Livzon Pharm 1513 HK 42,145 61.25 75 34.4 15.0 24.3 21.6 15 18 15 11 26 120 (33) 17 14.5 19.7 11.8 12.2 17% 1.4

Luye Pharma 2186 HK 18,100 5.46 19 17.4 15.9 14.1 12.8 2 24 9 10 18 7 13 10 14.7 14.4 na 13.8 11% 1.3

SSY Pharm 2005 HK 11,474 4.03 63 23.3 18.7 15.3 12.7 6 17 13 12 21 26 21 23 19.3 20.8 21.3 21.8 22% 0.7

United Lab 3933 HK 10,558 6.42 22 -33.6 25.3 18.1 14.6 (8) 13 11 9 NA NA 41 23 -4.9 6.9 8.8 9.8 -232% -0.1

Dawnrays 2348 HK 3,553 4.48 (4) 11.6 10.2 9.0 7.7 (15) 24 13 16 (12) 15 15 12 NA NA NA 17.8 14% 0.6

HEC Pharm 1558 HK 11,097 24.55 58 25.0 18.7 15.2 12.6 36 30 24 20 43 33 23 20 16.5 18.5 19.7 19.4 26% 0.6

Lee's Pharm 950 HK 4,089 6.92 10 16.2 14.8 13.1 11.8 1 7 9 9 10 7 15 12 16.4 15.7 15.3 15.0 11% 1.2

Simple average 22.8 21.9 18.9 16.1 9 18 16 13 18 27 17 17 15.6 17.2 17.5 17.3 -1% 1.0

H-TCM

Guangzhou BYS 874 HK 58,421 23.95 19 19.1 18.1 16.2 15.4 5 3 6 6 16 24 13 7 11.7 10.4 11.2 11.1 7% 2.2

China TCM 570 HK 19,011 4.28 19 16.8 13.6 11.5 9.8 76 21 16 14 55 22 19 16 8.5 9.4 10.5 11.7 20% 0.6

TRT Tech 1666 HK 14,422 11.28 (22) 20.5 18.8 16.0 15.1 15 8 13 1 10 7 19 (4) 14.2 11.8 11.3 12.0 11% 1.5

TRT CM 8138 HK 9,292 11.10 6 22.2 19.1 16.7 14.8 12 14 13 13 19 15 14 13 21.3 21.3 20.9 20.9 14% 1.2

Shineway 2877 HK 5,954 7.16 (16) 8.6 12.8 12.3 11.9 (3) (15) 2 3 (10) (33) 4 3 10.8 7.1 7.4 7.8 -10% -1.2

Simple average 17 17 15 13 21 6 10 8 18 7 14 7 13 12 12 13 0 0.8

H-Medtech

Microport 853 HK 13,158 9.07 55 118.0 42.6 28.1 24.3 4 13 12 10 (217) NA 42 15 4.4 11.3 12.7 14.4 69% 0.4

SSY Group 2005 HK 11,474 4.03 63 23.3 18.7 15.3 12.7 6 17 13 12 21 26 21 23 19.3 20.8 21.3 21.8 22% 0.7

Modern Dental 3600 HK 2,160 2.16 (24) 21.1 13.1 10.5 8.8 16 32 21 11 24 60 26 19 5.6 8.7 10.7 12.0 34% 0.3

Simple average 45.5 22.4 16.9 14.5 10 18 15 11 (43) 39 25 17 7.1 11.5 12.3 13.3 36% 0.6

H-Distribution

Sinopharm 1099 HK 87,302 31.55 (1) 16.1 14.8 15.4 13.6 13 9 10 11 23 8 13 13 14.1 14.3 14.2 14.2 6% 2.7

China Resources Pharm 3320 HK 63,348 10.00 14 17.5 18.3 16.1 14.2 7 11 11 10 (1) 22 14 13 8.9 8.2 8.5 9.7 7% 2.2

Shanghai Pharm 2607 HK 71,435 19.34 9 13.9 12.6 11.0 10.0 14 11 13 10 11 11 15 10 10.2 10.6 11.1 11.3 12% 0.9

Simple average 15.8 15.2 14.2 12.6 11 10 11 10 11 14 14 12 11.0 11.1 11.3 11.7 8% 2.0

H-Hospital services

China Resources Phoenix 1515 HK 12,681 9.77 (2) -5.0 23.2 26.0 23.0 12 23 11 15 NA (130) 5 13 13.9 8.4 7.9 8.3 NA NA

Kangning Hospital 2120 HK 2,713 37.15 9 33.8 28.4 26.7 21.4 21 29 25 18 24 15 21 27 7.1 7.6 8.9 10.2 17% 1.6

Guangdong Kanghua 3689 HK 3,632 10.86 (4) 17.3 18.2 18.4 13.1 17 9 14 15 19 18 18 19 17.5 14.3 14.7 15.7 10% 1.9

