Industry China Healthcare - pg.jrj.com.cn

Deutsche Bank Markets Research

Asia Hong Kong Health Care Health Care

Industry

China Healthcare

Date 3 June 2014

Industry Update

China Edge P144: Monthly data tracker, May 2014

Monthly data tracker, May 2014

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.

Jack Hu, Ph.D

Research Analyst (+852) 2203 6208 [email protected]

Companies Featured

China Shineway (2877.HK),HKD14.34 Buy 2013A 2014E 2015E P/E (x) 12.3 12.4 11.0 EV/EBITDA (x) 6.9 7.1 6.0 Price/book (x) 1.6 1.9 1.7

Source: Deutsche Bank

Recent data suggest 1) drug consumption growth was 14.2% YoY in Apr 2014 vs. 19% YTD Mar 2014; 2) government healthcare spending was up 28% YoY YTD Apr 2014, 3) the Shenzhen export value of patient monitors and ultrasound machines increased 4% YoY in Apr, 4) 6-APA, 7-ACA and vitamin C prices remained stable, 5) individual TCM raw material prices dropped from the previous month, and 6) commercial healthcare insurance inflow and outflow grew 10% and 0% YTD Apr 2014, respectively. We advise investors to exercise caution in interpreting these data points.

Macro data: government spending, commercial insurance, and UBMI data Government spending on healthcare was RMB77.4bn in April 2014, up 8% YoY, lower than the 45% YoY growth in April 2013. Commercial healthcare insurance inflow and outflow grew 42% and 39% YoY in April 2014, respectively. Meanwhile, drug consumption growth dropped in April 2014, with 14.2% YoY growth vs. 18.7% YoY growth in April 2013. We have also started tracking monthly fund inflow and outflow for UBMI with this note. On a YTD Feb 2014 basis, the inflow and outflow growth rates are 18% and 22% respectively, comparable to those last year.

Shenzhen exports suggest growth deceleration in April vs. March Exports of patient monitors and ultrasound machines from Shenzhen customs increased 4% YoY and decreased 21% MoM in April 2014, compared with a decrease of 7% YoY and an increase of 70% MoM in March 2014, respectively. For 1Q14, YoY growth was -4%, vs. 14% in 4Q13, 8% in 3Q13, 23% in 2Q13 and 15% in 1Q13.

6-APA and 7-ACA price in line with last month As of April 2014, the 6-APA and 7-ACA prices were RMB205/kg and RMB500/kg, respectively, in line/slightly lower than the previous month. We attribute this to stable antibiotics usage. While we remain cautious on their long-term pricing trends, we find price increases of 6-APA encouraging.

TCM raw material prices: QKL and Shen Mai ingredients mixed The TCM index fell in March, with a 1.7% drop from the previous month. The prices of honeysuckle and indigowoad root (the main ingredients used in Shineway’s flagship product, Qing Kai Ling) decreased 12% MoM and 18% MoM in May 2014. Prices of Shen Mai’s main ingredients ophiopogon root and gadix ginseng dropped 24% and rose 9% MoM, respectively.

Vitamin C prices remain stable The domestic price of vitamin C was RMB28/kg in May 2014, in line with April 2014. The average export price was USD3.9/kg in April 2014, slightly higher than the previous month.

We prefer multiples-based valuation; risks relate mainly to policy/regulations We use a multiples-based valuation approach in light of the sustainable growth that we expect from the sector. Key risks include price erosion, government policy, capitated reimbursement control and increasing competition.

3 June 2014

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China Healthcare

Page 2 Deutsche Bank AG/Hong Kong

Drug consumption growth deceleration continues

14.2% YoY growth in Apr 2014 vs. 18.7% in Apr 2013

Sales of traditional Chinese and Western medicine totaled RMB55.2bn in April 2014, representing 14.2% YoY growth vs. 18.7% YoY in April 2013. On a YTD basis, YoY growth of drug consumption in April YTD 2014 was 19.0% vs. 23.1% growth April YTD 2013.

Figure 1: Monthly drug consumption data Figure 2: Quarterly drug consumption data

29.5%

10.8%

23.7%

13.0%

14.2%

0%

5%

10%

15%

20%

25%

30%

35%

0%

5%

10%

15%

20%

25%

30%

35%

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

Total Sales of TCM and WM (YoY Growth)

Source: Deutsche Bank, National Bureau of Statistic Source: Deutsche Bank, National Bureau of Statistic

We remain concerned about 1H14 growth, given the impact of the anti-bribery campaign, which adds another layer of complexity. We previously assumed a growth recovery in 2H13, mainly due to a better comp in 2H12. At present, we still anticipate modest growth recovery in 2014.

