10 March 2014

GLG Life Tech is a research client of Edison Investment Research Limited

GLG Life Tech is positioning itself to emerge as a more robust and cost-efficient operator in the growing global stevia industry. We believe the firm will return to generating consistently positive EBITDA in 2016, driven by its utilisation of high-yielding proprietary leaves. A stronger than expected turnaround provides geared upside to our base case NPV of C$131m.

Year end Revenue (C$m)

PBT* (C$m)

EPS* (C$)

DPS (C$)

P/E (x)

Yield (%)

12/11 24.8 (52.6) (1.80) 0.0 N/A N/A 12/12 21.7 (24.3) (0.76) 0.0 N/A N/A 12/13e 18.1 (20.6) (0.57) 0.0 N/A N/A 12/14e 33.0 (15.2) (0.44) 0.0 N/A N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

GLG making steps towards a recovery… GLG had a challenging 2011-13 after the completion and non-renewal in mid-2011 of Cargill’s US$65m initial purchase order for stevia extract. Yet as stevia use continues to expand worldwide (we forecast the market to grow at an 18% CAGR through 2017) and GLG lowers its cost structure through harvesting higher-extract yielding proprietary leaves, we expect the firm’s operations should gradually improve, leading to consistently positive EBITDA from early 2016. GLG’s supply relationships in China and its high-yielding strains could give it a cost advantage vs competitors for commoditised stevia extract, and we expect it to capture 15% of the stevia market. Partnerships with the China National Cereals, Oils and Foodstuff Corporation (COFCO) and moves to market Monk Fruit extract underscore additional growth prospects for GLG.

…but relies on asset backing of debt GLG needs to maintain its access to capital as C$29.5m of its debt is due to be repaid over the next 12 months. GLG indicates that as this debt is secured by its Chinese processing facilities and as its largely Chinese government-affiliated lenders have renewed its debts since 2008, it expects to continue to renew these obligations as needed. GLG’s operations depend on how well stevia extracts can be formulated in food and beverage (F&B) products and received in the marketplace. Alternative natural sweeteners and lower-cost methods to generate stevia extracts long-term (eg yeast fermentation) are potential threats.

Valuation: NPV of C$131m, equity valued at C$61m Our NPV of C$131m is based on a discounted cash flow analysis using a weighted-average cost of capital (WACC) of 10%. Subtracting GLG’s estimated net debt of C$70.6m from our NPV provides an equity valuation of C$61m, or C$1.84 per share. Given GLG’s high debt-to-equity ratio, our per-share equity valuation is highly levered to our margin, penetration and stevia market size assumptions, and stronger than expected operating improvements under favourable market conditions could lead to many times upside to our per-share equity valuation.

GLG Life Tech Initiation of coverage

A turnaround could be sweet

Price C$0.39 Market cap C$13m

C$1.11/US$ Net debt (C$m) Q413e 70.6

Shares in issue 33.1m

Free float 57%

Code GLG

Primary exchange TSX

Secondary exchange N/A

Share price performance

% 1m 3m 12m

Abs (26.9) (34.2) (40.2)

Rel (local) (29.5) (38.9) (46.3)

52-week high/low C$1.77 C$0.30

Business description

GLG Life Tech is a vertically integrated supplier of stevia-derived extracts primarily for use as low-calorie high-intensity sweeteners (HIS) in the food and beverage industries. It sources stevia in China and processes extracts at its China-based facilities.

Next events

Q413 results March 2014

Q114 results May 2014

Analysts

Pooya Hemami +1 646 653 7026

Christian Glennie +44 (0)20 3077 5727

healthcare@edisongroup.com

Edison profile page

Pharma & biotech

GLG Life Tech | 10 March 2014 2

Investment summary

Company description: A vertically integrated stevia producer GLG Life Tech sources, refines and markets stevia rebaudiana plant extracts for use in the F&B industries. The firm was incorporated in 1998 as Cheng Tai Panoramic Mirror Inc and focused on the stevia business after its reverse-takeover transaction with Grand Leaf International in 2005, and changed its name to GLG Life Tech Corp in 2007. Since 2007, GLG raised C$34.5m in equity capital in 2007, US$27.5m in 2009, and C$58.2m in 2011. The company has vertically integrated operations, where it supplies its proprietary stevia seeds to local farmers and farming groups, sources harvested stevia leaf from them, then refines it at its processing facilities before sale to global F&B customers and distributors. Industry overcapacity and the completion of a US$65m purchase order from Cargill led to challenging operating performance in 2011-13. While Cargill previously accounted for most of GLG’s revenue, the firm now prefers to limit customer concentration risk by diversifying its customer base; in 9m13, its top three customers accounted for 34% of revenue (vs 42% in 9m12).