Simple average 15.4 23.2 23.7 19.2 16 21 17 16 21 (32) 15 20 13.9 8.4 7.9 8.3 13% 1.8

H-CROs

Wuxi Biologics 2269 HK 50,651 43.45 54 247.8 124.5 73.4 38.3 78 58 52 81 217 160 76 80 105.9 16.5 13.9 22.3 86% 0.9

Genscript Biotech 1548 HK 16,247 9 154 598.1 552.4 447.1 391.3 32 18 22 56 50 17 24 30 15.0 15.2 17.8 24.2 15% 29.4

Simple average 422.9 338.4 260.3 214.8 55 38 37 69 133 88 50 55 60.4 15.9 15.9 23.2 51% 15.1

ROE (%)P/E (x) Revenue growth (%) Net profit growth (%)

Nov 17, 2017

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2018 Sector Outlook

CSPC Pharmaceutical (1093 HK)

Accumulate (maintained)

Target price: HK$16.10

Continued solid growth in 3Q17

Figure 19: Stock performance (as of Nov 16) Figure 20: Key data

Sources: Bloomberg

Figure 21: Stock valuation

Sources: Company data, GF Securities (Hong Kong)

Better-than-expected 3Q17 operation CSPC Pharma posted HK$4.0bn in net profit and

HK$730m in net profit during 3Q17, representing growth of 29% and 37% respectively. The accelerating growth vs 1H17’s 17% and 27% was a result of rapid growth in finished drugs and the turnaround of its API businesses.

Near-term pipeline products - albumin-bound paclitaxel and clopidogrel to receive approval by end-2017 Abraxane reached US$973m in worldwide sales in 2016, vs about Rmb270m in

China. As a 2nd-line treatment for several types of cancers in China, Celgene is currently the only player, accounting for about 15% of the Rmb1bn paclitaxel market. According to CDE, CSPC Ouyi Pharma, Jiangsui Hengrui (600276 CH) and seven other companies have filed for applications. The former two were granted priority review in March and June 2017 respectively. Management targets Rmb200m in sales for paclitaxel and sales of Rmb500m-1bn for metformin in 2018, based on the current market size of Rmb1bn and Rmb3.1bn respectively, which would imply 20% and 25% market shares after launch.

Figure 22: Overall revenue mix (3Q17) Figure 23: Finished drugs revenue mix (3Q17)


Valuation As a leading drug manufacturer with above peers’ bottom-line growth, we think CSPC

Pharma should trade at a premium to its peers. Our one-year target price of HK$16.10 is based on a target P/E of 24x our 2019 EPS forecast.

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80%1093 HK Equity Hang Seng Index

Nov 16 close (HK$) 15.28

Shares in issue (m) 6243

Major shareholder Massive Giant Group (17.9%)

Market cap (HK$ bn) 95.39

30 day avg. vol. (m) 20.64

52W high/low (HK$) 7.43/16.08

Turnover

(HK$ m)

Net profit

(HK$ m)

EPS

(HK$)

EPS YoY

(%)

P/E BPS

(HK$)

P/B ROE

(%)

2015 11,394 1,665 0.28 31% 54.2 1.4 11.3 21%

2016 12,369 2,101 0.35 25% 43.3 1.7 9.1 21%

2017E 15,038 2,746 0.45 28% 33.9 2.0 7.7 23%

2018E 17,779 3,423 0.55 22% 27.9 2.3 6.6 24%

2019E 20,294 4,180 0.67 22% 22.8 2.8 5.5 24%

43%

27%

30%

Innovative drugs Bulk drugs Generic drugs

32%

11%6%10%

41%

NBP Oulaining Xuanning Oncology Generic drugs

Nov 17, 2017

10

2018 Sector Outlook

Figure 24: Financial statements


Year-end Dec 31 (HK$ m) FY15 FY16 FY17E FY18E FY19E Year-end Dec 31 (HK$ m) FY15 FY16 FY17E FY18E FY19E

Revenue 11,394 12,369 15,038 17,779 20,294 Non-current assets

Cost of sales (6,173) (6,060) (6,083) (7,024) (7,888) PPE 5,143 5,415 5,663 5,952 6,140

Gross profit 5,221 6,309 8,955 10,755 12,406 Prepaid lease payments 468 527 423 393 363

Goodwill 119 112 79 79 79

Other income 87 107 150 178 203 Intangible assets 96 79 71 64 58

Marketing expenses (2,267) (2,788) (4,093) (4,871) (5,520) Available-for-sale investments 0 92 87 83 79

Administration expenses (535) (554) (668) (782) (873) Interest in JV and associate 28 80 82 83 84