3 June 2014

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China Healthcare

Deutsche Bank AG/Hong Kong Page 3

Government healthcare spending up 28% YTD April 2014

8% YoY growth in April 2014, vs. 45% YoY growth in same period of 2013

Total government spending in the month of April 2014 was reported at RMB77.4bn, up 8% YoY compared with RMB71.7bn, 45% YoY and RMB49.3bn, 6% YoY, in April 2013 and 2012, respectively. The YoY growth rate YTD April 2014 was lower than YTD April 2013 and 2012, indicating slower growth in healthcare spending in the past two years.

Figure 3: Monthly government spending on healthcare

(Jan 2007 to Apr 2014)

Figure 4: Annual government spending on healthcare

(2000 to 2013)

-30%

-10%

10%

30%

50%

70%

90%

0

25

50

75

100

125

150RMB bn monthly govt spending YoY %

49 57 64 78 85 104 132

199

276

399

475

637

720

821

0

100

200

300

400

500

600

700

800

900

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

RMB bn

2000 - 2013 CAGR: 24.2%

Source: Deutsche Bank, Ministry of Finance PRC Source: Deutsche Bank, Ministry of Finance PRC

3 June 2014

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Figure 5: Monthly government spending on healthcare (Jan 2011 to Apr 2014)

RMB bn Monthly MoM % YoY % Annual total YoY % YTD YoY % % of annual

Jan-11 18.5 -84% 58% 18.5 58% 3%

Feb-11 18.5 0% 38% 37.0 47% 3%

Mar-11 39.9 115% 64% 76.9 56% 6%

Apr-11 46.4 16% 44% 123.3 51% 7%

May-11 56.2 21% 75% 179.5 58% 9%

Jun-11 66.0 17% 73% 245.5 61% 10%

Jul-11 47.4 -28% 66% 292.9 62% 7%

Aug-11 49.2 4% 39% 342.1 58% 8%

Sep-11 54.4 11% 15% 396.5 50% 9%

Oct-11 46.8 -14% 37% 443.3 49% 7%

Nov-11 60.2 29% 4% 503.5 41% 9%

Dec-11 133.2 121% 12% 636.7 34% 636.7 34% 21%

Jan-12 31.2 -77% 69% 31.2 69% 4%

Feb-12 31.2 0% 69% 62.5 69% 4%

Mar-12 66.8 114% 68% 129.3 68% 9%

Apr-12 49.3 -26% 6% 178.6 45% 7%

May-12 57.2 16% 2% 235.8 31% 8%

Jun-12 75.3 32% 14% 311.1 27% 10%

Jul-12 55.1 -27% 16% 366.2 25% 8%

Aug-12 56.2 2% 14% 422.4 23% 8%

Sep-12 71.1 27% 31% 493.5 24% 10%

Oct-12 47.9 -33% 2% 541.4 22% 7%

Nov-12 61.3 28% 2% 602.7 20% 9%

Dec-12 117.2 91% -12% 719.9 13% 719.9 13% 16%

Jan-13 37.7 -68% 21% 37.7 21% 5%

Feb-13 37.7 0% 21% 75.3 21% 5%

Mar-13 82.7 120% 24% 158.0 22% 10%

Apr-13 71.7 -13% 45% 229.7 29% 9%

May-13 65.9 -8% 15% 295.6 25% 8%

Jun-13 85.0 29% 13% 380.6 22% 10%

Jul-13 56.5 -34% 3% 437.1 19% 7%

Aug-13 55.1 -2% -2% 492.2 17% 7%

Sep-13 73.5 33% 3% 565.7 15% 9%

Oct-13 56.8 -23% 19% 622.5 15% 7%

Nov-13 60.8 7% -1% 683.3 13% 7%

Dec-13 137.6 126% 17% 820.9 14% 820.9 14% 17%

Jan-14 51.6 -63% 37% 51.6 37%

Feb-14 51.6 0% 37% 103.2 37%

Mar-14 114.0 121% 38% 217.2 37%

Apr-14 77.4 -32% 8% 294.7 28%

Source: Deutsche Bank, Ministry of Finance PRC

3 June 2014

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Shenzhen customs data on equipment exports

4% YoY increase in April 2014

In this section, we track monthly and quarterly export shipments (the total of black and white ultrasound, color ultrasound and patient monitors) from the Shenzhen customs data. Shenzhen is a tier-one city in Guangdong, China’s southernmost province, and the closest Chinese city to Hong Kong.