Valuation: NPV of C$131m levered to performance metrics Our NPV of C$131m is based on a discounted cash flow analysis using future expected revenue, mostly from projected stevia sales. We use a weighted-average cost of capital (WACC) of 10%, which we base on our standard cost-of-equity assumption of 12.5% and GLG’s capital structure, weighted to debt at 84% (and its average cost of debt is estimated at 9.0%). Our base case valuation assumes that the stevia market will grow to US$430m by 2017 (from an estimated US$220m in 2013) and that GLG will start to become EBITDA positive again in early 2016. Subtracting GLG’s net debt of C$70.6m from our NPV provides an equity valuation of C$61m, or C$1.84 per share. Our NPV and per-share equity valuations are highly levered to our margin and stevia market size assumptions, given that historical and future expected near- to medium-term operating margins are relatively low and the firm’s debt-to-equity ratio is high.

Sensitivities: Financial leverage and operational leverage GLG needs to maintain its access to capital, as C$29.5m of its C$58.1m in external debt is due to be repaid in the next 12 months. GLG indicates that its external debt is secured by its four primary extract processing facilities. The firm’s Chinese government-affiliated bank lenders have repeatedly renewed these loans since 2008, and GLG believes they will continue to renew the obligations as needed. GLG's existing large-scale manufacturing facilities should not need substantial additional capex to ramp up stevia production significantly, even to levels under our base case scenario. GLG’s operations are also highly dependent on the dynamics of the stevia and sweetener market (eg how well stevia extracts can be formulated in F&B products and end-user demand). Alternative natural sweeteners and lower-cost methods to generate stevia extracts in the long term (eg yeast fermentation) are potential threats.

Financials: Further capital could be required GLG finished Q313 with C$68m of net debt (C$72.6m of total debt and C$4.6m in cash and equivalents); we estimate end-2013 net debt of C$70.6m. We expect it will take time for GLG’s operations to generate sufficient volume and margin improvements to consistently deliver positive free cash flow. We forecast sustainable positive free cash flow to begin in early 2016. As the current share price is well below the last public offering (C$11.00/share, early 2011), we do not expect GLG to raise equity at current price levels. We assume that GLG will raise C$20m in additional debt to fund its operations through to end-2015, although a stronger than expected ramp up in volumes and profitability could reduce or eliminate the need for this additional financing.

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Company description: An integrated stevia producer

GLG Life Tech is a Canada-based developer of stevia rebaudiana (stevia)-derived extracts, with established supply contracts and relationships in China and fully integrated processing and refining operations. GLG has right-of-first-refusal to much of the stevia grown in China, given its supply relationships with a number of provinces. While the stevia plant is native to South America, China is the world’s largest growing area of its extracts. GLG’s R&D operations have also enabled the firm to cultivate proprietary leaf strains with higher volumes and contents of key extracts vs conventional stevia leaf, which provides it with a potential cost advantage vs other stevia plant cultivation operations. The firm had a challenging time in 2011-13, but increasing global stevia sales and product introductions and the utilisation of higher-extract yielding proprietary leaf to reduce input costs may signal a potential turnaround in the company’s operations.

Review of high-intensity sweetener market and stevia Given the health effects of excess calorie consumption (eg diabetes, obesity), consumers are increasingly preferring alternatives to sugar that provide minimal calories per given unit of ‘sweetness’ sensation. These sweeteners can collectively be called high-intensity sweeteners (HIS); the global HIS market was estimated to be c US$1.2bn in 2011 (Tate & Lyle, LMC International) and is dominated by chemically-synthesised, artificial sweeteners (AS) such as aspartame (NutraSweet or Equal, accounting for 26% of the worldwide HIS share in 2011 according to LMC International), sucralose (Splenda, accounting for 34% of the global share) and saccharin (reflecting 12% of the worldwide share as per LMC). Beverages make up ~70-80% of HIS use.

The leading naturally-sourced HIS are now based on stevia plant extracts, such as Rebaudioside A (RebA), and these have zero or near-zero caloric impacts. Market research firm Mintel estimates that stevia extracts now account for about 8% of the HIS market by value. BCC Research estimates that the worldwide market for non-sugar sweeteners, including caloric sweeteners such as high-fructose corn syrup (HFCS) and honey, was $9.3bn in 2011.

Examining stevia costs vs sugar and artificial sweeteners Input costs are of utmost importance to F&B producers, particularly when targeting mass-market indications. Sweetener costs generally account for a single to low double-digit percentage of COGS for most companies in the F&B segment. While the price of stevia extracts (RebA) has declined markedly since 2008, the price of sugar has also fallen.

Exhibit 1: The price of sugar – Sugar #11 commodity (US$/lb)

Source: Bloomberg

The wholesale sugar price (Sugar #11 commodity) is currently US$0.15/lb, down from US$0.33/lb in late 2010. High-purity (>95%) RebA (HPRA) is currently priced at US$100-125/kg, and as it is about 200 times sweeter than sugar, on a sweetness-equivalent basis, HPRA costs about 50-90% more. In comparison, both aspartame and sucralose cost less than sugar on an equal-sweetness

$- $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40

2008

2009

2010

2011

2012

2013

2014

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basis, which explains why many F&B participants use them for low-calorie applications. Stevia is not expected to compete with these AS in terms of cost but, as it is naturally sourced, it may provide the perceived advantage to consumers of carrying fewer health risks.

