Sinopharm Group Co Ltd PERFORM - jrj.com.cnpg.jrj.com.cn/acc/Res/HK_RES/STOCK/2012/11/15/a8b7... · 15/11/2012 · market share from 7.1% in 2006 to 10.8% in 2011 (Exhibit 3). Exhibit

EQUITY RESEARCH

INITIATION OF COVERAGE

Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229

Ingrid Yin, [email protected]

Melody [email protected]

Oppenheimer & Co. Inc. does and seeks to do business with companies coveredin its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investmentdecision. See "Important Disclosures and Certifications" section at the end ofthis report for important disclosures, including potential conflicts of interest. See"Price Target Calculation" and "Key Risks to Price Target" sections at the end ofthis report, where applicable.

Stock Price Performance Company DescriptionSinopharm Group is China’s largestpharmaceutical distributor. Its networkcovers 178 prefecture-level cities in 30provinces in China. It also has 1,801retail drugstores.

November 15, 2012 CHINA/HEALTHCARE

Stock Rating:

PERFORM12-18 mo. Price Target NA1099.HK - HKSE HK$24.90

3-5 Yr. EPS Gr. Rate 21%52-Wk Range HK$27.45-HK$16.76Shares Outstanding 2,403.0MFloat 828.0MMarket Capitalization HK$59,825.4MAvg. Daily Trading Volume 2,452,955Dividend/Div Yield HK$0.19/0.76%Book Value HK$6.73Fiscal Year Ends Dec2012E ROE 9.0 %LT Debt HK$5,229.0MPreferred NMCommon Equity HK$21,528MConvertible Available No

Revenue(CNY/mil) 1H 2H Year Mult.

2011A 48.0B 54.2B 102.2B2012E 66.6BA 64.6B 131.2B2013E 81.4B 79.9B 161.3B2014E -- -- 195.1B2015E -- -- 234.2BEPSDiluted 1H 2H Year Mult.

2011A 0.34 0.32 0.662012E 0.40A 0.39 0.792013E 0.54 0.46 1.002014E -- -- 1.242015E -- -- 1.48Revenue and diluted EPS figures are in CNY. P/Emultiples based on HK$ are: 2011A-30x; 2012E-25x;2013E-20x; 2014E-16x.

Sinopharm Group Co LtdDominant Leader in a Growing/ConsolidatingIndustry; Initiating with PerformSUMMARYWe are initiating coverage of Sinopharm (1099.HK) with a Perform rating. China'spharma distribution is growing rapidly and consolidating gradually from a competitiveto an oligopolistic industry. Sinopharm, China's largest pharmaceutical distributor,represents the best investment vehicle to gain exposure, in our view. In recent years,it has gained market share, and we believe it will continue to do so with stronggovernment backing, ample capital and economies of scale. Although most pharmawholesalers experience margin erosion, Sinopharm's margins have been relativelystable. We believe it can grow revenue/net income at 21.5%/21.4% CAGRs during2011-17. However, its fair valuation keeps us on the sideline initially. We would lookto become more constructive as valuation becomes more attractive.

KEY POINTS

■ Absolute Dominance. China's No. 1 pharma distributor, Sinopharm has morethan 10% market share in an industry that's growing at a double-digit rate and,interestingly, consolidating at the same time, backed by government support. Weview Sinopharm as the future top oligopoly player in the space.

■ Expect Above-industry Growth. Management targets growing revenue300-500bps above the industry's. We estimate Sinopharm's revenue will rise ata 21.5% CAGR during 2011-17, on: 1) increasing direct sales, 2) expanding itsdistribution network, 3) developing retail pharmacies, and 4) using M&A.

■ So Far, Margins Remain Stable. Chinese pharma distributors' margins, higherthan global peers', are declining as regulations tighten. Industry margins couldbecome similar to global peers' at some point. So far, Sinopharm's gross marginhas been stable, on more direct sales and better product mix.

■ Valuation. Sinopharm trades at 25x/20x our 2012-13E EPS ofHKD0.97(RMB0.79) and HKD1.24(RMB1.00), respectively. DCF analysis givesus a fair value in the mid-20s HKD, which keeps us on the sideline; however,we would become more constructive if Sinopharm can consistently deliver stablemargins, given industry challenges.

This research report is intended for use only by institutions to which thesubject security or securities may be sold pursuant to an exemption from statesecurities registration in the state in which the institution is located.

2

Table of Contents

Investment Thesis ........................................................................................ 2

Company Overview ..................................................................................... 3

China Pharmaceutical Distribution Industry Overview ................................. 6

A Fragmented Market Undergoing Consolidation .................................... 6

Simplify Structure by Eliminating Bottom Layer ...................................... 7

Double-Digit Growth Rate to Stay ........................................................... 8

Distributors Must Focus to Survive ........................................................ 11

History as a Mirror: Margin Trend of Global Pharma Distributors ......... 16

Regulations Pressure China’s Pharmaceutical Distributors ..................... 18

Value-added Services Is Still at Early-Stage in China .............................. 20

Industry Consolidation ........................................................................... 21

Competitive Landscape .......................................................................... 23

M&A Environment ................................................................................ 28

Sinopharm: Competitive Advantages ......................................................... 32

1.Extensive Distribution Network .......................................................... 32

2.Leading Logistics Capabilities .............................................................. 33

3.Providing Value-added Services ........................................................... 34

4.Diversified Product Offerings ............................................................. 36

Growth Strategies ...................................................................................... 37

1.Increase Direct Sales to Hospitals ........................................................ 37

2.Expand Distribution Network ............................................................. 38

3.Grow Retail Pharmacy Business .......................................................... 38

4.Grow Through M&A .......................................................................... 39

Valuation.................................................................................................... 41

Investment Risks ........................................................................................ 44

Financial Analysis ....................................................................................... 45

Management .............................................................................................. 55

Financial Statements ................................................................................... 56

Sinopharm Group Co Ltd

3

Investment Thesis

We Are Initiating Coverage of Sinopharm Group (1099.HK) with a Perform Rating.

Sinopharm is China‟s largest pharmaceutical distributor with 10.8% market share (see

Exhibit 3). Its competitive advantages help it continue to gain share in this consolidating

industry, which we foresee as transforming into an oligopolistic one. Although overall,

China‟s pharma distribution industry is facing declining margins, so far Sinopharm has

been able to maintain or even improve margins by adjusting sales channel mix and

improving operation efficiencies. However, we view the current valuation as fair and begin

coverage on the sideline, waiting until valuation becomes more attractive.

Absolutely Dominant Player. With the largest pharmaceutical distribution network in

China, Sinopharm likely will continue to gain market share, benefiting from industry

consolidation. We expect Sinopharm‟s market share to grow from 10.8% in 2011 to 14.4%

in 2017 (see Exhibit 53), through organic growth and M&A activities. Long-term, we

believe Sinopharm will be the top oligopoly player with significant market share.

So Far, Margins Remain Stable. Chinese pharma distributors enjoy better margins than

global counterparts‟. However, recently, Chinese distributors‟ gross margins have started

experiencing pressure, from drug price cuts and mark-up reductions. In the long term, we

believe industry gross margin will continue a gradual decline to a global average level. So

far, Sinopharm has been able to maintain a stable gross margin at 8.0-8.4% (see Exhibit

72), driven by increasing direct sales to hospitals and adjusting its product portfolio.

We Expect Sinopharm to Grow Revenue/Net Income at a 21.5%/21.4% 2011-2017

CAGR. Sinopharm can grow revenue by: 1) increasing direct sales to hospitals; 2)

expanding its distribution network; 3) further developing its retail pharmacy business; and

4) engaging in M&A activities. With improving operating efficiency, we think it can achieve

net income growth of 21.4% during 2011-2017.

Valuation. Sinopharm is trading at 25x and 20x our 2012 and 2013 EPS estimates of

HKD0.97 (RMB0.79) and HKD1.24 (RMB1.00), respectively, 67% above global peers and

in-line with domestic peers‟ 21x PE multiple for 2013 (using consensus estimates for

peers). Applying a DCF analysis, we derived a fair value range in the mid-20s in HKD

terms. Believing the valuation quite rich, we will begin coverage on the sideline and would

become more constructive if Sinopharm consistently delivers stable margins.


4

Company Overview

Sinopharm (1099.HK) is China‟s largest pharmaceutical distributor, owning the nation‟s

most extensive pharmaceutical distribution network. Its 50 distribution centers cover 30

provinces and 178 cities and service 9,993 hospitals including 1,312 top-tier hospitals. It

also has more than 57,000 small customers (un-graded hospitals, community service

centers/stations, and healthcare centers), more than 45,000 retail customers, and more

than 5,700 pharmaceutical distributing customers as of 2011. In addition, it operates 1,801

retail drugstores with 1,637 (91%) directly owned and 164 (9%) franchised. Its distribution

business accounted for 94% of revenue while retail and other business contributed 6%

(Exhibit 1). Of its 1H12 revenue, 54% came from direct sales to hospital while 34% was

generated by sales to sub-distributors (Exhibit 2). Sinopharm has been increasing its

market share from 7.1% in 2006 to 10.8% in 2011 (Exhibit 3).