Other expenses (339) (424) (847) (918) (893) Deferred tax assets 39 28 40 40 40

Operating profit 2,166 2,649 3,498 4,361 5,323 5,892 6,333 6,445 6,694 6,843

Finance cost (56) (42) (32) (36) (41)

Other non-recurring items 2 28 1 1 1 Current assets

Profit before tax 2,112 2,635 3,468 4,327 5,284 Inventories 1,819 1,933 1,940 2,241 2,516

Income tax expense (432) (522) (711) (887) (1,083) Trade and other receivables 1,878 1,835 1,744 1,656 1,574

Net profit 1,680 2,113 2,757 3,440 4,201 Bills receivables 1,389 1,215 1,477 1,747 1,994

Minority interests 14 12 11 17 21 Trade receivables due from related companies 162 74 66 60 54

Net profit attributable to shareholders 1,665 2,101 2,746 3,423 4,180 Amount due from a joint venture 75 116 0 0 0

EPS (HK$) 0.28 0.35 0.45 0.55 0.67 Trade payables due to related companies 1 0 0 0 0

Prepaid lease payments 15 16 0 0 0

Growth rates (%) Tax recoverable 2 0 0 0 0

Revenue 4.0% 8.6% 21.6% 18.2% 14.1% Held for trading investments 1 1 0 0 0

Adjusted net profit 31.3% 26.2% 30.7% 24.7% 22.1% Restricted bank deposits 6 3 0 0 0

Adjusted EPS 31.5% 25.1% 27.7% 21.8% 22.1% Bank balance and cash 2,299 3,235 5,411 7,400 9,988

7,649 8,428 10,638 13,103 16,125

Margin & ratios (%)

Gross margin 45.8% 51.0% 59.6% 60.5% 61.1% Total assets 13,541 14,760 17,083 19,797 22,968

OP margin 19.0% 21.4% 23.3% 24.5% 26.2%

Net margin 14.6% 17.0% 18.3% 19.3% 20.6% Current liabilities

Effective tax rate 20.5% 19.8% 20.5% 20.5% 20.5% Trade and other payables 2,489 2,938 2,949 3,405 3,824

Payout ratio 39.0% 34.3% 40.0% 40.0% 40.0% Other payables and accrued expenses 396 101 101 117 131

Amount due to related parties 3 1 0 0 0

Tax liabilitites 145 148 249 310 379

Year-end Dec 31 (HK$ m) FY15 FY16E FY17E FY18E FY19E Bank borrowings 452 898 718 575 460

3,484 4,085 4,017 4,407 4,794

Profit before tax 2,112 2,635 3,468 4,327 5,284

Depreciation and Amortization 605 588 752 711 812 Non-current liabilities

Net finance income 48 33 15 17 23 Deferred tax liabilities 46 69 69 69 69

Others (26) (81) (77) (90) (103) Borrowings 1,011 240 282 425 540

Change of working capital (46) 335 217 (70) (60) Government grants 186 175 175 175 175

Tax paid (293) (477) (616) (799) (985) 1,243 484 526 669 784

Operating cash flow 2,251 3,000 3,733 4,068 4,938

Equity

Capex (816) (1,134) (1,000) (1,000) (1,000) Shareholders' equity 8,814 10,191 12,541 14,721 17,390

Change of AFS investments - - - - -

Acquisitions (27) 0 0 0 0 Total liabilities & equity 13,541 14,760 17,083 19,797 22,968

Others 129 64 21 20 19

Investing cash flow (714) (1,070) (979) (980) (981)

Year-end Dec 31 FY15 FY16 FY17E FY18E FY19E

Change of borrowings (1,324) 325 138 0 0

New borrowings raised 1,588 0 0 0 0 Current ratio 2.2 2.1 2.6 3.0 3.4

Dividend paid (591) (650) (715) (1,098) (1,369) Quick ratio 1.2 1.2 1.8 2.1 2.4

Others (277) (2) (1) 0 0

Financing cash flow (605) (328) (578) (1,098) (1,369) Asset turnover 0.9 0.9 0.9 1.0 0.9

Total assets/total equity 1.5 1.4 1.4 1.3 1.3

Net change of cash flow 932 1,602 2,176 1,989 2,588 Net cash/(debt) (HK$ m) 843 2,099 4,411 6,400 8,988

Forex changes (103) 0 0 0 0

Cash and cash equivalents an beginning 1,468 2,299 3,235 5,411 7,400 ROE (%) 20% 24% 27% 27% 29%

Cash and cash equivalents an end 2,299 3,901 5,411 7,400 9,988 ROA (%) 13% 16% 19% 20% 21%

Income Statement Balance Sheet

Cash Flow Statement

Financial Ratios

Nov 17, 2017

11

2018 Sector Outlook

WuXi Biologics (2269 HK)

Buy (maintained)


Primary beneficiary of pharma technology upgrade


Sources: Bloomberg



“Follow-the-molecule” strategy through end-to-end services platform WuXi Biologics was