Exhibit 2: Price comparisons to sugar of RebA and leading artificial sweeteners Sweetener Price

(US$/kg) Approximate sweetness vs sugar

(equal-weight basis) Price vs sugar

(equal-sweetness basis) High-purity RebA 100-125 200x 150-190% Aspartame 13-20 200x 20-30% Sucralose 100-150 600x 50-75% Source: Edison Investment Research

First leg of US Stevia launch below expectations When RebA was cleared for use in the US market by the FDA in 2008, ingredient marketers such as Cargill anticipated that it would gain a strong foothold in mass-market consumer products such as carbonated soft drinks (CSDs) and even formed collaborations with beverage makers such as Coca-Cola and PepsiCo to target such goals. However, while niche RebA-sweetened beverages such as Sprite Green and VitaminWater Zero were launched in the US shortly after clearance, penetration and extension into broader-market CSDs did not take off due to taste/formulation (zero-calorie RebA products tended to have a bitter aftertaste) and cost issues. GLG was Cargill's primary supplier of stevia from 2008 to H111, and Cargill accounted for the majority (we estimate ~60%) of GLG's stevia sales in this period through its US$65m initial purchase order. However, as US stevia extract use was below industry expectations, Cargill's stevia inventory at the completion of its order from GLG (mid-2011) was high, and it has not repurchased new RebA/extract quantities from GLG since then, prompting a severe drop in GLG's extract sales in 2011. In addition, as many smaller China-based producers began selling stevia in 2010-11, leading to stevia industry oversupply in relation to demand, the price of HPRA fell from US$200-250/kg in 2009-10 to US$80-100/kg in 2011-12. Mintel estimates that the growth of global stevia-based F&B launches slowed in this period, from 70% in 2009-10 to 27% in 2010-11. HPRA prices have since recovered to US$100-125/kg as some smaller producers or farms have left the stevia market and/or shifted to growing different crops.

Stevia could be entering its second growth spurt

New formulations help address taste and pricing hindrances Given HPRA’s potential aftertaste issues, stevia marketers such as GLG and PureCircle (the world’s largest stevia marketer with about 25-35% market share) researched other steviol leaf glycosides, such as stevioside (STV), Rebaudioside C (RebC), or Rebaudioside D (RebD). Both firms have developed formulations that combine RebA with some of these glycosides and/or sugar to diminish aftertaste effects and retain zero or low-calorie properties for the final finished product. These formulations give F&B producers increased flexibility for incorporating stevia into products without negatively affecting taste. Some of these newer formulations, particularly those that include STV (for example, PureCircle’s SG-95 and GLG’s BlendSure line), are priced up to 40-50% below HPRA given that STV is up to ~2.5x more plentiful in stevia leaves than RebA.

Recent and upcoming approvals extend commercial reach Increasing stevia penetration in countries where it has recently been approved and new approvals should increase its commercial reach. The EU approved stevia extracts in F&B products in November 2011, but stevia penetration appears low compared to comparable territories where it has had a longer market presence (the US, for instance). To date, Europe accounts for only 11% of global stevia market share, compared to 30% for North America, whereas in terms of sugar consumption, Europe accounts for nearly twice the amount of consumption as the US – this suggests the European market remains largely untapped.

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Exhibit 3: 2013 stevia market share by region Exhibit 4: Consumption of sugar by region Region Percentage Region Percentage North America 30% India 15% Asia-Pacific 33% European Union (EU-27) 11% South America 25% China 9% Europe 11% Brazil 8% US 6% Russia 4% Indonesia 3% Others 44% Source: Zenith International Source: OECD, Company reports

Indonesia and India collectively account for about 18% of the world’s sugar consumption, and could also become large future stevia markets. Approvals are believed to be imminent in both markets.

Mass-market beverage producers increasing stevia use Following the slowdown in 2010-11, global F&B stevia product introductions have been accelerating, growing at a 66% CAGR over 2011-13, according to Mintel. Mass-market beverage makers have recently introduced new soft drinks incorporating stevia in targeted regions. Coca-Cola launched Coca Cola Life in Argentina (2013) and reformulated a stevia-sweetened Sprite in 2012 for France and other Western European markets. PepsiCo launched stevia-sweetened Pepsi Next in Australia (2012) and France (2013). Customer responses to these launches could potentially lead to broader introductions in Western markets, significantly buoying stevia's global penetration.

The recent decline in diet soda sales, which could signal that consumers are increasingly concerned about the safety of AS, may encourage F&B makers to increase efforts to incorporate naturally-sourced HIS, such as stevia, in their products, as they may be perceived as healthier alternatives. Nielsen reported that dollar sales of zero and low-calorie soda sales dropped 6.8% in the year ended 23 November 2013, whereas regular soda sales only fell 2.2%. The Hartman Group also reported that more consumers are concerned with AS in 2013 vs 2007.

So how large can the stevia market become? Tate & Lyle estimates that the current HIS market (mostly consisting of AS) reflects about 10% of the global sugar market, in terms of MTSE (metric tonne sugar equivalents). As global consumption of sugar is currently ~170m MT (according to OECD), this would represent about 17m MTSE.