Annual growth was 26% in 2009, 28% in 2010, 22% in 2011, 10% in 2012 and 15% in 2013. The data are seasonal, as 1Q typically represents about 20% of annual shipments while 4Q about 30%.

Ultrasound and patient monitor shipments of USD35.3m were recorded in April 2014, an increase of 4% YoY and a decrease of 21% MoM vs. a decrease of 4% YoY and 30% MoM in April 2013.

On a rolling three-month basis from February 2014 to April 2014, growth was -2% YoY, higher than the 4% YoY decrease in January 2014 to March 2014.

-4% YoY growth in 1Q14 Shenzhen shipment data 1Q14 saw a 4% YoY decrease, compared with a 14% YoY increase in 4Q13, 8% YoY in 3Q13, 23% YoY in 2Q13, 15% YoY in 1Q13 and13% YoY in 4Q12 (see Figure 8 for quarterly details).

Figure 6: Monthly Shenzhen custom export data (Jan

2008 to Apr 2014)

Figure 7: Annual Shenzhen custom export data (2008 to

YTD 2014)

-40%

-20%

0%

20%

40%

60%

80%

0

10

20

30

40

50

60

70

Jan

-08

Ap

r-0

8

Jul-0

8

Oct

-08

Jan

-09

Ap

r-0

9

Jul-0

9

Oct

-09

Jan

-10

Ap

r-1

0

Jul-1

0

Oct

-10

Jan

-11

Ap

r-1

1

Jul-1

1

Oct

-11

Jan

-12

Ap

r-1

2

Jul-1

2

Oct

-12

Jan

-13

Ap

r-1

3

Jul-1

3

Oct

-13

Jan

-14

Ap

r-1

4

USD m Monthly export (LHS) YOY growth (RHS)

204.3

257.5

330.1

403.8

444.7

510.9

139.7

0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013 YTD 2014

USD m

Source: Deutsche Bank, Shenzhen custom statistics (Total of black & white ultrasound; color ultrasound and patient monitors. Source: Deutsche Bank, Shenzhen custom statistics (Total of black & white ultrasound; color ultrasound

and patient monitors

3 June 2014

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Figure 8: Monthly and quarterly Shenzhen custom export data (2008 to Apr 2014) Monthly: Year-over-year growth

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

2009 0% 63% 13% 10% 2% 22% 53% 45% 6% 49% 53% 25% 26%

2010 47% 34% 70% 19% 68% 43% 14% 31% 3% 29% 7% 14% 28%

2011 55% 3% 17% 23% -7% 10% 42% 13% 54% 6% 30% 29% 22%

2012 -25% 53% 13% 23% 19% 16% -3% 1% 3% 11% 0% 26% 10%

2013 48% -14% 18% -4% 35% 37% 9% 25% -7% 17% 26% 5% 15%

2014 -4% 2% -7% 4%

Quarterly data Quarterly: Year-over-year growth

USD m 1Q 2Q 3Q 4Q Total 1Q 2Q 3Q 4Q Total

2008 38.5 52.9 53.2 59.7 204.3 2008 n/a n/a n/a n/a n/a

2009 46 59 69 83.5 257.5 2009 20% 11% 30% 40% 26%

2010 69.9 83.8 79.7 96.7 330.1 2010 52% 42% 16% 16% 28%

2011 86.7 90.2 108.1 118.7 403.8 2011 24% 8% 36% 23% 22%

2012 94 107.4 108.6 134.7 444.7 2012 8% 19% 0% 13% 10%

2013 108.5 132 116.9 153.5 510.9 2013 15% 23% 8% 14% 15%

2014 104.4 2014 -4% Source: Deutsche Bank, Shenzhen custom statistics (Total of black & white ultrasound; color ultrasound and patient monitors.