Exhibit 1. Revenue Breakdown,1H12

Distribution94%

Retail3%

Other3%

Source: Company Reports, Oppenheimer & Co. Inc. Research

Note: Other business represents production and sale of pharmaceutical products, chemical

reagents and laboratory supplies.

Exhibit 2. Sales Breakdown by Channels,1H12

Hospital Sales54%

Sales to Basic Healthcare

Institutions7%

Direct Retail Sales

5%

Indirect Sales34%


Exhibit 3. Sinopharm’s Market Share by Sales

7.1%

7.7%8.1%

9.3%9.8%

10.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2006 2007 2008 2009 2010 2011

Source: Company Reports, MOFCOM, Oppenheimer & Co. Inc. Research


5

History and Parent Companies

Sinopharm was established in January 2003 as a joint venture by China National

Pharmaceutical Group Corp (CNPGC) and Fosun Investment, with investment capital of

RMB 1.637B. Fosun Investment transferred its equity interest in Sinopharm to Fosun

Pharma in 2004. CNPGC and Fosun Pharma currently hold 33.5% and 32.1% equity

interests in Sinopharm, respectively (Exhibit 4). Sinopharm IPO‟ed in Hong Kong on

September 23rd

, 2009.

Exhibit 4. Sinopharm’s Corporate Structure

China National

Pharmaceutical Group Corp.

(CNPGC)

Sinopharm

Industrial Investment Co. Ltd.

The National

Social Security Fund

(NSSF)

Public

Shareholders

Sinopharm Group

Co. Ltd. (1099.HK)

51%

65.41%0.11% 2.61% 31.97%

Fosun Pharma

Qishen Company

49%

100%


CNPGC

CNPGC, founded in 1998, is a medical and healthcare group directly managed by the

state-owned Assets Supervision and Administration Commission of the State Council

(SASAC). Its core business includes distribution and retail sales of pharmaceuticals, and

R&D of healthcare related products. In 2011, CNPGC‟s sales exceeded RMB120B

($19.2B). Currently, CNPGC has 10 wholly owned or holding subsidiaries, and 5 publicly

listed companies (Exhibit 5) including Sinopharm (1099.HK), China National Medicines Co.

(600511.CN), Beijing Tiantan Biological Products Co. (600161. CN), Shyndec

Pharmaceutical Co. (600420. CN) and China National Accord (000028.CN).


6

Exhibit 5. CNPGC’s Corporate Structure

China National Pharmaceutical

Group Corp.

(CNPGC)

China National Biotec Group

(CNBG)

China State Institute of

Pharmaceutical Industry

(CSIPI)

China Sinopharm

International Corp.

Reed Sinopharm Exhibitions

Co., Ltd

China National Scientific

Instruments & Materials

Corp. (CSIMC)

China National Corporation

of Traditional & Herbal

Medicine

Sinopharm United

Engineering Crop.

Sinopharm United

Engineering Corp.

Sinopharm Group Finance

Co.

Yangzhou VACBIO Biological

Engineering Co., Ltd.

Beijing Tiantan Biological

Products

(600161-CN, Mkt Cap: $1.1B)

Shyndec Pharmaceutical

(600420-CN, Mkt Cap: $557M)

Sinopharm Group

(1099-HK, Mkt Cap: $7.6B)

China National Medicines

(600511-CN, Mkt Cap: $1.1B)

China National Accord

(000028-CN, Mkt Cap: $1.5)

44.01%

38.33%

95% 53%

41.62%

Private

Public

Source: Company Data, Oppenheimer & Co. Inc. Research

Fosun Pharma

Fosun Pharma is a leading healthcare company in China. Its business includes

manufacturing, distributing, and retail sales of pharmaceuticals, diagnostic products and

medical devices, and healthcare services. Its 2011 revenue was RMB6.4B. Fosun Pharma

has listed on the Shanghai Stock Exchange under ticker 600196 since 1998. Recently, it

IPO‟ed on the Hong Kong Stock Exchange on October 30, 2012.


7

China Pharmaceutical Distribution Industry Overview

A Fragmented Market Undergoing Consolidation

The pharmaceutical distribution industry in China is very fragmented: there are total of

13,853 pharmaceutical wholesale distributors. The top 3 players, namely CNPGC,

Shanghai Pharma and China Resources Pharma, have only 22.8% of total market share

as of 2011, compared with their counterparts‟ 95% in the US, 70% in Europe and 77% in

Japan (Exhibits 6 and 7). Most wholesalers are small local players dispersed throughout

sub-provincial level cities. We estimate there are ~60 tier 1 distributors (Exhibit 8), with 1-2

in each province/municipality/autonomous region. We expect the ongoing consolidation in

the industry to allow market share to concentrate in top 3 players and gradually move

toward the level similar to developed countries‟.

Exhibit 6. Market Share of Top 3 Pharma Distributors in China, US,

Europe and Japan

23%

95%

70%

77%

China US Europe Japan Source: Company Reports, Oppenheimer & Co. Inc. Estimates

Exhibit 7. Market Shares of Top 3 Pharma Distributors, China vs. US

McKesson, 36%

Cardinal Health, 33%

Others, 5%

US

AmerisourceBergen,26%

Sinopharm, 13.2%

Shanghai Pharm, 5.2%

China Resources Pharma, 4.4%

Others, 77.2%

China

Source: MOFCOM, Company Reports, Oppenheimer & Co. Inc. Research


8

Exhibit 8. Pharmaceutical Distribution Channel in China

Manufacturers

Tier 1 Distributors

Hospitals

Tier 2 Distributors

Patients

Drug Stores

Tier 3 Distributors

>70% ~20%

To Be Eliminated

Source: Oppenheimer & Co. Inc. Research

Simplify Structure by Eliminating Bottom Layer

In China, pharmaceutical products are sold/distributed from drug manufacturers through

one or more tiers of distributors (Exhibit 8). The complicated distribution channels and

mark-up structures at each level are causing unreasonably high drug prices. The reason

behind the multiple layers of distribution is that in China, more than 70% of drugs are

dispensed by hospitals, which become centers of important decision-making. Local

relationships with hospitals have created unnecessary extra layers in the distribution value

chain. The situation is totally different in the US, where 71% of Rx drugs are sold through

retail channels (Exhibit 9). In order to reduce patients‟ out-of-pocket drug spending, the

Chinese government aims to simplify and “shrink” the distribution channel to reduce the

mark-up between ex-factory price and hospital purchase price. Lowest-tier distributors that

mainly rely on earning mark-up by reselling pharmaceuticals to local hospitals are facing

an increasingly difficult business environment. In the structural transformation process,

large distributors such as Sinopharm are gaining market share.

Exhibit 9. Drug Sales by Channels, China vs. US

Retail Drugstores

25%

Hospitals62%

Basic Healthcare Institutions

13%

China

Retail Channels

71%

Hospitals/Clinics29%

US

Source: IMS, Oppenheimer & Co. Inc. Research

Note: US drug sales refer to sales of prescription drugs


9

Double-Digit Growth Rate to Stay

China‟s pharmaceutical industry sales grew at a 23% CAGR during 2005-2011 from

RMB437.3B (US$54B) to RMB1.53 trillion (US$238B) (Exhibit 10). Highly correlated with

pharmaceutical sales, pharma distribution industry revenue has been growing at double

digits for the last seven years (Exhibit 11). Although regulation changes such as NDRC

price cuts and centralized provincial tenders have put pressure on the industry since

healthcare reform launched in 2009, volume has driven the sales value to increase at a

21% CAGR from RMB300B (USD$37B) in 2005 to RMB943B(US$147B) in 2011 (Exhibit

11), according to MOFCOM (Ministry of Commerce of China). We expect the industry to

grow at 20% CAGR through 2015, supported by unmet medical need due to the aging

population, rising affordability and expansion of healthcare insurance coverage.

Exhibit 10. China’s Pharmaceutical Industry

Sales

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2005 2006 2007 2008 2009 2010 2011

RMB Bn

2005-2011 CAGR: 23%

Source: National Bureau of Statistics, Oppenheimer & Co. Research

Exhibit 11. China’s Pharmaceutical

Distribution Industry Sales

300336

402.6469.9

568.4

708.4

942.6

12.0%

19.8%16.7%

21.0%

24.6%

23.0%

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

700

800

900

1000

2005 2006 2007 2008 2009 2010 2011

Sales Value of China's Drug Distribution Industry YoY Change

RMB Bn

2005-2011 CAGR: 21%

Source: MOFCOM, Oppenheimer & Co. Research

Note: 2011 Year-over-year growth rate excluding non-comparable factors is

23%, according to MOFCOM.

1. Aging Population

China‟s population is aging fast. The number of people over the age of 65 in China

reached 119 million, representing 8.9% of total population, in 2010. That number is

expected to reach 172 million in 2020 and 336 million, or 24% of the total population, by

2040 (Exhibit 12). The rapidly aging population will drive the growth of hospital visits,

hence boosting demand for pharmaceuticals and healthcare products.