China’s largest biologics outsourcing services provider in 2016 with a market share of 48%. It has been working on customer projects from an early stage of the biologics development process and develops an in-depth understanding of the relevant biologics drug candidates. With a solid track record in growing its customer base, WuXi Biologics should see improving quality and efficiency for its services for such projects once it progresses to later stages. Strong backlog to support future earnings growth WuXi Biologics posted a backlog of

US$452m as of 1H17 with new business of US$172m (+163% HoH) and US$69m (+18% MoM). Of the US$383.2m backlog in May 2017, the company will convert US$172.4m, US$136.5m and US$74.6m into service fees in 2017, 2018 and afterwards, representing a backlog conversion rate of about 45%. We expect revenue growth momentum to remain strong in 2H17, as its backlog mix shifts to late phase projects and anticipated milestone fees of US$816m from Arcus Biosciences.

Figure 28: Revenue breakdown by pre-IND services and post-IND services (2016)

Figure 29: Revenue breakdown by development phases (2016)

Sources: company data, GF Securities (Hong Kong)

Valuation Our PEG-derived target price is HK$50.10 which is based on 80.5% EPS CAGR and

1.0x PEG. The DCF valuation gave us HK$47.80/share for the intrinsic value of the company, with a WACC of 8% and terminal growth rate of 2%.

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80%

Jun

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2269 HK Equity Hang Seng Index


Shares in issue (m) 1163

Major shareholder Founding Individuals (80.59%)


3M avg. vol. (m) 1,255.28

52W high/low (HK$) 25/49.25

Turnover

(Rmb m)

Adj net profit

(Rmb m)

Adj EPS

(Rmb)

EPS YoY

(%)

P/E BPS

(Rmb)

P/B ROE

(%)

2015 557 65 0.07 39% 584.9 0.2 260.0 44%

2016 989 219 0.23 238% 173.3 0.3 140.4 81%

2017E 1,563 375 0.32 42% 122.1 3.5 11.4 9%

2018E 2,305 614 0.53 64% 74.6 3.9 10.1 13%

2019E 4,272 1,116 0.96 82% 41.1 4.8 8.2 20%

69%

31%

Pre-IND services Post-IND services

21.30%

65.60%

11.40%

0.30%21.30%

Drug Discovery Preclinical Development Early Phase (Phase I & II)

Late Phase (Phase III) Commercial Manufacturing

Nov 17, 2017

12

2018 Sector Outlook



Year-end Dec 31 (Rmb m) FY15 FY16 FY17E FY18E FY19E Year-end Dec 31 (Rmb m) FY15 FY16 FY17E FY18E FY19E

Revenue 557 989 1,563 2,305 4,272 Non-current assets

Cost of sales (376) (600) (944) (1,408) (2,589) Plant and equipment 754 1,153 2,000 2,769 3,342

Gross profit 181 389 619 897 1,683 Deferred tax assets 1.6 2.4 3 0 0

Other income 7 8 31 23 64 756 1,155 2,003 2,769 3,342

Other gains and losses 6 (2) (42) 0 0

Administration expenses (44) (95) (86) (92) 0 Current assets

Selling and marketing expenses (13) (15) (31) (35) (150) Inventories 50 79 124 185 307

Research and development expenses (40) (53) (84) (92) (150) Service work in progress 101 123 147 177 212

Other expenses - (32) (16) 0 0 Trade and other receivables 283 419 600 764 1,342

Operating profit 55 226 417 678 1,324 Income tax recoverable - 6 0 0 0

Finance cost (3) (24) (47) (18) (34) Restricted bank deposits 9 33 40 40 40

Profit before tax 65 176 370 659 1,290 Bank balance and cash 158 169 2,108 1,486 1,969

Income tax expense (21) (35) (76) (135) (264) 601 830 3,020 2,653 3,870

Net profit 45 141 294 524 1,026

Adjusted net profit 65 219 375 614 1,116 Total assets 1,357 1,985 5,023 5,422 7,212

EPS (Rmb) 0.05 0.15 0.25 0.45 0.88

Core EPS (Rmb) 0.07 0.23 0.32 0.53 0.96 Current liabilities

Trade and other payables 726 558 716 608 1,373

Growth rates (%) Loans from related parties 456 183 - - -

Revenue 67.9% 77.6% 58.0% 47.5% 85.3% Income tax payable 20 9 17 - -

Adjusted net profit 38.7% 237.6% 71.2% 63.8% 81.7% Bank borrowings - 39 200 200 200

Adjusted EPS 38.7% 237.6% 41.9% 63.8% 81.7% Obligations under a finance lease - 11 10 10 10

1,202 801 943 818 1,583

Margin & ratios (%)