Data directionally correlates to Mindray international sales growth

2Q14 data discrepancy likely due to data fidelity and/or product mix changes The historical trend shows that actual reported growth is directionally correlated to Shenzhen data. In 2Q12, 3Q12, 4Q12, 1Q13, 2Q13, 3Q13, 4Q13 and 1Q14, MR reported international revenue growth of 21%, 12%, 15%, 3%, 5%, 18%, 24% and 14%, compared with Shenzhen’s export growth of 19%, 0%, 13%, 15%, 23%, 8%, 14% and -4% respectively (see Figure 9).

For the first time since 1Q08, the two data points in 2Q13 deviated from this pattern of directional correlation. Media reports recently indicated a discrepancy between overall export data to Taiwan and South Korea published by Chinese sources and overall import data from China published by Taiwan and South Korea. While it is premature to ascribe the aforementioned discrepancy to data fidelity, we see the following possibilities: 1) the pattern could be broken, as could our definition of directional correlation; 2) there could be a problem with data fidelity; or 3) there could have been a change in export mix that the Shenzhen data did not capture.

3 June 2014

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Figure 9: Shenzhen’s customs export data vs. Mindray’s international

business revenue growth

20%

11%

30%

40%

52%

42%

16% 16%

24%

8%

36%

23%

8%

19%

0%

13%15%

23%

8%

14%

-4%

61%

-4%

-1% 6%

17%

27%

18%

20% 30%

18%

26%

15%

17% 21%

12%15%

3%5%

18%

24%

14%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

1Q092Q093Q094Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q121Q132Q133Q134Q131Q14

Shenzhen exports Mindray's international

Source: Deutsche Bank, Shenzhen custom statistics (Total of black & white ultrasound; color ultrasound and patient monitors

3 June 2014

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Active pharmaceutical ingredient (API) pricing

Both 7-ACA and 6-APA prices rebounded from a two-year nadir

6-APA (aminopenicillanic acid) is the core active pharmaceutical ingredient (API) used in penicillin antibiotics. It is a byproduct of corn. 7-ACA (aminocephalosporanic acid) is the core API used in cephalosporins antibiotics. For a description of these antibiotics, refer to our ‘reinstating coverage’ report on The United Laboratories (3933.HK), published on 18 November 2010.

6-APA price is slightly lower than in the previous month Currently, the 6-APA price is RMB205/kg, slightly lower than in the previous month (April 2014), and near the bottom of historical levels of RMB163-490/kg. Prices declined 21% in 2012 and continue to decline in 2013; however, there has been a 17% rebound from the trough of RMB163/kg in 2H11.

The range between January 2011 and December 2012 was RMB163/kg (December 2011) to RMB215/kg (January 2011).

Outlook for 2014 We anticipate stable ASPs with a modest chance of limited appreciation, due to continuous government tightening on antibiotics usage. The price of 6-APA has been relatively stable following a slight upward trend in 2012. We expect volumes to pick up slightly in 2014 given the deceleration of inflation and a lower base in 1H14 amid the implementation of restrictions on the use of antibiotics.

Figure 10: 6-APA price (Jan 2007 to May 2014) Figure 11: 6-APA price (Jan 2010 to May 2014)

0

100

200

300

400

500

Jan

-07

Ap

r-0

7Ju

l-07

Oct

-07

Jan

-08

Ap

r-0

8Ju

l-08

Oct

-08

Jan

-09

Ap

r-0

9Ju

l-09

Oct

-09

Jan

-10

Ap

r-1

0Ju

l-10

Oct

-10

Jan

-11

Ap

r-1

1Ju

l-11

Oct

-11

Jan

-12

Ap

r-1

2Ju

l-12

Oct

-12

Jan

-13

Ap

r-1

3Ju

l-13

Oct

-13

Jan

-14

Ap

r-1

4

RMB/kg

0

100

200

300

400

500

Jan

-10

Mar

-10

May

-10

Jul-1

0S

ep-1

0N

ov-

10

Jan

-11

Mar

-11

May

-11

Jul-1

1S

ep-1

1N

ov-

11

Jan

-12

Mar

-12

May

-12

Jul-1

2S

ep-1

2N

ov-

12

Jan

-13

Mar

-13

May

-13

Jul-1

3S

ep-1

3N

ov-

13

Jan

-14

Mar

-14

May

-14

RMB/kg

Source: Deutsche Bank, www.healthtoo.com Source: Deutsche Bank, www.healthtoo.com

7-ACA price in line with previous month Prices declined every month between November 2010 and February 2012, when they finally rose 9%. The price of 7-ACA is still near its five-year low. In China, the price of 7-ACA was RMB500/kg as of May 2014, the same as the previous eight months, up 15% from the trough of RMB435/kg in January 2012,

3 June 2014

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but down 46% since year-end 2010. Prices have declined as a result of restrictions on the use of cephalosporin antibiotics in China and the large capacity increases at 7-ACA facilities.