Exhibit 12. China’s Population is Aging Rapidly

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

350

400

2000 2010 2020E 2030E 2040E 2050E

Population Aged 65+ % of Total Population

Million

Source: National Population and Family Planning Commission, Oppenheimer & Co. Inc. Research


10

2. Increasing Affordability

The economic boom in the last 15 years has pushed up income levels in China. Income

per capita in urban and rural China grew at 12.8% and 9.9% CAGRs during 2000-2010

(Exhibit 13). During the same period, medical expenditures per capita in China grew at

10.6% and 14% in urban areas and suburban areas, respectively (Exhibit 14). Even

though the economy recently cooled off to less than 8% growth this year, the typical salary

increase in China is still above 10% annually. Rising disposable income should continue

to boost volume increases of pharmaceutical products, thus supporting pharmaceutical

distribution industry growth.

Exhibit 13. Income Per Capita in China

0

5,000

10,000

15,000

20,000

25,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Rural Household Urban Household

RMB

2000-2010 CAGRUrban: 12.8%Rural: 9.9%

Source: National Statistics Bureau, Oppenheimer & Co. Inc. Research

Exhibit 14. Healthcare Expenditure Per Capita

0

100

200

300

400

500

600

700

800

900

1,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Urban Rural

RMB

2000-2010 CAGRUrban: 10.6%Rural: 14.0%

Source: National Statistics Bureau, Oppenheimer & Co. Inc. Research

3. Near-Universal Healthcare Insurance Coverage

In China, healthcare spending as a percentage of GDP is still behind that in developed

countries (Exhibits 15 and 16). China kicked off a 3-year healthcare reform program in

2009, aiming to increase government spending on healthcare and improve healthcare

access, especially for the grassroots population.

Exhibit 15. Per Capita Healthcare Expenditure

as % of GDP, 2010

17.9

11.9 11.6

9.6 9.5 9

6.9

5.14.1

US France Germany UK Japan Brazil Korea China India

Per Capita Healthcare Spending as % of GDP

Source: World Bank, Oppenheimer & Co. Inc. Research

Exhibit 16. Public Health Expenditure as % of

Total Healthcare Spending 83.9 82.5

77.8 77.1

5953.6 53.1

47

29.2

UK Japan France Germany Korea China US Brazil India

Public Health Expenditure as % of Total

Source: World Bank, Oppenheimer & Co. Inc. Research

Government healthcare expenditures increased significantly during 2009-2011: by 45%,

20% and 34% year over year, respectively (Exhibit 17). Healthcare outlays also grew

23.5% yoy YTD as of August 2012. Meanwhile, basic healthcare insurance coverage

increased from merely 25% of the population in 2005 to 97% in 2011 (Exhibit 18). Social

security spending on healthcare has grown at a 5-year CAGR of 27% to RMB443B in

2011 (Exhibit 19). The Chinese government plans to increase the annual medical

insurance subsidy per person from RMB240 in 2012 to RMB360 in 2015 (Exhibit 20). As

a result, patient traffic in China is rising rapidly, with outpatient and inpatient volume


11

jumping by 11% and 13%, respectively, in 2011 (Exhibits 21 and 22). The growth rates

accelerated to 15% and 19% during January-July, 2012.

In August 2012, the Chinese government announced it will expand medical insurance for

serious diseases, to reimburse at least 50% on top of the existing coverage under basic

healthcare insurance. Near-universal healthcare insurance, a rising reimbursement ratio,

and increasing government expenditure should continue to serve as medium - to long-

term growth drivers for the pharmaceutical distribution industry.

Exhibit 17. China’s Government Healthcare

Expenditure

16.3%11.5%

22.5%

9.8%

21.3%

27.3%

50.7%

38.5%

44.9%

20.3%

33.8%

23.5%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

RMB Bn YoYChange

Source: MoH, Oppenheimer & Co. Inc. Research

Exhibit 18. Basic Medical Insurance Coverage

in China

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011

Population covered by Urban Basic Medical Insurance

Population covered by New Rural Co-op Basic Medical Insurance

Coverage Ratio

Million


Exhibit 19. Medical Expenditure of the Social

Security Fund

050

100150200250300350400450500

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

RMB Billion

2000-2011 CAGR: 38%

Source: MOHRSS, Oppenheimer & Co. Research

Exhibit 20. Government Subsidy for

Healthcare Insurance Program

4060

120

200

240

360

2008 2009 2010 2011 2012 2015 Goal

RMB/person


Exhibit 21. Outpatient Volume at Hospitals

6%

11%

9%8%

6%

11%

15%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

500

1,000

1,500

2,000

2,500

2005 2006 2007 2008 2009 2010 20111-7, 2012

Million yoy

change

Source: MoH, Oppenheimer & Co. Research

Exhibit 22. Inpatient Volume at Hospitals

9%

17%

14%15%

12%13%

19%

0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 1-7, 2012

Million yoy

change

Source: MoH, Oppenheimer & Co. Research


12

Distributors Must Diversify to Survive

Distributors in China have to be very adaptive to market trend changes in order to survive

in a tough environment. They have to constantly adjust their strategies regarding what

kind of products to distribute, what sales channel to use, and what geographic regions to

focus on to stay ahead of competitors and gain market share.

1. Western Drugs vs. Traditional Chinese Medicine

The majority of pharmaceuticals consumed in China are Western chemical and biological

products, representing 76% of industry sales (Exhibit 23). Traditional Chinese medical

(TCM) accounted for 18%, still a very important category due to historical reasons and

Chinese government support. Medical devices and reagents are much smaller, only 5% of

the total; we believe this segment has more growth potential with better margins.

Exhibit 23. Distribution Industry Sales by Product Type, 2011

Western Drugs and Biological

Products76%

TCM and TCM raw materials

18%

Medical Devices and Instruments

3%

Reagents1%

Others2%


2. Direct vs. Indirect

Of pharmaceuticals in China, 56% are sold by distributors directly to hospitals/healthcare

institutions and retail drug stores (Exhibit 24), and the other 44% are sold to sub-

distributors, especially in regions where top-tier distributors cannot penetrate easily. The

current percentages are similar to the 2010 level. Compared with the industry average,

large players usually have heavy direct sales because of broad distribution networks and

strong relationships with hospitals. For example, direct and indirect revenue were 66%

and 34% at Sinopharm, respectively. At Shanghai Pharma, in 2011, hospital sales

contributed 61.4% of distribution business. Cachet Pharma (嘉士堂), a No. 58-ranked

wholesaler in 2011, has hospital sales only 46% of total revenue, below the industry

average of 56%.

Exhibit 24. Distribution Industry Sales by Channels

Sales to Sub-

distributors44%

Direct Sales56%



13

3. Coastal vs. Interior Regions

Due to significant wealth disparity, residents of China‟s coastal regions in the east, north

and south consume significantly more pharmaceutical products than those living in the

western interior. These three regions accounted for 80.4% of industry sales in 2011

(Exhibit 25) as they historically have experienced faster economic growth and therefore

better affordability. Recently, growth in the traditionally “backward” southwest, northwest

and northeast regions has exceeded that of the nation average in 2011 (Exhibit 25). The

growth rates for these three regions were 76%, 27% and 28% yoy respectively, vs. 17%

for the coastal area. In our view, those interior regions could serve as future drivers for the

industry with healthcare insurance coverage expansion, which has significantly improved

patients‟ affordability there.

Exhibit 25. China’s Pharmaceutical Distribution Sales by Regions

2010 2011 YoY Change 2010 2011 YoY Change

East 339 396 16.9% 44.2% 42.0% -2.2%

North 156 182 16.9% 20.3% 19.3% -1.0%

South 151 180 19.3% 19.7% 19.1% -0.6%

Sub-total 645 758 17.4% 84.2% 80.4% -3.8%

Southwest 62 109 76.1% 8.1% 11.6% 3.5%

Northwest 22 28 27.2% 2.9% 3.0% 0.1%

Northeast 37 47 28.1% 4.8% 5.0% 0.2%

Sub-total 121 185 52.6% 15.8% 19.6% 3.8%

Sales BreakdownSales (RMB Bn)Regions


4. Urban vs. Rural

Recent healthcare insurance coverage expansion and increased healthcare subsidies

have benefited rural populations more than urban populations. Before the 2009 healthcare

reform, rural residents had very low or even no healthcare insurance coverage. Now they

can afford to seek basic healthcare diagnosis and treatments. Medical consumption per

capita in rural areas grew 34% in 2011 and 22.6% in 1H12 compared with 12% and 4.4%

in urban cities during the same period (Exhibit 26). Drug sales in other regions outside

top-3 tier cities grew by 25%/20% in 2010/2011, faster than national rates of 20% and

17% (Exhibit 27 and 28). We expect the trend to continue in the next few years.

Exhibit 26. Growth Rates of Medical Consumption Per Capita

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Rural Urban

Source: National Bureau of Statistics, Oppenheimer & Co. Research


14

Exhibit 27. Drug Sales Growth by City Tiers

22%

17%

21%

17%

19%

25%

17%

13%

18%17%

13%

20%

0%

5%

10%

15%

20%

25%

30%

China 1st Tier Cities

2nd Tier Cities

3rd Tier Cities

3 regions Others

2010

2011

Note: IMS Health, Oppenheimer & Co. Inc. Research

Exhibit 28. Drug Sales Breakdown by City Tiers

20% 18%

20% 21%

6% 6%

6% 6%

48% 49%

2010 2011

1st Tier Cities 2nd Tier Cities 3rd Tier Cities 3 regions Others

Note: IMS Health, Oppenheimer & Co. Inc. Research

1st Tier Cities: Beijing, Shanghai, Guangzhou

2nd Tier Cities: 11 cities, Hangzhou, Tianjing, Wuhan, Nanjing, Shenzhen

3rd Tier Cities: 7 cities, Changzhou, Ningbo, Taiyuan, Dalian, Qingdao

3 Regions: Pearl River Delta, FuXiaQuan, SuXi; Others： Rest of China

5. SOE vs. Private

State-owned enterprises (SOEs), businesses either wholly or partially owned by the

government, take significant market share in China‟s pharmaceutical distribution industry.