Gross margin 32.4% 39.3% 39.6% 38.9% 39.4% Non-current liabilities

OP margin 9.9% 22.8% 26.7% 29.4% 31.0% Deferred revenue 9 13 18 18 18

Net margin 11.7% 22.2% 24.0% 26.6% 26.1% Bank borrowings - 866 0 0 0

Effective tax rate 31.9% 19.8% 20.5% 20.5% 20.5% Deferred tax liabilities - 30 25 25 25

Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% Others - 5 6 6 6

9 914 49 49 49

Year-end Dec 31 (Rmb m) FY15 FY16 FY17E FY18E FY19E Equity

Shareholders' equity 146 270 4,032 4,555 5,581

Profit before tax 65 176 370 659 1,290

Depreciation and Amortization 57 93 153 230 427 Total liabilities & equity 1,357 1,985 5,023 5,422 7,212

Interest expense 3 24 48 19 35

Others 26 43 72 98 99

Change of working capital (40) (206) 170 (299) 110 Year-end Dec 31 FY15 FY16 FY17E FY18E FY20E

Tax paid (4) (47) (76) (135) (264)

Operating cash flow 107 82 737 573 1,698 Current ratio 0.5 1.0 3.2 3.2 2.4

Quick ratio 0.4 0.8 2.9 2.8 2.1

Capex (334) (429) (1,000) (1,000) (1,000)

Option fee received - 27 - - - Asset turnover 0.6 0.6 0.4 0.4 0.7

Others (2) (19) 31 32 34 Total assets/total equity 9.3 7.3 1.2 1.2 1.3

Investing cash flow (336) (421) (969) (968) (966) Net cash/(debt) (Rmb m) 158 (736) 1,908 1,686 2,169

Change of borrowings (4) 905 (705) 0 0 ROE (%) 12% 97% 109% 13% 23%

Proceeds from issue of ordinary shares 0 0 3,573 0 0 ROA (%) 10% 16% 19% 12% 21%

Dividend paid (18) 0 0 0 0

Others 400 (562) (697) (227) (249)

Financing cash flow 377 343 2,171 (227) (249)

Net change of cash flow 148 4 1,939 (622) 483

Forex changes 4 17 (18) 0 0

Cash and cash equivalents an beginning 6 158 169 2,108 1,486

Cash and cash equivalents at end of year 158 169 2,108 1,486 1,969

Financial Ratios


Cash Flow Statement

Nov 17, 2017

13

2018 Sector Outlook

China TCM (570 HK)

Buy (maintained)


Margin expansion through new acquisitions


Sources: Bloomberg



3Q17 operations on track Sales momentum of Tianjiang and Yifang continued (20% and over 20%

respectively) in 3Q17 after solid growth in 1H17 (+24% YoY). Sales in Guangdong reached Rmb600m and maintained market position with a significant increase in the number of medicine dispensing machines. Management is still expecting the segment to grow at least 20% in 2017. Chance to improve net margins from integration China TCM will have nationwide geographic

coverage of TCM decoction pieces in key regions in China following the Huamiao, Jianyou and HLJ Sinopharm acquisitions. This will give it healthy exposure to the entire value chain of the CCMG business. China TCM already has an extensive channel network in eastern and southern China while Huamiao and Jianyou have a larger market exposure in Beijing and Sichuan. In addition, the integration will also expand production capacity for its modernized decoction and toxic decoction pieces. The production plant in Sichuan is the largest production base for toxic decoction pieces in China with an annual production capacity of 4,000 tonnes. Consolidation of the four companies is expected in early 2018.

Figure 34: Revenue growth projection (concentrated TCM granules)

Figure 35: Revenue growth projection (finished drugs)


Valuation Our target price of HK$5.40 is based on a 16% EPS CAGR during 2017-19, and 1.0x

PEG.

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570 HK Equity Hang Seng Index


Shares in issue (m) 4432.00

Major shareholder Sinopharm HK (36%)


3M avg. vol. (m) 6.43

52W high/low (HK$) 4.45/2.95

Turnover

(Rmb m)

Net profit

(Rmb m)

EPS

(Rmb)

EPS YoY

(%)

P/E BPS

(Rmb)

P/B ROE

(%)

2015 3,709 626 0.17 4% 22.9 3.0 1.3 9%

2016 6,533 967 0.22 28% 17.9 2.6 1.5 9%

2017E 7,910 1,169 0.26 21% 14.7 2.8 1.4 10%

2018E 9,971 1,350 0.30 16% 12.8 3.0 1.3 11%

2019E 12,008 1,531 0.35 13% 11.3 3.3 1.2 11%

21.8%22.0%

18.0%

0%

5%

10%

15%

20%

25%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2015 2016 2017E 2018E

Concentrated TCM granules (Rmb m) YoY growth (concentrated TCM granules)