Figure 12: 7-ACA price (Jan 2007 to Apr 2014) Figure 13: 7-ACA price (Jan 2010 to Apr 2014)

0

200

400

600

800

1000

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08

Oct

-08

Jan

-09

Ap

r-09

Jul-

09

Oct

-09

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

Jan

-14

Ap

r-14

RMB/kg

0

200

400

600

800

1000

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

RMB/kg

Source: Deutsche Bank, www.healthtoo.com Source: Deutsche Bank, www.healthtoo.com

Corn prices slightly increased Corn prices in China started to increase at the beginning of 2009. They hit a high in the 38th week of 2011, when the price was RMB2,600/ton. Since then, prices have dropped 7% to the current level of RMB2,440/ton, which increased slightly from the previous month.

Despite a significant rise in corn prices in general, 6-APA prices have not followed the same path. Thus, we conclude that 6-APA prices are largely determined by supply and demand instead.

Figure 14: Weekly corn price in China (2009 to 2014)

1000

1500

2000

2500

3000

W12009

W5 W9W13W17W21W25W29W33W37W41W45W49 W12010

W5 W9W13W17W21W25W29W33W37W41W45W49 W12011

W5 W9W13W17W21W25W29W33W37W41W45W49 W12012

W5 W9W13W17W21W25W29W33W37W41W45W49 W12013

W5 W9W13W17W21W25W29W33w37w41w45w49 w12014

w5 w9 w13w17w21

RMB/ton

Source: China JCI

3 June 2014

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China Healthcare


Figure 15: Weekly corn price in China (2009 to YTD 2014) Weekly data

RMB/ton W1 W5 W9 W13 W17 W21 W25 W29 W33 W37 W41 W45 W49 YTD

2009 1480 1500 1570 1650 1630 1630 1650 1720 1730 1770 1730 1750 1810 22%

2010 1820 1830 1820 1910 1940 2010 1930 1980 2030 2000 2000 2070 2050 13%

2011 2060 2080 2150 2170 2190 2270 2320 2310 2380 2510 2410 2260 2330 13%

2012 2330 2410 2450 2470 2430 2410 2440 2500 2510 2470 2320 2400 2430 4%

2013 2430 2420 2380 2360 2330 2380 2380 2390 2360 2410 2320 2330 2340 -4%

2014 2330 2350 2360 2360 2400 2440

Weekly: Year-over-year growth

W1 W5 W9 W13 W17 W21 W25 W29 W33 W37 W41 W45 W49 Total

2010 23% 22% 16% 16% 19% 23% 17% 15% 17% 13% 16% 18% 13% 13%

2011 13% 14% 18% 14% 13% 13% 20% 17% 17% 26% 21% 9% 14% 14%

2012 13% 16% 14% 14% 11% 6% 5% 8% 5% -2% -4% 6% 4% 4%

2013 4% 0% -3% -4% -4% -1% -2% -4% -6% -2%

2014 -4% -3% -1% 0% 3% 3% Source: China JCI

3 June 2014

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TCM raw material prices

TCM raw material index

The TCM raw material index is the first price index of traditional Chinese medicine raw materials approved in China and the first national price index (of the 12 released by the NDRC) created by a large private company in China.

The index has risen significantly since its inception, but decreased recently As of 28 May 2014, the TCM raw material index stood at 1,159, a 1.7% MoM decrease from the previous month. Since its inception, the TCM raw material index has experienced consecutive positive MoM growth ranging from 0.01% to 3.3%. The upward trend of the index has been obvious – only on five occasions has MoM growth fallen below zero (down 0.3% at worst).