As marketed stevia extracts and blends vary in price and composition, we assume that the average stevia extract (ASE) has an average price of 70% that of HPRA and an average sweetness of 150x that of sugar. Assuming a US$80/kg cost for ASE, a stevia penetration level equal to the current global HIS market size of 17m MTSE would reflect potential global sales of US$9.1bn, suggesting that there can be substantial long-term upside for stevia if it displaces other HIS.

Market research firms differ in their estimates of the current stevia market. Mintel and Leatherhead Food Research estimate that global stevia extract sales totalled US$110m in 2013, and they project it to grow to US$275m by 2017 (CAGR 26%). Zenith International estimated that worldwide stevia sales were 4,100MT in 2013 (up 6.5% y-o-y) and reached US$304m (hence, ~US$74/kg ASE). Zenith estimates the global stevia market will reach US$490m in 2016 (CAGR 17%). In any event, such high forward growth rates (17-26%) should benefit industry participants such as GLG.

GLG’s recent performance affected by slowdown

While stevia macro market dynamics could be improving, GLG’s operating performance since 2010 has been underwhelming. The non-renewal of Cargill’s purchase order in 2011 significantly affected GLG’s revenue, as extract sales dropped from C$58.9m in 2010 to C$17.1m in 2011. Stevia extract

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gross margins fell from ~29-30% in 2009 and 2010, to -16.1% in 2011. Margins were also affected by GLG’s decision to build an additional leaf refining facility (Runhao) in 2009, as the demand cycle was nearing its peak. Runhao augmented GLG’s capability to refine intermediate stevia extract into HPRA (by 1,000MT of HPRA per year), but it exacerbated GLG’s fixed-cost overheads as its operations were well below capacity after mid-2011.

In 2011, GLG formed a joint venture, AN0C, with the purpose of formulating and selling stevia-sweetened F&B products to Chinese consumers. While AN0C recorded C$7.7m of sales in 2011, it was not profitable as the competitive practices of established Chinese F&B participants and supply-chain issues with bottlers affected its operations. In 2012 the firm reverted its focus to its core competency, the stevia ingredients business, and AN0C was divested.

Exhibit 5: Historical financial performance for GLG

Source: Company reports, Edison Investment Research

GLG working to improve profitability

Stevia leaves account for ~60% of COGS in extract production, and GLG is working to optimise sourcing efficiencies in its leaf supply chain.

Proprietary H3/H4 leaf varieties offer yield advantages Through proprietary plant breeding, GLG has developed generations of stevia leaves with a higher content of high-demand glycosides, such as RebA, than conventional stevia leaves. These plants can grow higher volumes of leaf per plant, and can be sold to farmers as seeds rather than seedlings, which reduces farmers’ production costs by up to four times for equal volumes of stevia leaf. GLG’s proprietary leaf strains could provide potential cost advantages versus competitors.

GLG’s Huinong 3 (H3) plants contain 26% more RebA in each plant leaf than its first-generation (H1) plants and 46% more leaves per acre. Conventional stevia leaf only has 2-4% RebA by weight, compared to 7.01% to 9.1% for H3 and Huinong 4 (H4), respectively.

Exhibit 6: Analysis of generations of proprietary GLG stevia leaf Variety Yield (kg) per acre RA (% dry weight of leaf) Generic stevia leaf Variable 2.00-4.00% Huinong 2 1,386 5.73% Huinong 3 1,560 7.01% Huinong 4 1,872 9.10% Source: Company reports

H3 leaf accounted for the majority of leaf purchased by GLG in the 2013 harvest. GLG has also developed Huinong 4 (H4), which we expect will start to be distributed to farmers for the 2014-15 growing season. It has a 16% increase in leaf yield (vs H3). GLG estimates that the H4 leaf will have up to five times more extract per acre than the H1 leaf grown in 2010. GLG has also developed H5 and H6 strains, which produce high STV quantities, and are planned to reduce

-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%40.0%

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000

2008 2009 2010 2011 2012 2013EStevia revenues (LHS) AN0C (Discontinued) revenues (LHS)Stevia business gross margin (RHS)

GLG Life Tech | 10 March 2014 7

COGS for its BlendSure line. Altogether, GLG’s advancement in its leaf strains could drive progressive margin improvement in 2014 through 2017. GLG sells its proprietary stevia seeds to farmers and cooperatives in China. These are planted in the winter and spring, and GLG purchases harvested stevia leaves back in the late summer months and the fall.

Leaf supply secured through relationships in low-cost China GLG has agreements with local Chinese governments, which give it right-of-first-refusal access to much of the stevia leaf grown in the country. It has 10-year agreements with governments in Dongtai and Mingguang (both started 2007) and a 20-year agreement (started in 2008) with the Juancheng government. GLG estimates these long-term agreements give it a sourcing advantage relative to other stevia processors, particularly as China accounts for up to ~80% of the world’s stevia supply. While stevia can also be cultivated in Paraguay, Kenya and California, China has an advantage over each of these markets: Kenya’s summer seasons are very short and can result in harvested leaf with low glycoside levels, California has high labour costs, and stevia sourcing costs in Paraguay also exceed China.