90.0%

3.0%

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3.0%

3.0%

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2,000

2,500

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2014 2015 2016 2017E 2018E

Finished products (Rmb m) YoY growth (finished products)

Nov 17, 2017

14

2018 Sector Outlook



Year-end Dec 31 (Rmb m) FY15 FY16 FY17E FY18E FY19E Year-end Dec 31 (Rmb m) FY15 FY16 FY17E FY18E FY19E


Cost of sales (1,509) (2,745) (3,522) (4,447) (5,380) PP&E 1,669 2,019 2,300 2,531 2,713

Gross profit 2,201 3,788 4,388 5,524 6,628 Investment properties 3 2 0 0 0

Deposits and prepayments 136 162 170 179 187

Other income 141 74 52 81 89 Prepaid lease payments 308 334 301 271 244

Selling and distribution expenses (1,196) (1,968) (2,105) (2,692) (3,242) Goodwill 3,341 3,456 3,456 3,456 3,456

Administration expenses (273) (330) (348) (449) (540) Intangible assets 6,680 6,764 6,817 6,866 6,911

Operating profit 761 1,377 1,741 2,155 2,563 Interest in JV and associate 88 89 98 107 118

Net finance income (cost) (70) (73) (173) (210) (209) Deferred tax assets 111 140 140 140 140

Other non-recurring items (2) 0 (4) 0 0 Other financial assets 0 0 171 192 84

Profit before tax 689 1,304 1,565 1,945 2,353 12,336 12,966 13,453 13,742 13,853

Income tax expense (119) (217) (266) (331) (400)

Net profit 644 1,087 1,299 1,614 1,953 Current assets

Minority interests (18) (120) (130) (161) (195) Inventories 1,236 1,894 2,062 2,934 3,109

Net profit attributable to shareholders 626 967 1,169 1,350 1,531 Trade and other receivables 3,398 2,716 4,652 4,637 6,549

EPS (Rmb) 0.17 0.22 0.26 0.30 0.35 Other current assets 106 34 0 0 0

Pledged bank deposits 36 2 0 0 0

Growth rates (%) Fixed deposits 0 1,050 1,050 1,050 1,050

Revenue 40.0% 76.1% 21.1% 26.1% 20.4% Bank balance and cash 2,102 2,373 4,305 4,056 4,944

Adjusted net profit 51.4% 54.6% 20.9% 15.5% 13.4% 6,878 8,070 12,068 12,676 15,652

Adjusted EPS 4.1% 28.0% 21.4% 15.5% 13.4%

Total assets 19,214 21,037 25,521 26,419 29,505

Margin & ratios (%)

Gross margin 59.3% 58.0% 55.5% 55.4% 55.2% Current liabilities

OP margin 20.5% 21.1% 22.0% 21.6% 21.3% Trade and other payables 2,660 2,304 4,064 3,855 5,725

Net margin 16.9% 14.8% 14.8% 13.5% 12.7% Current portion of deferred govt grants 76 0 0 0 0

Effective tax rate 17.3% 16.7% 17.0% 17.0% 17.0% Tax liabilitites 149 202 202 202 202

Payout ratio 0.0% 40.2% 30.0% 30.0% 30.0% Bank borrowings 1,600 1,001 800 800 800

4,485 3,507 5,066 4,857 6,727

Non-current liabilities

Year-end Dec 31 (Rmb m) FY15 FY16 FY17E FY18E FY19E Deferred tax liabilities 1,669 1,723 1,723 1,723 1,722.92

Borrowings 850 423 400 400 350

Profit before tax 763 1,304 1,565 1,945 2,353 Unsecured notes 0 2,486 4,486 4,486 4,486

Depreciation and amortization 157 334 369 419 468 Government grants 70 143 143 143 143

Net finance cost (income) (25) 59 164 200 199 2,589 4,774 6,751 6,751 6,701

Others (39) 19 - - -

Change of working capital (189) (47) (340) (1,066) (218) Equity

Tax paid (149) (204) (250) (311) (376) Shareholders' equity 11,133 11,588 12,407 13,352 14,423

Operating cash flow 519 1,465 1,508 1,187 2,425.8 Minority interests 1,007 1,168 1,297 1,459 1,654

12,140 12,756 13,704 14,811 16,078

Capex (7,677) (1,531) (850) (850) (850)

Change of AFS investments 301 - - - - Total liabilities & equity 19,214 21,037 25,521 26,419 29,505

Interest received 89 15 9 10 11

Others 129 (984) (20) (20) (20)

Investing cash flow (7,158) (2,500) (861) (860) (859) Year-end Dec 31 FY15 FY16 FY17E FY18E FY19E

Change of borrowings 1,202 1,821 1,776 0 (50) Current ratio 1.5 2.3 2.4 2.6 2.3

Proceeds from issue of shares 7,200 0 0 0 0 Quick ratio 1.2 1.5 1.8 1.8 1.7

Dividend distribution 0 (59) (140) (170) (170)