Figure 16: China TCM index (Sep 2012 to May 2014)

980990

1,0001,0101,0201,0301,0401,0501,0601,0701,0801,0901,1001,1101,1201,1301,1401,1501,1601,1701,1801,1901,200

Sep

-12

Oct

-12

No

v-1

2

Dec

-12

Jan

-13

Feb

-13

Mar

- 13

Ap

r-1

3

May

-13

Jun

-13

Jul-1

3

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

TCM raw material indexpoints

Source: Deutsche Bank, www.wnkmprice.com

Individual prices were lower compared with the previous month

Honeysuckle (flos lonicerae) price dropped from the previous month Honeysuckle, or flos lonicerae, is a key element used for treating influenza, and the major raw material for Qing Kai Ling products.

As of May 2014, the price of honeysuckle was RMB110/kg, down from RMB125/kg in April 2014. Currently, the price is 67% below the peak level of February 2010. Following this peak, prices dropped and were stable between August 2010 and April 2011. However, since then, prices have fallen around 60%.

3 June 2014

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We believe prices could fall further to January 2008 levels, the lowest we have seen. Prices increased from RMB70/kg in January 2008 to RMB340/kg in February 2010. Then, seasonally weak demand dragged the price down to RMB187/kg in June 2010, before it picked up slightly during the peak influenza season.

Figure 17: Flos Ionicerae (Jan 2008 to May 2014) Figure 18: Flos Ionicerae (Jan 2010 to May 2014)

0

50

100

150

200

250

300

350

400

Jan

-08

Ap

r-0

8

Jul-0

8

Oct

-08

Jan

-09

Ap

r-0

9

Jul-0

9

Oct

-09

Jan

-10

Ap

r-1

0

Jul-1

0

Oct

-10

Jan

-11

Ap

r-1

1

Jul-1

1

Oct

-11

Jan

-12

Ap

r-1

2

Jul-1

2

Oct

-12

Jan

-13

Ap

r-1

3

Jul-1

3

Oct

-13

Jan

-14

Ap

r-1

4

RMB/kg

Flos lonicerae

0

50

100

150

200

250

300

350

400

Jan

-10

Ap

r-1

0

Jul-1

0

Oct

-10

Jan

-11

Ap

r-1

1

Jul-1

1

Oct

-11

Jan

-12

Ap

r-1

2

Jul-1

2

Oct

-12

Jan

-13

Ap

r-1

3

Jul-1

3

Oct

-13

Jan

-14

Ap

r-1

4

RMB/kg

Fos lonicerae

Source: Deutsche Bank, www.zgycsc.com Source: Deutsche Bank, www.zgycsc.com

Indigowoad root (radix isatidis) price dropped from previous month Indigowoad root, or radix isatidis, is another major raw material for Qing Kai Ling products and is often used to treat laryngitis and pharyngitis.

The root’s price rose significantly from November 2009 (at RMB13/kg) and peaked in May 2010 (at RMB27.25/kg). Its price declined 73% to RMB8.5/kg in May 2014, down 42% vs. year-end 2010. Industry sources say that the price dropped back to normal level as flux effects faded after 2009, and the current oversupply in the market is the main cause of the recent decline.

Figure 19: Radix isatidis (Mar 2008 to May 2014) Figure 20: Radix isatidis (Jan 2010 to May 2014)

0

5

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Mar

-08

Jun

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Mar

-09

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-09

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-10

Jun

-10

Sep

-10

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-10

Mar

-11

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-11

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-11

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-11

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-12

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-12

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-12

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-12

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-13

Jun

-13

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-13

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-13

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-14

RMB/kg

Radix isatidis

0

5

10

15

20

25

30

Jan

-10

Ap

r-1

0

Jul-1

0

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-10

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-11

Ap

r-1

1

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3

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RMB/kg

Radix isatidis


Ophiopongon root (radix ophiopogonis) down compared with previous month Ophiopongon root, or radix ophiopogonis, is often used with red ginseng to reduce perspiration and moisten the lungs and body. It is a major ingredient of Shen Mai products.

3 June 2014

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China Healthcare


The root has been a hot topic in the TCM raw materials market, as its price rose sharply (by 908%) from the trough levels of March 2008 to the July 2011 peak as a result of a substantial reduction in its planting area. Since year-end 2010, prices have decreased 59% to RMB35/kg currently. The large price increase restrained demand, which depressed prices thereafter, in our view.

In 2011, prices peaked twice at RMB139/kg in April 2011 and RMB145/kg in July 2011. Since the July 2011 peak, prices have declined 68% to RMB 46/kg currently. The price rebounded from RMB31/kg in March 2013 to RMB50/kg in May and has remained at similar levels since then.