Declining Chinese leaf supply could provoke pricing rebound GLG estimates that the amount of stevia plant being grown in China has decreased significantly. As demand grows, a supply crunch could ensue and lead to higher prices, supporting GLG’s margins. In 2010, GLG harvested over 16,600 acres of stevia leaf (H1), while in 2013 it was down to ~2,500 acres (representing ~30% of all stevia grown in China, according to the firm). GLG expects that ~8,300 acres of stevia was harvested across China in 2013, down from ~60,000 in 2010, as other suppliers also cut production. Competitors that import leaves into China for processing could face import restrictions and additional costs that GLG does not due to its integrated supply chain.

Additional future growth opportunities

A cease-trade order (CTO) instituted in May 2012 for failure to file audited financials was lifted in July 2013, resolving an overhang that could have previously impeded new customer wins for GLG.

COFCO arrangement targets Chinese consumers GLG signed a letter of intent in June 2013 with a unit of COFCO, which could provide an opportunity for GLG to significantly increase its sales in the Chinese market. COFCO is China's largest food processor and trader, and is working with GLG to formulate stevia-sweetened F&B products for the Chinese market. While GLG expects 2014 sales prospects from COFCO will be modest, given the size of the Chinese market the longer-term extract sales potential to COFCO could exceed the amount sold to Cargill in 2009-10.

China Sugar Reserve opportunity (CSR) In 2010 GLG started discussions with Chinese government officials about the government establishing a CSR, under which it would buy stevia from GLG and reformulate it into a blend with sugar that would then be used in Chinese F&B products, thus reducing the sugar content in food products consumed by the public. GLG supplied product in 2011 for a trial order with then-partner FXY, which satisfied testing requirements, but no additional orders or material developments have since ensued. Hence, current visibility on this project is limited.

Adding Luo Han Guo (Monk Fruit) extract to GLG’s portfolio GLG intends to commercialise Monk Fruit (Luo Han Guo, LHG) extracts, specifically mogroside V, which conveys sweetness without caloric effects and can have up to 300x the sweetness of sugar (at least at low concentrations) on an equal-weight basis. LHG is native to China and Thailand, and

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mogroside V is less bitter than RebA. BioVittoria (New Zealand) and Guilin Layn Natural Ingredients (China) were among the first firms to obtain US GRAS clearance for LHG extracts, in 2010 and 2011, respectively. Mogroside V’s potential weaknesses are flatter sweetness-to-dose curves at higher concentrations (so as concentrations rise, its sweetness may level off more quickly than RebA or AS) and that its current supply chain is much less established than for stevia.

GLG intends to form supply relationships with farmers in China, and claims to have access to LHG strains with up to twice the mogroside V content of common LHG varieties. It intends to make minor modifications (capex costs estimated C$0.5m) to its currently-idle Runyang facility in H114 to enable mogroside V extract commercialisation by Q314. GLG expects to sell 30-40MT of mogroside V extracts within a year of starting production and it estimates the current market price for 50% mogroside V extracts at about US$300-320/kg. GLG plans to source and process an annual extract capacity of up to 500MT a year within two to three years. GLG also plans to introduce a competitively-priced LHG/stevia combination extract that combines the benefits of each ingredient to provide a clean sweet taste profile without aftertaste.

GLG will need to compete with existing LHG players. Namely, BioVittoria has the advantages of having worked with LHG extracts since the mid-2000s, having existing customer relationships (eg Tate & Lyle) and, it claimed in 2012, having locked up ~90% of the world’s LHG supply. Blue California and Niutang are also working on LHG extracts.

LHG could be a promising entrant in the natural sweetener scene but stevia is likely to remain the larger player until LHG’s price becomes more competitive, its supply is scaled up more consistently to meet potential user needs, and considerations about flatter sweetness curves are alleviated.

GLG’s external debt backed by fixed assets

In Q313, GLG had C$68.0m of net debt, with C$29.5m due within 12 months. C$58.1m of GLG’s debt was owed to Chinese-government affiliated banks, and C$13.3m is owed to its chairman and CEO, Dr Zhang. GLG’s loans to external lenders have at times become overdue (eg at YE12, over C$57m was past due), but terms were reached in 2013 to renew all overdue loans and none of GLG’s current loans are currently in default. According to GLG, its C$58.1m external debt is secured by its four primary extract processing facilities (Runhai, Runyang, Runde and Runhao), and their recoverable values, as recorded under the Chinese lender agreements, exceed this outstanding debt by a ratio of about 2:1. This helps explain why Chinese bank lenders have repeatedly renewed GLG’s external debts since 2008, providing GLG with flexibility to continue working towards improving profitability. Given the value of the assets secured against the debt, GLG believes that its lenders will continue to renew the loans as needed. In the event that renewals cannot be secured, GLG expects that the likely worst-case scenario would be for it to have to sell one of its processing facilities (for near the full value of the outstanding debt), which could reduce its potential peak stevia processing revenue capacity by about 30% (from US$150-200m/year at present).