Others (72) (634) (351) (405) (459) Asset turnover 0.2 0.3 0.3 0.4 0.4

Financing cash flow 8,330 1,128 1,285 (575) (679) Total assets/total equity 1.7 1.8 2.1 2.0 3,794

Net cash/(debt) (Rmb m) (312) (484) (331) (580) 358

Net change of cash flow 1,691 92 1,932 (249) 888 Gearing ratio (%) 22% 34% 46% 43% 39%

Forex changes (28) 0 0 0 0

Cash and cash equivalents at beginning 439 2,102 2,373 4,305 4,056 ROE (%) 9% 9% 10% 11% 11%

Cash and cash equivalents at end 2,102 2,194 4,305 4,056 4,944 ROA (%) 5% 5% 6% 5% 6%

Financial Ratios


Cash Flow Statement

Nov 17, 2017

15

2018 Sector Outlook

China Resources Pharma (3320 HK)

Buy (maintained)


New distribution agreement could be accretive for its P/E valuation


Sources: Bloomberg



New distribution agreement with Beigene On Nov 10, CR Pharma signed a distribution

agreement with Beigene to distribute three blockbuster products in China (Abraxane, Revlimid and Vidaza). Abraxane and Revlimid have a market size of about Rmb270m and Rmb19m respectively, whereas Vidaza will launch soon in China. While the company did not disclose much information about the payment terms and conditions, we believe it could be accretive to its earnings given these products have high margins and high growth. Pharmaceutical distribution saw stable momentum in 8M17 The company’s distribution

business posted stable revenue growth in July and Aug 2017. They see ongoing distribution GPM pressure from the rollout of the two-invoice system but believe the effect will be offset by higher direct-to-hospital sales.

Figure 40: Overall revenue mix (HK$ m, 1H17) Figure 41: CR Pharma's distribution channel mix


Valuation We expect the company to maintain above-peer profitability in FY17-18 on an

expansion of its distribution network, stable growth in its manufacturing business, and a more proactive M&A strategy. Our SOTP-derived TP of HK$11.10 implies 17.3x FY18 P/E on 21% growth.

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15%

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25%

30%

3320 HK Hang Seng Index


Shares in issue (m) 6284.506

Major shareholder CR Corp (53.04%)


3M avg. vol. (m) 4.79

52W high/low (HK$) 8.28/10.28

Turnover

(HK$ m)

Net profit

(HK$ m)

EPS

(HK$)

EPS YoY

(%)

P/E BPS

(HK$)

P/B ROE

(%)

2015 146,568 2,850 0.62 NA 16.1 4.6 2.1 14%

2016 156,705 2,821 0.57 -8% 17.5 6.1 1.6 13%

2017E 173,075 3,338 0.53 -7% 18.8 6.3 1.6 9%

2018E 193,122 4,034 0.64 21% 15.5 6.8 1.5 10%

2019E 214,362 4,644 0.74 15% 13.5 7.5 1.3 10%

Distribution, 69,070 , 83%

Manufacturing, 11,480 , 14%

Retail , 2,117 , 3%

0%

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40%

60%

80%

100%

2013 2014 2015 1H16

Hospitals and other medical institutions Other distributors Retail pharmacies and others

Nov 17, 2017

16

2018 Sector Outlook



Year-end Dec 31 (HK$ m) FY15 FY16 FY17E FY18E FY19E Year-end Dec 31 (HK$ m) FY15 FY16 FY17E FY18E FY19E


Cost of sales (123,369) (132,596) (146,885) (163,675) (181,676) PPE 12,578 12,500 13,645 13,944 14,156

Gross profit 23,199 24,109 26,190 29,447 32,685 Investment properties 1,020 1,390 1,390 1,390 1,390

Prepaid lease payments 2,321 2,224 2,427 2,480 2,518

Selling and distribution expenses (10,112) (10,947) (11,596) (13,132) (14,577) Goodwill 16,395 17,405 17,405 17,405 17,405

Administration expenses (3,845) (3,882) (3,677) (4,442) (4,716) Intangible assets 3,894 3,807 4,010 4,199 4,373

Other income and expenses 800 582 173 386 429 Other receivables 1,221 461 461 461 461

Operating profit 10,043 9,861 11,090 12,259 13,822 Interest in JVs and associates 441 1,949 2,144 2,358 2,594

Share of results of associates 58 48 53 58 64 Deferred tax assets 423 448 448 448 448

Listing expenses 0 (71) 0 0 0 38,292 40,183 41,930 42,685 43,345

Finance costs (2,050) (1,796) (2,077) (2,317) (2,572)

Profit before tax 8,050 8,043 9,066 10,000 11,313 Current assets

Income tax expense (1,968) (2,075) (2,266) (2,200) (2,489) Inventories 15,252 18,859 21,942 23,523 26,943