Figure 21: Radix ophiopogonis (Jan 2008 to May 2014) Figure 22: Radix ophiopogonis (Jan 2010 to May 2014)

0

20

40

60

80

100

120

140

160

Jan

-08

Ap

r-0

8

Jul-0

8

Oct

-08

Jan

-09

Ap

r-0

9

Jul-0

9

Oct

-09

Jan

-10

Ap

r-1

0

Jul-1

0

Oct

-10

Jan

-11

Ap

r-1

1

Jul-1

1

Oct

-11

Jan

-12

Ap

r-1

2

Jul-1

2

Oct

-12

Jan

-13

Ap

r-1

3

Jul-1

3

Oct

-13

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-14

Ap

r-1

4

RMB/kg

Radix ophiopogonis

0

20

40

60

80

100

120

140

160

Jan

-10

Ap

r-1

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r-1

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3

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4

RMB/kg

Radix ophiopogonis


Gadix ginseng (red ginseng) increased from previous month Red ginseng, or gadix ginseng, is a major ingredient in Shen Mai products and is used to invigorate the central nervous system, leading to increased energy and circulation.

There was a sharp price increase of 176% throughout 2010 and up to August 2011, peaking at RMB215/kg, but prices then declined 26% to RMB160/kg in March 2013. However, in January the price reached its historical peak since January 2009 at RMB330/kg. In May 2014, the price was RMB360/kg, higher than the previous month. The short-term upward trend has been obvious.

3 June 2014

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Figure 23: Gadix ginseng (Jan 2009 to May 2014) Figure 24: Gadix ginseng (Jan 2010 to May 2014)

-

50

100

150

200

250

300

350

400

Jan

-09

Ap

r-0

9

Jul-0

9

Oct

-09

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-10

Ap

r-1

0

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0

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-10

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-11

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r-1

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3

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RMB/kgGadix ginseng

-

50

100

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400

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-10

Ap

r-1

0

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3

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3

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-14

Ap

r-1

4

RMB/kg

Gadix ginseng


3 June 2014

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China Healthcare


Vitamin C price

Vitamin C prices remain stable

The price of vitamin C (VC) dropped dramatically by 80% from a peak of about RMB140/kg in 2008 to less than RMB30/kg in 2012. This resulted from fierce competition and oversupply in the market.

As of May 2014, the domestic price of vitamin C was RMB28/kg, in line with previous three months, and slightly higher than RMB24/kg in January. The average export price of vitamin C was USD3.9/kg in April 2014, in line with last month, showing a steady upward trend since 2013.

As manufacturers have already reacted to the excessive supply in the market since 2008, the price of vitamin C is expected to remain stable in the near term.

Figure 25: Domestic VC price (Jul 2008 to May 2014) Figure 26: Average export VC price (Jan 2009 to Apr

2014)

0

20

40

60

80

100

120

140

160

J u l-08 J an -09 J u l-09 J an -10 J u l-10 J an -11 J u l-11 J an -12 J u l-12 J an -13 J u l-13 J an -14

RMB/kg

0

2

4

6

8

10

12

J an-08 J ul-08 J an-09 J ul-09 J an-10 J ul-10 J an-11 J ul-11 J an-12 J ul-12 J an-13 J ul-13 J an-14

USD/kg

Source: Deutsche Bank, Wind Source: Deutsche Bank, Wind

3 June 2014

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Urban basic medical insurance

UBMI fund inflow and outflow increased in Feb 2014

We have started tracking monthly fund inflow and outflow for UBMI with this note. The fund inflow is defined as the total amount of the insurance premium, while outflow refers to total amount of the insurance claims. On a YTD Feb 2014 basis, the inflow and outflow growth is 18% and 22% respectively, comparable to those in last year.

The fund inflow of the urban basic medical insurance schemes (UBMI) in the month of February 2014 was reported at RMB64.2 bn, up 24% YoY compared with RMB60.7 bn, 12% YoY in January 2014.

The fund outflow of the urban basic medical insurance schemes in the month of February 2014 was reported at RMB54.8bn, up 25% YoY compared with RMB51.7bn, 19% YoY in January 2014.