Valuation

GLG’s valuation is primarily based on the future profitability of its stevia operations. While the company is also making moves to sell LHG extracts, this market is in its infancy compared to stevia and GLG’s positioning and sourcing is not yet well established. Hence, our medium-term LHG extract sales forecasts are modest compared to GLG’s stevia operations, although we assume that GLG will start selling LHG extracts in H214 and that it will sell C$10.4m of extract in 2015.

GLG’s profitability will depend significantly on stevia volumes sold; management indicated that it would need ~C$40-50m in extract sales to become consistently profitable (on a net income basis).

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We assume that GLG revenue will grow as the stevia market expands. We also expect GLG’s margins will begin to improve significantly in H214 as the H3 leaf strain will then make up the majority of its leaf supply for processing; prior to then, the company will still be mostly processing its inventory of earlier-generation (H1 or H2) leaf. Margins could further expand in 2016 as even higher-yielding H4 leaf is procured and processed. Our base case scenario assumes that GLG will start generating consistently positive EBITDA in early 2016.

Exhibit 7: Revenue and margin forecasts for GLG (C$000s) Year 2014e 2015e 2016e 2017e 2018e Stevia extract revenue 28,312 38,261 50,900 66,876 75,068 LHG and other revenue 4,716 12,281 13,875 14,894 16,007 Total revenue 33,027 50,542 64,775 81,770 91,075 Gross profit 850 4,809 10,890 16,354 18,215 Gross margin 2.6% 9.5% 16.8% 20.0% 20.0% EBITDA (6,550) (2,739) 3,191 8,501 10,205 EBITDA margin N/A N/A 4.9% 10.4% 11.2% Source: Edison Investment Research

We value GLG using a net-present-value (NPV) analysis. We use a weighted average cost of capital (WACC) of 10%, given a cost of equity of 12.5% and GLG’s capital structure, which is weighted to debt at 84% given current market values (and its average cost of debt is estimated at 9.0%). Our base case valuation assumes that by 2017, the stevia market will grow to US$430m (growing at 10% CAGR in volume and 7.5% CAGR in price, from estimated US$220m in 2013). Given the yield benefits of GLG’s proprietary leaves, we forecast that GLG will have a 15.0% long-term stevia market share (by value), that ASE pricing will rise to US$98.20/kg and that GLG’s gross margins will grow to 20%. We assume a stepwise deceleration in the stevia market growth rate after 2017, and use a terminal growth rate of 1% after 2026. We obtain a total NPV for GLG of C$131.2m, which net of estimated end-2013 net debt of C$70.6m provides an equity valuation of C$60.6m, or C$1.84/share.

We provide a sensitivity analysis of how GLG’s valuation can vary based on changes in certain assumptions on the stevia market and GLG’s performance. This analysis shows that given GLG’s high current financial leverage, its equity value can vary widely depending on performance metrics. Using more pessimistic assumptions (bear case) of a smaller stevia market size with lower market share, pricing and margins provides an NPV of only C$67m for GLG, and a negative equity valuation given the outstanding debt. However, using more optimistic assumptions could result in marked upside. Our bull and best case scenarios cited below show that under favourable market conditions GLG’s equity value per share could rise markedly from current levels.

Exhibit 8: Scenario analysis and effects on valuation Bear case Base case Bull case Best case Stevia market size in 2017 (US$m) 380 430 460 490 Penetration rate of GLG extracts in the stevia market in 2017 14.0% 15.0% 16.0% 17.0% Average stevia extract price in 2017 (US$/kg) 94.60 98.20 100.00 103.80 Total GLG revenue in 2017 (C$m) 69.8 81.8 90.3 100.9 Gross margin in 2017 18.0% 20.0% 22.0% 24.0% EBITDA in 2017 (C$m) 4.7 8.5 12.0 16.4 NPV (C$m) 67.3 131.2 187.6 260.2 Current net debt (Q413e) (C$m) 70.6 70.6 70.6 70.6 Equity valuation (C$m) net of debts (3.4) 60.6 116.9 189.6 FD equity value per share (C$) (0.10) 1.84 3.55 5.75 Source: Edison Investment Research

Sensitivities

In addition to the intricacies of the stevia and sweetener market (ie how well stevia or LHG extracts can be formulated in F&B products, how cost-competitive they are versus sugar or other HIS, and

GLG Life Tech | 10 March 2014 10

consumers’ sensitivities to the health effects of AS and sugar consumption), GLG’s prospects depend on several factors and considerations.

Financing risk. GLG has C$29.5m in debt due over the next 12 months and while it expects the debt to be rolled over, the firm may need to divest one of its processing facilities if the loans cannot be renewed. Failing this, and in a worst-case scenario, GLG could be forced into a dilutive equity financing. Our base case assumes that GLG will raise an additional C$20m in debt through FY15 to fund working capital, although a quicker recovery of profit margins or better-than-expected working capital management could lower or even eliminate the need for further financing.