In 2011, 60% of sales of large-scale pharmaceutical distributors, meaning wholesale

distributors with more than RMB50M in sales and retail players with more than RMB20M

in sales, were generated by SOEs (Exhibit 29). Although the ratio declined slightly from

62% in 2010, SOEs still dominate the market. Among the top 10 pharmaceutical

distributors, only Jointown (No.4) and Sichuan Kelun (No.9) are non-SOEs.

SOEs generally have more resources such as capital, local government and business

relationships, natural advantages for them to conduct business in China. In addition,

current policies favor large players, as the government aims to consolidate the industry.

Thus, we do not expect market shares of SOEs to come down significantly in the medium

term, and expect players such as Sinopharm, with national-level government backing, to

continue to have an edge over those distributors with local government backing and

private players.


15

Exhibit 29. Sales Breakdown by Enterprise Type

State-owned or State-holding

Companies62%

Shareholding Company

21%

Foreign Company

11%

Private Company

6%

Other0%

2010

State-owned or State-holding

Companies60%

Shareholding Company

23%

Foreign Company

9%

Private Company

8%

Other1%

2011


Note: large scale pharmaceutical distributors include wholesale distributors with >RMB50M sales and retail players

with >20M sales.

6. Retail Drugstores vs. Healthcare Institutions

Unlike in the US, retail drugstores are not as important a drug dispensing outlet as in

China. Only 25% of drugs are distributed through retail stores compared with 71% in US

(Exhibit 9). Retail drugstores sales have been growing at a 17% CAGR from RMB79B in

2005 to RMB203B in 2011 (Exhibit 30). There are a total of 2,607 retail chain drugstore

enterprises in China as of 2011, running total 423,788 retail drug stores, including 146,703

chain drug stores and 277,085 independent stores (Exhibit 31). The total number of retail

drugstores grew by 6% in 2011. In the long run, the government intends to transfer drug

distribution from healthcare institutions to drugstores, imitating developed countries‟ model.

However, numerous hurdles exist as many interested parties are involved. Meanwhile, big

distributors have to invest in this segment, preparing for a potential shift in the future.

Exhibit 30. Retail Drugstores Sales

79.091.6

110.0

129.5

153.1

185.3

203.8

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011

RMB Bn

2005-2011 CAGR: 17%

Source: SFDA Southern China Economic Research Center, Oppenheimer

& Co. Research

Exhibit 31. Number of Retail Drugstores

121,579 121,070 129,346 135,762 137,073146,703

198,076

223,861236,232

252,631261,996

277,085

0

50,000

100,000

150,000

200,000

250,000

300,000

2006 2007 2008 2009 2010 2011

# of Chain Drugstores # of Independent Drugstores

Source: SFDA, Oppenheimer & Co. Research


16

Exhibit 32. 2011 China’s Top 10 Retail Drugstores

(RMB Bn) (USD M)

1 国药控股国大药房连锁 Sinopharm Holding Guoda Drugstore 3.72 59.1 14% 2.0%

2 重庆桐君阁药房连锁 Chongqing Tongjunge Pharmacy Chainstore 3.69 58.6 10% 2.0%

3 广东大参林连锁药店 Guangdong Dashenlin Chain Drugstore 3.67 58.3 20% 1.9%

4 中国海王星辰连锁药店 China Nepstar Chain Drugstore 3.62 57.5 6% 1.9%

5 老百姓大药房连锁股份 LBX Pharmacy 3.57 56.7 13% 1.9%

6 湖北同济堂药房 Hubei Ready Medicine 2.88 45.7 21% 1.5%

7 成大方圆医药连锁 Chengda Fangyuan Pharmarcy Chains 2.60 41.3 10% 1.4%

8 云南鸿翔一心堂药业 Yunnan Hongxiang Yixintang 2.58 41.1 9% 1.4%

9 上海华氏大药房 Shanghai Huashi Pharmacy 2.50 39.7 25% 1.3%

10 重庆和平药房连锁 Chongqing Peace Chain-drugstore 1.93 30.6 -24% 1.0%

Ranking Company Name

2011 SalesYoY

Change

Market Share

by Sales

Source: MOFCOM, Oppenheimer & Co. Inc. Research

Exhibit 33. Market Share of China’s Retail Drugstores, 2011

2%2%

2%2%

2%

2%

1%

1%1% 1%

84%

Sinopharm Holding Guoda Drugstore

Chongqing Tongjunge Pharmacy Chainstore

Guangdong Dashenlin Chain Drugstore

China Nepstar Chain Drugstore

LBX Pharmacy

Hubei Ready Medicine

Chengda Fangyuan Pharmarcy Chains

Yunnan Hongxiang Yixintang

Shanghai Huashi Pharmacy

Chongqing Peace Chain-drugstore

Other


Exhibit 34. 2011 China’s Top 10 Retail Drugstores by Store Numbers

1 中国海王星辰连锁药店 China Nepstar Chain Drugstore 2883 0 2883 -

2 国药控股国大药房 Sinopharm Holding Guoda Drugstore 2000 0 2000 360-450

3 重庆和平药房连锁 Chongqing Peace Chain-drugstore 1800 720 2520 -

4 哈尔滨宝丰医药连锁 Harbin Baofeng Pharmaceutical Chain 1604 0 1604 1512

5 云南鸿翔一心堂药业 Yunnan Hongxiang Yixintang 1505 0 1505 993

6 重庆桐君阁大药房连锁 Chongqing Tongjunge Pharmacy Chainstore 1172 6454 7626 1645

7 广东大参林连锁药店 Guangdong Dashenlin Chain Drugstore 1100 0 1100 -

8 云南健之佳健康连锁店 Yunnan Jianzhijia Chain Health Drug Store 800 0 800 430

9 成大方圆医药连锁 Chengda Fangyuan Pharmarcy Chains 658 170 828 631

10 江西黄庆仁栈华氏大药房 Jiangxi Huang Qing Ren Zhan Hua Shi Pharmacy 616 0 616 -

11 老百姓大药房连锁股份 LBX Pharmacy 600 0 600 -

Ranking Company Name Total # of Stores

Eligible for Healthcare

Insurance

Reimbursement

# of Directly

Owned

# of

Franchise

Stores



17

History as a Mirror: Margin Trends of Global Pharma Distributors

We believe Chinese pharma distributors are enjoying better margin profiles than most

global counterparts‟ (Exhibits 73, 78, and 80): 2011 average gross margin, operating

margin, and net margin of Chinese peers (excluding Guangzhou Pharma and Huadong

Medicine which have a high contribution from manufacturing business) were 6.7%, 2.5%,

and 1.6%, respectively, vs. 4.2%, 1.7%, and 1.0% for US peers, and 7.5%, 0.7%, and

0.5% for Japanese peers, respectively. We have studied historical margin trends of global

pharmaceutical distributors, which convince us that it‟s inevitable that China distributors‟

current gross margin will come down in the future, although it might take decades before it

reaches the global level.

US

The US pharmaceutical distribution industry experienced consolidation during 1978-1995:

the number of pharmaceutical wholesalers dropped from 147 firms to 53, and market

share of the largest six firms increased from 35% in 1977 to 77% in 1995. More than 100

buyouts have taken place since 1980s. Currently the top 3 players, Cardinal Health,

McKesson, and AmerisourceBergen, together hold ~95% market share. Technology

upgrades of IT systems, better inventory management, nationwide delivery capabilities,

efficiencies and cost reductions are driving the industry to further consolidate.

In the process, average gross margins of the top 3 players have been declining (Exhibit

35), from 9.75% in 1990 to only 4.1% in 2011. Operating margin declined from 2.8% to

1.63%. Net margin has also narrowed from 1.40% to 0.93% over the same period.

Revenue CAGRs of MCK and CAH during 1990-2011 were 13.5% and 24.7%,

respectively, faster than their respective net income CAGRs of 12.3% and 19.2%. ABC

managed to increase net income at CAGR of 22.3% during 1995-2011, faster than its

revenue CAGR of 19.5%.

Exhibit 35. Margin Trend of Top 3 US Pharma Distributors

-2

0

2

4

6

8

10

12

14

16

18

Gross Margin Operating margin Net margin

Source: Factset, Oppenheimer & Co. Inc. Research Note: Data availability: MCK: 1980-2012, CAH: 1982, 1984-2012, ABC: 1994-2011


18

Europe

European distributors have also experienced consolidation during the last few decades as

well. The market share of top 3 players, Alliance Boots, Phoenix and Celesio, has

increased from 47% in 2004 to the current 70%. Consolidation in the EU was accelerated

by intensive cost containment policies imposed by governments. Players have survived by

improving efficiency, increasing logistic capabilities and cutting costs. Celesio‟s revenue

grew at a 12.5% CAGR during 1990-2011 with negative net income growth. Gross margin,

operating margin and net margin declined from 8.2%, 2.6%, and 1.5% in 1990 to 4.8%,

0.8% and 0% in 2011, respectively (Exhibit 36).