Net profit 6,082 5,968 6,799 7,800 8,824 Trade and other receivables 47,514 54,337 57,569 64,125 70,794

Minority interests (3,232) (3,147) (3,462) (3,766) (4,180) Other current assets 11,471 3,971 3,962 3,964 3,965

Net profit attributable to shareholders 2,850 2,821 3,338 4,034 4,644 Restricted bank deposits 2,241 2,675 2,832 2,551 3,462

EPS (HK$) 0.62 0.57 0.53 0.64 0.74 Bank balance and cash 12,379 13,960 14,783 13,317 18,067

88,857 93,802 101,088 107,480 123,230

Growth rates (%)

Revenue 8.0% 6.9% 10.4% 11.6% 11.0% Total assets 127,149 133,986 143,018 150,165 166,574

Net profit 7.7% -1.0% 18.3% 20.9% 15.1%

EPS NA -8.1% -6.8% 20.9% 15.1% Current liabilities

Trade and other payables 41,953 50,961 42,255 48,140 55,053

Margin & ratios (%) Other current liabilities 5,935 697 668 688 711

Gross margin 15.8% 15.4% 15.1% 15.2% 15.2% Bonds payable 0 5,590 5,210 4,168 4,168

OP margin 6.9% 6.3% 6.4% 6.3% 6.4% Bank borrowings 24,335 13,737 25,000 20,000 20,000

Net margin 1.9% 1.8% 1.9% 2.1% 2.2% 72,224 70,985 73,132 72,995 79,932

Effective tax rate 24.4% 25.8% 25.0% 22.0% 22.0%

Payout ratio 0.0% 20.0% 20.0% 20.0% 20.0% Non-current liabilities

Deferred tax liabilities 862 938 950 950 950

Bonds payable 8,235 4,359 4,304 4,304 4,304

Year-end Dec 31 (HK$ m) FY15 FY16 FY17E FY18E FY19E Borrowings 4,648 2,025 2,000 2,000 2,000

Other non-current liabilities 1,334 1,376 1,358 1,358 1,358

Profit before tax 8,050 8,043 9,066 10,000 11,313 15,079 8,699 8,613 8,613 8,613

Depreciation and amortization 867 1,274 1,399 1,502 1,605

Interest income (145) (265) (214) (237) (239) Equity

Others 1,186 1,401 1,692 1,980 2,193 Shareholders' equity 39,846 54,302 61,273 68,557 78,029

Change of working capital (2,213) (4,154) (15,021) (2,252) (3,175)

Tax paid (1,756) (2,179) (2,381) (2,311) (2,615) Total liabilities & equity 127,149 133,986 143,018 150,165 166,574

Operating cash flow 5,989 4,120 (5,459) 8,682 9,082

Capex (2,218) (1,982) (2,559) (1,905) (1,889)

Others (1,702) 29 0 0 0 Year-end Dec 31 FY15 FY16 FY17E FY18E FY19E

Investing cash flow (3,919) (1,953) (2,559) (1,905) (1,889)

Current ratio 1.2 1.3 1.4 1.5 1.5

Change of borrowings 2,733 (9,267) 10,803 (6,042) 0 Quick ratio 0.9 1.0 1.0 1.1 1.2

Interest paid (1,963) (1,705) (1,973) (2,202) (2,444)

Net proceeds from shares issued 0 7,749 0 0 0 Asset turnover 1.2 1.2 1.2 1.3 1.3

Others (2,324) 2,598 0 0 0 Total assets/total equity 3.2 2.5 2.3 2.2 2.1

Financing cash flow (1,554) (625) 8,830 (8,244) (2,444) Net debt/(cash) (HK$ m) 24,840 11,751 18,899 14,604 8,944

Net debt/equity (%) 62% 22% 31% 21% 11%

Net change of cash flow 515 1,541 811 (1,466) 4,750

Forex changes (1,036) (784) 0 0 0

Cash and cash equivalents at beginning 13,735 13,214 13,972 14,783 13,317 ROE (%) 14% 13% 9% 10% 10%

Cash and cash equivalents at end 13,214 13,972 14,783 13,317 18,067 ROA (%) 5% 4% 5% 5% 5%


Cash Flow Statement

Financial Ratios

Nov 17, 2017

17

2018 Sector Outlook

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report.

Disclosure of Interests (1) The proprietary trading division of GF Securities (Hong Kong) Brokerage Limited (“GF Securities (Hong Kong)”) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report.

Disclaimer This report is prepared by GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. No representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness of the information contained in the research report. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its affiliates. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright © GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. © GF Securities (Hong Kong) Brokerage Limited. All rights reserved. 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: +852 3719 1111 Fax: +852 2907 6176 Website: http://www.gfgroup.com.hk

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