Foreign exchange risk. A majority of GLG’s revenues are incurred in US dollars, whereas the company pays its China-based operations employees in yuan; and its costs for its Canadian head office/administration and international sales staff are incurred in Canadian dollars. A depreciation in the US dollar vs either currency would influence GLG’s financial performance.

Emergence of RebD or RebX/RebM could diminish GLG’s cost advantages vs other producers. Much of GLG’s seed base operations have focused on improving RebA yields, but RebD and potentially Rebaudioside M (RebM, also referred to as RebX) are emerging as stevia glycosides that could have cleaner taste profiles (ie, less bitter aftertaste), particularly in carbonated or acidic solutions (ie, for CSDs). Both extracts are only present in trace quantities in typical stevia leaves and are presently much more expensive than RebA, but they could potentially draw sales away from RebA or GLG’s other marketed stevia extracts if supply and pricing can be improved. While GLG is also capable of extracting RebD or RebM from stevia, it does not have a leaf sourcing advantage for these constituents (as it does with RebA).

Emergence of alternative sweeteners and competition. Stevia and LHG’s commercial acceptance in F&B products could be affected by the emergence of alternate non-stevia natural sweeteners or ingredients (eg, molomo monate). In the stevia market, GLG must also compete with multiple players including PureCircle, Blue California, Sunwin, Morita Kagaku Kogyo and Stevia First. Many of these firms may not have the same access to as high-yielding RebA strains in an optimal-cost harvesting territory (China), which may benefit GLG’s competitive position.

Reliance on CEO and chairman. Many of GLG’s contractual arrangements in China (such as leaf harvesting exclusivity agreements, terms with lenders and commercial arrangements) were secured by Dr Zhang, who has deep relationships with government officials in these regions. The maintenance of such agreements and lender flexibility could be dependent on Dr Zhang remaining with the company. If Dr Zhang (who directly owns 12.6% of GLG equity) left the company, there could be material disruption to the firm’s operations and arrangements.

Emergence of alternate stevia glycoside production technologies. Evolva Holding and Stevia First are both working on fermentation technologies to produce glycosides such as RebA, RebD, or potentially even RebX at a greater scale and potentially lower cost than the conventional plant-cultivation processes employed by GLG and PureCircle. If these firms are successful, particularly for RebD or RebX, then such technologies could pose a significant threat for GLG’s stevia extraction business. We estimate that the earliest that such fermentation approaches could compete with conventional stevia suppliers would be in the H215 or early 2016 timeframe. However, extracts derived from these processing methods could lose the “naturally-sourced” perception among consumers, potentially reducing their appeal compared to conventional plant-cultivated extracts such as those produced by GLG.

Margin improvements. Our forecasts are driven by assumptions that the utilisation of higher-yielding H3 and H4 leaf will significantly improve GLG’s margins. If extract pricing remains under pressure (ie industry oversupply of aggressive competitor pricing) or if the processing of these proprietary strains does not provide the anticipated improvements in extract yield, margins could be lower than forecast, which would have downside implications to our valuation assumptions.

GLG Life Tech | 10 March 2014 11

Financials

GLG had C$68m of net debt in Q313 (C$72.6m of total debt and C$4.6m in cash and equivalents); we estimate end-2013 net debt of C$70.6m. The company has had free cash flow (defined by operating cash flow plus net capex) of minus C$42.8m in 2011 (due in part to its AN0C project), C$1.4m in 2012, and minus C$4.4m in 9m13. As stevia demand grows and as higher-yielding stevia leaves enter GLG’s supply chain, we expect that gross margins will gradually improve to 20% and GLG’s stevia market share will rise to 15%. Our base case assumes that GLG will increase its debt by C$20m through to end-2015, after which it would generate consistently positive free cash flow (starting in 2016).