Exhibit 36. Historical Margin Trend of Celesio

-2

0

2

4

6

8

10

12

Gross Margin EBIT Margin Net Margin

%

Source: Factset, Oppenheimer & Co. Inc. Research

Japan

Similarly, Japan‟s pharma distribution industry has experienced consolidation in recent

decades, mainly due to a drastic local drug price-cut policy in the early 1990‟s. Before

consolidation, small distributors served customers within a limited geographic area and

had sales rights with only a select number of manufacturers. During the consolidation,

local distributors were acquired by those with nationwide coverage and broader sales

rights. The number of pharmaceutical wholesale distributors dropped from 434 in 1987 to

128 in 2007. The market share of the top 10 players increased from 37.1% in 1996, to

61.7% in 2004. By 2010, the top four participants, namely Medipal, Alfresa, Suzuken, and

Toho, accounted for 89.4% market share.

The gross margin of Japan‟s top 4 pharmaceutical wholesalers has been on a declining

path (Exhibit 37): from an average 13% in 1994 to currently 7.5%. Net margin contracted

from 1.11% to only 0.53% in 2011, despite revenue growth at a high single-digit to low

double-digit pace. Sales of primary-care drugs, the main source of distributors‟ revenue,

are shrinking significantly in Japan. Therefore, major players expect further gross margin

erosion. They are reducing costs to survive in a low-margin business environment, at the

same time, gaining market share by offering low-cost and high-quality logistics solutions to

customers.


19

Exhibit 37. Margin Trend of Top 4 Japan Pharma Distributors

0

2

4

6

8

10

12

14

Gross Margin Operating Margin Net Margin

%

Source: Factset, Oppenheimer & Co. Inc. Research

Regulations Pressure China’s Pharmaceutical Distributors Chinese pharmaceutical distributors are subject to the supervision of the Ministry of

Commerce (MoC) and the State Food and Drug Administration (SFDA). MoC is

responsible for setting plans, policies and standards regarding industry development,

promoting industry structure adjustment, guiding industry reform, and promoting the

development of modern logistics. SFDA is responsible for the approval, registration, and

supervision of pharmaceutical distributors, setting product quality and safety standards,

and inspection. Wholesalers and retail pharmacies need to get the local SFDA‟s approval

for operational permit and Good Supply Practice (GSP) designation. China‟s National

Development and Reform Commission (NDRC) is responsible for drug pricing and the

mark-up ceiling in distribution channels, and both impact the pharmaceutical distribution

industry. Ministry of Health, together with SFDA and NDRC, regulates drug tenders. Below

we listed some recent important regulation changes impacting the industry.

Centralized Drug Tenders

In 2009, the Chinese government announced “Guideline of Further Standardization of

Pharmaceuticals Procurement by Healthcare Institutions” (“进一步规范医疗机构药品集中

采购工作的意见”), requesting that all domestic pharmaceutical manufacturers must attend

drug tenders, and in the case of imported products, main distributors have to do it. Prior to

that, distributors could bid on behalf of domestic manufacturers. After winning the bids,

manufacturers can either distribute the product on their own or through distributors. The

policy limits that distribution task can be only assigned once, compared with previously

multiple times, for one product although multiple tier-1 distributors could be appointed in

certain region. The bidding prices of the pharmaceuticals already include distribution fees,

and distributors are not allowed to collect extra fees from hospitals and healthcare

institutions. The policy reduces the number/layers of distributors by shortening the supply

chain of pharmaceutical distribution and favors large players in winning exclusive

distribution rights.

Drug Price Cuts

NDRC has announced six retail price ceiling cuts since 2009 (Exhibit 38). Price cuts are

usually absorbed by both distributors and manufacturers, which will negatively affect

wholesalers‟ profitability, although some manufacturers will reimburse them partial price

difference.


20

Exhibit 38. NDRC Price Cuts 2005-2012

Annoucement

Date

Implementation

DateDrug Category

Types of

Products

Affected

Average

Reduction of

Retail Price

9/28/2005 10/10/2005 Cefuroxime and others 22 40%

6/1/2006 6/12/2006 Adriamycin and other oncology drugs 68 23%

8/22/2006 8/28/2006 Antimicrobial agents, including Penicillins 99 30%

11/14/2006 11/20/2006Anti-tumor Chinese Patent Medicines including

Cinobutacini Injection32 15%

1/25/2007 1/26/2007 Various 354 20%

2/28/2007 3/15/2007 Chinese Patent Medicines 278 15%

4/9/2007 4/16/2007 Chinese Patent Medicines 188 16%

5/9/2007 5/15/2007 Western Medicines 260 19%

10/2/2009 10/22/2009 EDL Drugs 307 12%

11/30/2010 12/12/2010 Ceftriaxone and others 174 19%

3/7/2011 3/28/2011 Antimicrobial drugs and circulatory system drugs 162 21%

8/5/2011 9/1/2011 Hormone, endocrinology and nervous system drugs 82 14%

3/30/2012 5/1/2012 Alimentary drugs 53 17%

9/18/2012 10/8/2012 Oncology, immunology and hematology drugs 95 17% Source: NDRC, Oppenheimer & Co. Research

Exhibit 39. Major Policies Related to Pharma Distribution Industry

English Chinese

5/2011

2011-2015 Plan for China's

Pharmaceutical Distribution

Industry

2011-2015

全国药品流通行业发展规划纲要

Encourage pharmaceutical distribution industry consolidation through M&A.

Major Goals:

Have 1-3 large national pharmaceutical distributors with >RMB100B sales;

Have 20 regional distributors with >RMB10B sales;

Top 100 distributors to account for >85% market share;

Chain drugstores to have >60% market share;

Chain drugstores to account for >2/3 of total retail drugstores.

1/2012

Pharmaceutical Distribution

Channel Mark-up Measure

(Draft)

药品流通环节价格管理暂行办法

(意见稿)

Suggest mark-up ceilings for drugs at both wholesale level (from pharmaceutical

manufacturers to hospitals) and retail level (from hospitals to patients).

Lower maximum mark-up from previous 40% to current 30%, and set stricter

control on ex-factory mark-up.

Request manufacturers to report the highest, lowest and average ex-factory price

of last year to NDRC

4/2012

Practices of Pharmaceutical

Distribution and Retail

(Revised Draft)

药品经营质量管理规范

(修订草案)

Raise entry-barrier and industry standards.

Request pharmaceutical distributors and retailers to build quality management

system.

Request pharmaceutical distributors/retailers to promptly report/deal with drug

quality issue.

DocumentDate of Release Key Comments

Source: Ministry of Commerce, NDRC, SFDA, Oppenheimer & Co. Research

A Draft of Pharmaceutical Distribution Channel Mark-Up Measure (药品流通环节价格管理

暂行办法征求意见稿) was published in January 2012 (Exhibit 39 and 40). It suggested

mark-up ceilings for drugs at both wholesale (from manufacturers to hospitals) and retail

levels (from hospitals to patients). The new measure lowers maximum mark-up from the

previous 40% to the current 30%, and set stricter controls on ex-factory mark-up. It also

requests that manufacturers report the highest, lowest and average ex-factory prices from

the previous year to the NDRC. The policy was originally scheduled to be finalized in July

2012. However, it was delayed, and we expect the final version to be released soon.


21

Exhibit 40. Proposed and Previous Mark-up Ceilings

Ex-Factory (Imported)

Price (RMB)

Mark-up Ceiling at

Wholesale Level

Mark-up Ceiling at Retail

Level

1 <10 30% 25%

2 10-40 20%+RMB1 15%+RMB1

5 40-200 15%+RMB3 10%+RMB3

4 200-800 10%+RMB18 8%+RMB5

5 800-2,000 8%+RMB34 RMB69

6 >2,000 RMB194 RMB69

2011 Draft Version

Ex-Factory (Imported) Price (RMB) Mark-up at Retail Level

1 <5 40%

2 5-20 30%+RMB0.5

5 20-100 25%+RMB1.5

4 100-500 20%+RMB6.5

5 500-1000 15%+RMB31.5

6 1,000-10,000 8%+RMB101.5

7 >10,000 RMB901.5

2010 Draft Version

Ex-Factory (Imported) Price (RMB) Mark-up at Retail Level

1 <5 50%

2 5.01-6.25 RMB2.5

5 6.26-10 40%

4 10.01-12.50 RMB4

5 12.51-50.00 32%

6 50.01-57.14 RMB16

7 57.15-100 28%

8 100.01-112.00 RMB28

9 112.01-500 25%

10 >500 15%+RMB50

2000 Official Version

Source: NDRC and Oppenheimer & Co. Inc. Research

Value-added Services Is Still at Early Stage in China

For years, global pharma distribution players have been seeking ways to differentiate and

increase profit (Exhibit 41). In US, AmerisourceBergen provides specialized medical

distribution, while McKesson focuses more on distribution solutions and healthcare

technology solutions. Other than pharmaceuticals, Cardinal Health also distributes

surgical products. Medipal distributes cosmetics and daily necessities in addition to

healthcare products. In Europe, different from other global players, Celesio shifted its

strategy focus back on core business in 2011, after it invested heavily in diversification as

expectations were not met due to both internal and external reasons, including the

European financial crisis. Meanwhile, Celesio plans to further expand its network in

emerging markets such as Latin America and Brazil.