Figure 27: UBMI fund inflow and outflow (Jan 2013 to

Feb 2014)

Figure 28: UBMI fund inflow and outflow (2005 to 2013)

0%

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30%

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UBMI fu n d in flo w UBMI fu n d o u tflo wYo Y g ro wth (%) o f fu n d in flo w Yo Y g ro wth (%) o f fu n d o u tflowRMB b n

0%

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1,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

UBMI fund inflow UBMI fund outflow

Inflow YOY(%) Outflow YOY(%)RMB bn

Source: Deutsche Bank Source: Deutsche Bank

3 June 2014

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Commercial healthcare insurance inflow and outflow

Both inflow and outflow increased YTD Apr 2014

Commercial healthcare inflow rose 42% YoY and outflow rose 39% in April 2014. On a YTD April 2014 basis, inflow rose 10% (vs. 29% for YTD April 2013) and outflow remained flat (vs. 27% for YTD April 2013).

We define inflow as the sum of total insurance premiums collected and outflow as total claims settled. We remind investors that commercial healthcare insurance represents approximately 1.5% of China’s entire healthcare expenditure.

Figure 29: Commercial healthcare insurance inflow and

outflow (Jan 2011 to Apr 2014)

Figure 30: Total commercial insurance inflow and

outflow (Jan 2010 to Apr 2014)

-60%

-40%

-20%

0%

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40%

60%

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100%

120%

0.0

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HC insurance outflow HC insurance inflow Outflow YoY Inflow YoY

RMB bn

-20%

-10%

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r-1

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Total insurance inflow Total insurance outflow

Inflow YoY growth (RHS) Outflow YoY growth (RHS)

RMB bn

Source: Deutsche Bank, China insurance regulatory commission Source: Deutsche Bank, China insurance regulatory commission

3 June 2014

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China Healthcare


Figure 31: Total commercial insurance inflow breakdown

(Jan 2010 to Apr 2014)

Figure 32: Total commercial insurance outflow

breakdown (Jan 2010 to Apr 2014)

-40%

-20%

0%

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100%

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Ap

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4

Total insurance (LHS) Life insurance(LHS)Healthcare insurance (LHS) Total insurance YOY (RHS)Life insurance YOY (RHS) Healthcare insurance YoY (RHS)RMB bn

-60%

-40%

-20%

0%

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60%

80%

100%

120%

0.0

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50.0

60.0

70.0

80.0

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Jul-1

0

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Jan

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Ap

r-1

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Jul-1

1

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r-1

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Oct

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3

Jul-1

3

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Ap

r-1

4

Total insurance (LHS) Life insurance(LHS)Healthcare insurance (LHS) Total insurance YOY (RHS)Life insurance YOY (RHS) Healthcare insurance YoY(RHS)RMB bn

Source: Deutsche Bank, China insurance regulatory commission Source: Deutsche Bank, China insurance regulatory commission

3 June 2014

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China Healthcare


Appendix 1

Important Disclosures Additional information available upon request Disclosure checklist

Company Ticker Recent price* Disclosure

China Shineway 2877.HK 14.30 (HKD) 3 Jun 14 NA *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Jack Hu

Historical recommendations and target price: China Shineway (2877.HK) (as of 6/3/2014)

12

34

5 6 7

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14

Sec

uri

ty P

rice

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

1. 02/09/2012: Hold, Target Price Change HKD13.00 5. 02/09/2013: Buy, Target Price Change HKD17.20

2. 22/10/2012: Upgrade to Buy, Target Price Change HKD15.50 6. 19/01/2014: Buy, Target Price Change HKD17.60

3. 31/03/2013: Buy, Target Price Change HKD17.30 7. 30/03/2014: Buy, Target Price Change HKD20.00

4. 26/07/2013: Buy, Target Price Change HKD17.50

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr�

3 June 2014

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China Healthcare


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

54 %

39 %

7 %24 %

23 %11 %

050

100150200250300350400450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

3 June 2014

Health Care

China Healthcare


Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of Deutsche Securities Inc. (DSI) are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation. Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia. United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority.

http://gm.db.com/�

http://www.globalmarkets.db.com/riskdisclosures�

David Folkerts-Landau

Group Chief Economist Member of the Group Executive Committee

Guy Ashton

Global Chief Operating Officer Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Richard Smith and Steve Pollard Co-Global Heads Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

Steve Pollard Regional Head

Americas Research

International locations

Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234

Deutsche Bank AG Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00

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Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6770

Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500

Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.

Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report.

Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.

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