Exhibit 9: Financial summary C$(000) 2011 2012 2013e 2014e 2015e 31-December IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 24,840 21,709 18,084 33,027 50,542 Cost of Sales (26,422) (26,958) (22,268) (32,177) (45,733) Gross Profit (1,582) (5,250) (4,184) 850 4,809 General & Administrative (35,021) (10,229) (6,411) (7,400) (7,548) EBITDA (36,603) (15,479) (10,595) (6,550) (2,739) Operating Profit (before exceptionals) (47,033) (17,389) (13,798) (8,588) (4,719) Exceptionals 0 0 0 0 0 Other 0 0 1,857 0 0 Operating Profit (47,033) (17,389) (11,940) (8,588) (4,719) Exceptionals (128,545) (10,436) (8,733) 0 0 Net Interest (5,538) (6,913) (6,775) (6,591) (7,351) Profit Before Tax (norm) (52,570) (24,301) (20,573) (15,179) (12,070) Profit Before Tax (FRS 3) (181,115) (34,738) (27,449) (15,179) (12,070) Tax (440) (83) (2) 0 0 Minority interests (4,643) (793) 1,725 0 0 Profit After Tax and minority interests (norm) (57,654) (25,177) (18,851) (15,179) (12,070) Profit After Tax and minority interests (FRS 3) (186,199) (35,613) (25,726) (15,179) (12,070) Average Number of Shares Outstanding (m) 32.0 32.9 32.9 34.5 37.1 EPS - normalised (C$) (1.80) (0.76) (0.57) (0.44) (0.33) EPS - normalised and fully diluted (C$) (1.80) (0.76) (0.57) (0.44) (0.33) EPS - (IFRS) (C$) (5.81) (1.08) (0.78) (0.44) (0.33) Dividend per share (C$) 0.0 0.0 0.0 0.0 0.0 BALANCE SHEET Fixed Assets 53,807 50,225 51,907 50,670 49,130 Intangible Assets 0 0 0 0 0 Tangible Assets 53,807 50,225 51,907 50,670 49,130 Current Assets 93,575 52,840 28,148 31,484 40,032 Cash 4,487 3,582 1,977 1,403 4,013 Other 89,088 49,258 26,171 30,081 36,019 Current Liabilities (103,376) (86,694) (51,352) (57,629) (65,687) Creditors (32,802) (26,811) (21,831) (28,108) (36,166) Short term borrowings (70,574) (59,883) (29,520) (29,520) (29,520) Long Term Liabilities 0 (8,683) (46,174) (56,174) (66,174) Long term borrowings 0 (8,673) (43,089) (53,089) (63,089) Other long term liabilities 0 (10) (3,085) (3,085) (3,085) Net Assets 44,006 7,688 (17,470) (31,649) (42,698) CASH FLOW Operating Cash Flow (26,797) 8,865 5,352 (3,183) 401 Net Interest (5,538) (6,913) (6,775) (6,591) (7,351) Tax 0 0 0 0 0 Capex (9,006) (568) (165) (800) (440) Acquisitions/disposals 0 0 0 0 0 Financing 54,240 0 0 0 0 Net Cash Flow 12,899 1,384 (1,588) (10,574) (7,390) Opening net debt/(cash) (23,252) 66,087 64,974 70,632 81,206 HP finance leases initiated 0 0 0 0 0 Other (102,238) (271) (4,070) 0 0 Closing net debt/(cash) 66,087 64,974 70,632 81,206 88,596 Source: Edison Investment Research, GLG Life Tech accounts

GLG Life Tech | 10 March 2014 12

Contact details Revenue by geography Suite 2168, 1050 West Pender Street, Vancouver, BC Canada V6E 3S7 Phone: (604) 669 2602 Fax: (604) 662 8858 ir@glglifetech.com www.glglifetech.com

CAGR metrics Profitability metrics Balance sheet metrics Sensitivities evaluation EPS 2011-15e N/A EPS 2013-15e N/A EBITDA 2011-15e N/A EBITDA 2013-15e N/A Sales 2011-15e 19.4% Sales 2013-15e 67.2%

ROCE 14e N/A Avg ROCE 2011-15e N/A ROE 14e N/A Gross margin 14e N/A Operating margin 14e N/A Gr mgn / Op mgn 14e N/A

Gearing 14e N/A Interest cover 14e N/A CA/CL 14e N/A Stock days 14e N/A Debtor days 14e N/A Creditor days 14e N/A

Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

Management team Chairman and CEO: Luke Zhang, PhD President and CFO: Brian Meadows Dr Luke Zhang is the founder of GLG and has over 30 years of experience in managing firms in the health and food industries, and medical and software development industries. He holds a PhD in pharmacology from Vanderbilt University, a master of science in pharmaceutical chemistry from Shanghai First Medical University in China, and a bachelor of medicine from Shandong Medical University in China.

Before joining GLG, Brian Meadows worked in the telecommunications industry for over 20 years, including positions with Telus and EnerTel. He has also held senior financial and business development roles in several start-up companies in Europe. Mr Meadows has a bachelor of business administration from Wilfrid Laurier University and an international MBA from the University of Glasgow. He also holds both the certified financial analyst and certified management accountant designations.

Vice president, sales: Shaun Richmond Investor relations executive: Stuart Wooldridge Shaun Richmond has spent much of his career in senior sales roles managing both North American and international business within the natural food and beverage industry. He has experience with launching new brands into evolving markets and forming commercial partnerships. Mr Richmond has a business degree from the University of British Columbia and also received a degree in international business at Hogeschool Zeeland in the Netherlands.

Stuart Wooldridge has 25 years of experience in marketing, investor communications and international finance. He has held senior roles in the publicly listed resource and consumer products sectors with worldwide operations and provided due diligence services for institutional investors. Early in his career, he held senior marketing and business development positions with Exxon and PetroCanada. Mr Wooldridge has a BComm degree (finance) and an MBA, both from the University of British Columbia.

Principal shareholders (%) Luke Zhang (chairman & CEO) 12.56 Columbia Wanger Asset Management 10.48 IG Investment Management 10.19 Skyland International Investment Management 9.81 Pacific Marketing Consultants 9.23 HZ Health Management 6.95

Companies named in this report PureCircle (PURE), Evolva Holding SA (EVE), Stevia First Corp (STVF), Sunwin International (SUWN)

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