22

Exhibit 41. Major Global Pharma Distributors

Medipal

McKesson

AmerisourceBergen

Cardinal HealthCelesio

Business Model

Diversification

Drug Distribution

Value-added Service

Geographic

Coverage

Diversified Services

Sinopharm

Local Regional Int‟l

Source: Booz & Co., Oppenheimer & Co. Inc. Research

Chinese pharmaceutical distributors have started to modify their business model by

adding value-added services although development is still at an early stage. Large players

are transforming from pure distributors into pharmaceutical distribution solution providers.

For example, Sinopharm worked with the 309th Military Hospital to provide a solution

which could track drugs from procurement to dispensing. Nanjing Pharma pioneered a

hospital-pharmacy-trusteeship model (医院药房托管). Through this model, a hospital will

assign a drug distributor to operate the hospital pharmacy, without changing the

ownership of the pharmacy. This format then transitioned to pharmacy services (药事服务),

which provide full solutions to hospital pharmacies.

Government is supportive of improving overall system efficiencies by introducing

advanced logistics systems and information systems. Ministry of Commerce launched a

demonstration project of pharmaceutical logistics service extension in Beijing in June 2011.

Beijing Pharmaceutical Co. (a subsidiary of China Resources Pharma) helped Tiantan

Hospital redesign the pharmacy flow structure and introduced an IT system. The project

successfully improved the operational efficiency of Tiantan Hospital‟s pharmacy: 60% of

pharmacists can focus on clinical pharmacy services, inventory capacity increased by

20% and inventory turnover improved by 20%. The collaboration is viewed as a service

outsourcing model, through which hospitals can lower costs and improve service quality

while distributors can earn service fees.

At the current stage, value-added service for hospitals is a way to help retain customers;

however, it does not generate revenue for either Sinopharm or Nanjing Pharma (see p.

26), the No. 5 pharma distributor in China and a pioneer in providing pharmacy services to

hospitals. Nanjing Pharma has even experienced profit declines and net losses in recent

years, partially attributable to those value-added services. However, as scale grows and

as the business model matures, we expect those services to become profitable.

Industry Consolidation

China‟s drug distribution industry is consolidating, backed by government policy support

(Exhibit 42). Government clearly expressed in the “2011-2015 Development Outline for

Drug Distribution Industry” (Exhibit 39) that it will support three nationwide leaders with


23

annual sales of more than RMB100B, and 20 regional leaders with sales of more than

RMB10B. Government is also targeting the top 100 players to account for 85% of industry

sales by 2015, vs. only 73% in 2011. For retail, the government aims that chain drugstores

to dispense two-thirds of the pharmaceutical products and the top 100 players to have

60%-plus market share by 2015. The policy also emphasizes the need for overall

capabilities improvement, such as logistics equipment, IT systems, and other value-added

services.

We expect the industry to consolidate quickly through 2015 and small players to be

acquired or eliminated. As the bellwether with a strong SOE background, SinoPharm

would largely benefit from the government‟s policy and can further expand its operating

scale through M&A.

Exhibit 42. China’s Pharma Distribution Industry Is Consolidating

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2003 2004 2005 2006 2007 2008 2009 2010 2011

% of TotalTop20Top 100

% of TotalTop 3Top 10

Top 11-20

Top 3 Top 10 Top 11-20 Top 100 Top 20

Source: CAPC, Company Reports, Oppenheimer & Co. Inc. Research

The retail drugstore industry has been consolidating as well. According to MOFCOM, the

top five players accounted for 26% market share by sales, up from 24% a year ago while

the top ten players hold a combined 44% share, vs. 41% in 2010. In total, the top 20

players accounted for a 61% share of industry sales, up from 58% in 2010. As policy

headwinds on retail drugstores continue, we expect consolidation to accelerate in

upcoming years. Sinopharm, Guoda, Guangdong Dasenlin, and LBX Pharmacy gained

shares in 2011 while Nepster lost market share. The market share of Chongqing

Tongjunge remained stable at 1.81% in 2011, while Sinopharm Guoda‟s share doubled

from 0.9% in 2006 to 1.82% in 2011 (Exhibit 43).

Large players have been actively expanding their drugstore network by acquiring either

independent stores or regional chain drugstores. Long-term, as hospital drug prescription

and dispensing are gradually separated, we expect drugstore industry growth to re-

accelerate.


24

Exhibit 43. Market Share of Top 5 Retail Drugstores Players

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2006 2007 2008 2009 2010 2011

Sinopharm Holding Guoda

Chongqing Tongjunge

Guangdong Dashenlin

China Nepstar

LBX Pharmacy

Source: China Drugstore Magazine, Company Reports, Oppenheimer & Co. Inc. Research

Competitive Landscape

In China, pharmaceutical distributors compete very intensely in a very fragmented market

for distribution rights for manufacturers and hospitals. The top 10 pharma distributors

control 34% market share, according to 2011 data (Exhibits 44 and 45). CNPGC,

Sinopharm‟s parent company, is the industry leader, with more than twice the market

share of the No.2 player, Shanghai Pharma. The top four distributors, CNPGC, Shanghai

Pharma, China Resources Pharm, and Jointown, have nationwide networks, while Nanjing

Pharm, Guangzhou Pharma, Chongqing Medicine, Huadong Medicine, Sichuan Kelun

Medicine & Trade, and Zhejiang Int‟l are more regional. Each company has its

differentiated business model and geographical focus (Exhibits 46 and 49).

Exhibit 44. 2011 China’s Top 10 Pharma Wholesale Distributors, 2011

(RMB Bn) (USD Bn)

1 中国医药集团总公司 China National Pharmaceutical Group (CNPGC) 125 19.8 42% 13.2% National

2 上海医药(集团)股份有限公司 Shanghai Pharmaceuticals Holding 49 7.8 48% 5.2% National

3 华润医药控股有限公司 China Resources Pharmaceutical 41 6.5 27% 4.4% National

4 九州通医药集团有限公司 Jointown Pharmaceutical Group 25 3.9 17% 2.6% National

5 南京医药股份有限公司 Nanjing Pharmaceutical 20 3.2 32% 2.1% Regional

6 广州医药有限公司 Guangzhou Pharmaceutical 18 2.8 21% 1.9% Regional

7 重庆医药(集团)股份有限公司 Chongqing Medicine Group 13 2.1 21% 1.4% Regional

8 华东医药股份有限公司 Huadong Medicine 11 1.8 24% 1.2% Regional

9 四川科伦医药贸易有限公司 Sichuan Kelun Medicine & Trade 10 1.5 12% 1.0% Regional

10 浙江英特药业有限责任公司 Zhejiang Int'l Group 9 1.4 32% 0.9% Regional

Ranking YoY ChangeNational/

Regional

Market

Share by

Sales

2011 SalesCompany Name



25

Exhibit 45. Market Share of China’s Pharmaceutical Distributors, 2011

13%

5%

5%

3%2%

2%

1%

1%

1%

1%

66%

CNPGC

Shanghai Pharma

China Resources Pharma

Jointown Pharma

Nanjing Pharma

Guangzhou Pharma Corp.

Chongqing Medicine

Huadong Medicine

Sichuan Kelun Medicine &TradeZhejiang Int'l

Others


Sinopharm, owning 10.8% market share, derives 96% of revenue from its distribution

business. It has the broadest geographic coverage in the industry, with coverage of 30

provinces and municipalities. It‟s the first mover to massively expand into central and

western areas while other players are still focusing on top tier cities and coastal regions

(Exhibit 46). Sinopharm currently covers 178 (55%) out of total 333 prefecture-level cities

(above tier 3). Its revenue/net profit grew by 34%/69% CAGR during 2006-2011,

significantly faster than the industry average. It focuses on hospital direct sales (54% of

1H12 sales) for its higher gross margin and large market potential. It distributes a broad

range of pharmaceuticals produced by top multinational corporations (MNCs) and

domestic manufacturers.

Exhibit 46. Distribution Network Coverage of Top 10 Pharma Distributors in China

SinopharmShanghai

Pharma

China

ResourcesJointown

Nanjing

Pharma

Guangzhou

Pharma

Corp.

Chongqing

Med

Huadong

Med

Sichuan

Kelun Med

Zhejiang

Int'l

2nd tier ** ** ** ** * *

3rd tier ** ** ** ** *

County-level ** ^ ** ** *

1st tier

(Shanghai)** ** ** ** ** ** **

2nd tier ** ** ** ** ** * ** **

3rd tier ** ** ** ** ** ** **

County-level ** ** ** ** ** ** **

1st tier

(Beijing)** ** ** **

2nd tier ** ** ** **

3rd tier ** ** ** **

County-level ** ^ ** **

1st tier

(Guangzhou,

Shenzhen)

** ** ** ** **

2nd tier ** ^̂ ** ** **

3rd tier ** ^̂ * ** **

County-level ** - - ** **

2nd tier ** ** * * * * ** **

3rd tier ** ^̂ * * * * ** **

County-level ** - * * * ** **

2nd tier ** ^̂ ** * *

3rd tier ** ^̂ ** * *

County-level ** - ** * *

2nd tier ** * ** * *

3rd tier ** * ** * *

County-level ** - ** * *

Southwest

Northwest

Northeast

Regions

Central

East

North

South


Note: ** strong coverage; * medium coverage; ^^ strong coverage by sub-distributors; ^ medium coverage by sub-distributors.


26

Shanghai Pharma has a strong presence in the Yangtze River Delta, with 72.5% of

distribution revenue derived from that region in 1H12 (Exhibit 47). Of revenues, 20.5% and

7% were from northern and eastern China. It acquired Guangzhou Z.S.Y Pharma (广州中

山医药) and CITIC Pharma (中信医药) to expand to southern and northern regions.

Shanghai Pharma distributes more high-end products with more than 50% revenue

generated from selling imported medicines or those manufactured by MNCs‟ China

subsidiaries. Shanghai Pharma also targets hospitals directly, which was 59.8% of its

1H12 distribution revenue. It manufactures pharmaceuticals, 14% of FY11 revenue, with

58 key products contributing 55% of its manufacturing revenue. Its total revenue grew at a

26% CAGR from 2008 to RMB38.7B in 2011. Distribution grew faster at a 31.6% CAGR

compared with 7.4% for the manufacturing segment. Net profit grew at a 35% CAGR

during the same period due to better operating margins despite declining gross margins.

Exhibit 47. Shanghai Pharma Revenue Breakdown by Regions

East72.5%

North20.5%

South7.0%


China Resources Pharma moved up in the ranks after acquiring Beijing Pharma, a

leading distributor of healthcare products in northern China. It has a nationwide network,

covering 28 provinces with 13,000 end-customers. It also has more than 1,200 retail chain

drugstores. China Resource Pharma Group has three domestically listed, well-known

pharmaceutical subsidiaries: Huarun Sanjiu (000999-CN), Hurun Shuanghe (000062-CN)

and Dong-E E-Jiao (000423-CN). These three subsidiaries generated RMB14.6B in 2011,

while China Resources Pharma‟s drug distribution business had RMB41B in revenue.

China Resources‟ revenue and net profit were US$8.8B (HK$67.9B) and US$628M

(HK$4.87B), respectively, in 2011 with the highest net margin in the industry: 7%.

Jointown is the only company without an SOE background among the top six players.

Before 2010, it mainly targeted low-tier markets, namely hospitals below tier 2, grassroots

healthcare institutions, retail drugstores and sub-distributors. More than 41% of its drugs

are OTC compared with Sinopharm and Shanghai Pharma‟s focus on prescription drugs.

It conducted a low margin and low accounts-receivable strategy. After listing in the

domestic market in 2010, Jointown began to enter mid- to upper-tier hospitals. However,

given the existing strong presence of other large distributors, it was slowly winning

business at big hospitals. Sales to tier 2 and above hospitals of RMB1.3B in 2011,

although up 47% yoy, represented only 5.5% of distribution revenue. Of Jointown‟s sales,

98% derive from its distribution business. Revenue and net profit grew at 15% and 23%

CAGRs, respectively, during 2008-2011 to RMB24.8B and RMB376M.

Nanjing Pharma is the leading distributor in Jiangsu Province with 98% of revenue

derived from distribution. It pioneered in outsourcing pharmacy services to hospitals and

collaborates with 277 hospitals, including 8 top-tier, 47 second-tier, and 222 third-tier.

However, the outsourcing business has not helped its profitability yet. Although its

revenue grew at a 14.5% CAGR during 2008-2011 to RMB17.1B, Nanjing Pharma has


27

experienced operating and net profit declines since 2008. Due to lower gross margin and

higher operation cost, it hasn‟t reported a profit since 2010. In 2012, Alliance Boots

announced that it would invest $91M (RMB560M) for a 12% equity interest in the

company. Final timeline for the deal is contingent upon government approval. Nanjing

Pharma aims to leverage MNCs‟ capital and experience to improve its operational

management, logistics capability and IT systems.

Exhibit 48. Corporate Structure of Guangzhou Pharma Corp. GZ Pharma Holding

广州医药集团有限公司（广药集团）

GZ Pharma Co.

(874-HK; 600332-SHE) 广州药业股份有限公司

Alliance Boots

GZ Pharma Corp.

广州医药有限公司

48.2%

50%

50%

Guangzhou

Baiyunshan(000522-SHE)

35.58%

Guangzhou Wang

Lao Ji Pharmaceutical Co.

Guangzhou Nuo

Cheng Bio-Tech Co.

48.05%50%

Hong Kong Tung Hing

Pharmaceuticals 香港同兴药业

48.05%

Guangzhou Jiahe

Bio-tech Co.广州市嘉合生物技术有

限公司

Guangzhou Bai Di(Subsidiary of GP Co.)

50%

98.48%

JV Companies

JV Partners

Other non-public listed

subsidiaries


Guangzhou Pharma Corp., ranking No. 6, has 100% hospital coverage in Guangdong

Province, and its customers include more than 5,700 healthcare institutions, more than

7,000 retail drugstores, and more than 3,100 sub-distributors across the country. It

became a JV company controlled by Alliance Boots and Guangzhou Pharma Co. (874-HK)

in 2008 (Exhibit 48). Although its geographic presence is still limited to southern China

and the Pearl River triangle, Guangzhou is expanding to other provinces via M&A. Its

revenue grew by a 17% CAGR from RMB9.9B in 2008 to RMB15.8B in 2011, and net

profit grew at a 15.3% CAGR over the same time.

MNCs. International distributors have started to pay more attention to China‟s

pharmaceutical market as it‟s on a path to become one of the largest pharma markets in

the world. International distributors typically enter China through JVs and acquisitions.

Alliance Boots, the largest pharmaceutical distributor in Europe and now 45% owned by

Walgreens, established a JV with Guangzhou Pharma in 2008 and acquired a 12% equity

interest in Nanjing Pharma in 2012. Recently, Alliance Boots aims to be a China‟s

pharmaceutical distribution industry consolidator, with plans to further expand through

M&A and steps into retail pharmacies. Cardinal Health, after acquiring two regional

distributors in Sichuan and Wuxi, acquired Zuellig Pharma, a leading healthcare distributor

doing business under the Yong Yu brand, in 2010. In June 2012, Cardinal Health acquired

Zhejiang Dasheng, another regional player. Yong Yu and Dasheng together had a 0.94%

market share in 2011. Cardinal is now a top 10 player.


28

Exhibit 49. Comparison Table of Top 10 Pharma Distributors in China Total 2011

Revenue

Distribution

Revenue

1 Sinopharm Group

It's China's largest pharmaceutical distributor with most

extensive network coverage. It distributes both imported

and domestic manufactured pharmaceutical products to

hospitals, grassroots healthcare institutions, retail

drugstores and sub-distributors. It has 1,801 retail chain

drugstores. Distribution and retail segments accounted for

94% and 3% of 2011 sales respectively.

102 99 10.8%

Largest distribution network among peers;

Covers 178 cities in 30 provinces;

Covers 9,993 (74% of total) hospitals and 1,312 (94% of total)

top-tier hospitals;

Hospital direct sales accounted for 54% of 1H12 sales.

>5,700

Increase direct hospitals sales;

Provide value-added services to customers;

Expand distribution network and further

penetrate mid-and-low tier cities;

Grow retail pharmacy business;

Grow though M&A.

We expect it to gain shares by further

penetrating existing markets and

expanding to new geographic regions,

through both organic growth and M&A.

2

Shanghai

Pharmaceuticals

Holding

It's China's second largest pharmaceutical distributor with

strong network coverage in Eastern China. 52% of

distribution revenue is from imported products/MNCs

brands. It has 1,700 chain drugstores. It also engaged in

R&D and manufacturing of pharma products. Distribution,

retail and manufacturing accounted for 82%, 14% and 4%

of 2011 sales respectively.

55 49 5.2%

National network; Covers >7,600 hospitals and medical

institutions, including >229 (64% of total) Class III, 879 (56% of

total) Class II hospitals in Eastern China;

75% of FY11 distribution sales is from Eastern China while

16.4% and 5.3% are from Northern and Southern China;

Hospital direct sales accounted for 61% of FY11 distribution

sales.

>3,354

Expand nationwide network coverage;

Optimize product portfolio and consolidate

manufacturing resources;

Enhance cross-segment and operational

integration;

Grow though M&A.


strengthening its network coverage in

regions besides Eastern China

through both organic and inorganic

growth.

3China Resources

Pharmaceutical

It's China's leading pharmaceutical company and is

dedicated to R&D, manufacturing and distribution of

pharmaceutical products. It provides nationwide wholesale,

logistics, retail and supply chain value-added services. It

has ~1,200 retail chain drugstores.

55 41 4.4%

National network; Covers 28 provinces;

Gained strong presence in Northern China through acquisition

of Beijing Pharmaceuticals in 2010.NA

Expand distribution network coverage;

Gain share by providing value-added services;

Integrate cross-segment business;

Grow though M&A.


penetrating existing markets and

expanding nationwide coverage

through both organic and inorganic

growth.

4

Jointown

Pharmaceutical

Group

It's a leading distributor of pharmaceutical and healthcare

products in China with strong network coverage of mid and

lower tier markets. >41% of products it distributes are OTC

drugs. It has 776 retail drugstores. Distribution business

accounted for 98% of its 2011 sales.

25 25 2.6%

National network; Covers 1,881 ≥ tier 2 hospitals and 25,994

basic healthcare institutions;

Has >8,600 sub-distributors and >37,000 other customers

including retail drugstores.

>8,600

Expand distribution network to top-tier hospitals

and increase hospital direct sales;

Gain market share by providing value-added

services;

Optimize product portfolio to improve margins;

Grow retail drugstores business;

Grow through M&A.

We expect its share to be stable or

lower as it's still in the process of

shifting target market from low-end

(grassroots healthcare institutions and

retail drugstores) to high-end market

(hospital direct sales). Major M&A

could accelerate its growth.

5

Nanjing

Pharmaceutical

Co.

It's a leading pharmaceutical distributor in Eastern China,

especially in Jiangsu province. 98% of its revenue derived

from distribution business while 1.3% was from

manufacturing business in 2011. It has ~400 retail

drugstores. Alliance Boots invested $91M for 12% equity

interest of the company in 2012.

17 17 2.1%Regional network; Covers >750 hospitals, including 250 top

tier hospitals and 500 tier 2 hospitals.NA

Enhance value-added services;

Grow retail drugstores business;

Strengthen cost control and improve margin

profile.


lower given its regional presence,

although investment by Alliance Coots

could help improve its operation

management, and service and

logistics capabilities in the long-term.

Major M&A could accelerate its

growth.

6

Guangzhou

Pharmaceutical

Corp.

It's a leading pharmaceutical distributor in Southern China,

especially in Guangdong province. It's engaged in the

wholesale and retail of pharmaceutical products and

medical apparatus. It has 2 retail chain drugstores brands:

Guangzhou Jianmin and Dazhong Yiyao. It became a 50:50

JV company in 2008, controlled by Guangzhou Pharma Co.

and Alliance Boots.

16 16 1.9%

Regional network; 100% hospital coverage in Guangdong

province;

Customers includes >5,700 healthcare institutions, >7,000

retail drugstores, and >3,100 sub-distributors across the

country.

>3,100

Grow hospital direct sales;

Expand distribution network;

Develop e-commerce business;

Grow through M&A.


lower given its regional presence.

Major M&A could accelerate its

growth.

7Chongqing

Medicine Group

It's the largest pharmaceutical distributor in Western China.

It's engaged in wholesale distribution, retail pharmacy, and

manufacturing business.

15 13 1.4%Regional network; Strong coverage in Chongqing; Distribution

network extends to 31 provinces.>200 Expand nationwide network coverage.


lower given its regional network

coverage. Major M&A could accelerate

its growth.

8 Huadong Medicine

It's a leading pharmaceutical distributor in Jiangsu province.

It‟s also engaged in manufacturing of pharmaceutical

products and API. 83% and 17% of its 2011 sales were

derived from distribution and manufacturing business

respectively.

11 11 1.2%Regional network; Established collaboration relationship with

>30 hospitals in Zhejiang province.72

Expand distribution network coverage;

Enhance logistics service capabilities;

Enrich product portfolio with more imported

products;

Grow through M&A.




its growth.

9Sichuan Kelun

Medicine & Trade

It's a leading pharmaceutical distributor in Sichuan province.

It distributes TCM and western pharmaceutical products,

API, medical devices and other healthcare products. It has

>13,000 retail drugstores in Sichuan province. It's a

subsidiary of Sichuan Kelun Pharmaceuticals, one of

China's largest manufacturers of IV solutions.

10 10 1.0%

Regional network; Strong coverage of mid-to-low tier markets

in Sichuan province;

Has >100 sub-distributors and covers thousands of hospitals.>100

Further expand network coverage within Sichuan

province;

Diversify product portfolio;

Develop hospital direct sales;

Enhance services capabilities;

Grow through M&A.




its growth.

10Zhejiang Int'l

Group

It's a leading pharmaceutical distributor in Zhejiang

province. It distributes western and TCM pharmaceuticals

products and medical devices.

9 9 0.9%

Regional network in Zhejiang province;

Covers all hospitals at county-level or above in Zhejiang;

Has >18,000 end-customers.

NA

Further expand coverage and penetrate lower-

tier market;

Diversify product portfolio, especially in biologic

products, medical devices and TCM;

Grow through M&A.




its growth.

Major Growth Strategies Comments

RMB M

Ranking Companies DescriptionMarket

ShareRegional Exposure

# of Sub-

distributors

Source: Company Data, MOFCOM, Oppenheimer & Co. Inc. Research


29

M&A Environment

M&A activities in China‟s pharmaceutical distribution industry were intense during 2010-

2011. All large players acquired companies to gain share and access to new geographic

regions. Acquisitions occurred in both the wholesale distribution and retail pharmacy

segments. However, the M&A pace slowed in 2012 (Exhibits 50 and 51): the number of

acquisitions during 1H12 was much less than those in 2010 and 2011. Sinopharm spent

less on acquisitions in 1H12 (RMB804M vs. RMB1.4B and RMB3.3B in 2010 and 2011)

(Exhibit 67). Among other players, the major acquisitions of 1H12 were the acquisition of

Zhejiang Xinxin Pharma by Shanghai Pharma, the acquisition of Anhui Yuanchu Chain

Drugstore by Jointown, and the purchase of Da Sheng Pharma by Cardinal Health (Exhibit

50).

In our view, major reasons for the slowing down of M&A are:

1) The price of M&A targets has been rising due to active M&A in prior years: typical P/E

multiples for acquisitions were ~8x in 1H10 and then rose to 12-15x in 2H10 and 2011.

2) Integration of previously acquired companies takes time, so acquirers slowed the M&A

pace to focus on integration.

3) M&A funds have gotten scarcer due to ongoing organic expansion projects, such as

system upgrades and distribution centers‟ build-out.

4) Operating costs tend to rise after acquisitions due to the differences between local

policies and the central government‟s goal of industry consolidation.

We expect industry consolidation to continue in the upcoming years; however, acquisitions

are expected to be smaller, and targets will be more concentrated in mid- to-lower tier

cities.


30

Exhibit 50. Major Pharma Distribution M&A since 2010

English Chinese

Shanghai Industrial Pharmaceutical 上海实业医药 Eastern Jan-10 1,946 100% -

Ningbo Pharmaceutical 宁波医药 Southeastern Apr-10 38 13% -

Qingdao Growful Pharmaceutical 青岛国风药业 Eastern Apr-10 150 26% -

Guangzhou Z.S.Y. Pharmaceutical 广州中山医药 Southern Jun-10 141 51% 0.16x FY09 sales

Fujian Pharmaceutical 福建省医药公司 Southern Jul-10 79 49% 0.14x FW sales

Beijing Aixin Weiye Medicine 北京上药爱心伟业医药 Northern Nov-10 206 52% -

Shanghai Yutiancheng Pharmaceutical 上海余天成医药 Shanghai Dec-10 70 51% -

Zhejiang Taizhou Pharmaceutical 浙江台州医药 Southeastern Dec-10 150 53% -

China HealthSystem Ltd. (Citic Pharma) 中信医药实业 Northern Jan-11 3,568 100% 0.42x FY11 Sales

Shanghai Zhongxie Pharmaceutical 众协药业 Eastern May-11 119 100% 0.15x FY10 sales

Wuxi Shanhe Group Pharmaceutical Logistics 无锡山禾医药 Eastern Jul-11 344 80% 0.43x sales

Shanghai Asia Pioneer Huakang Pharmaceutical 上海新先锋华康医药 Eastern Sep-11 356 100% 0.4x BV

Guangzhou Zhongnan Pharmaceutical 广州中南药业 Southern 2011 - - -

Foshan Daxiang Pharmaceutical 佛山大翔医药 Southern 2011 - - -

Zhuhai Kangtuo Pharmaceutical 珠海康拓医药 Southern 2011 - - -

Shantou Wande Pharmaceutical 汕头市万德医药 Southern 2011 - - -

Hangzhou Quandetang Pharmacy 杭州全德堂药房 Eastern 2011 - - -

Zhejiang Xinxin Pharmaceutical 浙江新欣医药 Eastern Mar-12 103 67% -

Jinan Zhongxin Pharmaceutical 济南中信药业 Eastern Nov-10 - - -

Henan Aisheng Pharmaceutical Logistics 河南爱生医药物流 Central Dec-10 - - -

Beijing Pharmaceutical 北京医药 Northern Jun-11 - 51% -

Beijing Purenhong Pharmaceutical 北京普仁鸿医药销售 Beijing Jun-11 250 25% 0.82x FY09 sales

Shenzhen Huayi Runsheng Pharmaceutical

Investment深圳华益润生医药投资有限公司

Drugstores in 14

provincesJul-11 73 100%

0.23x FY10 sales

14.2x FY10 PE

Suzhou Lian Pharmaceutical 苏州礼安医药有限公司 Eastern Nov-11 1,000 65% -

China Resources Guangdong

(Collaboration with Guangdong Zhongjian Pharma)

华润广东医药

(与广东中健医药共同组建)South Sep-12 - - -

Shaanxi Kangjiang Pharmaceutical 陕西康健医药 Northwestern Nov-10 - - -

Changsha Hengsheng Pharmaceutical 长沙恒生医药 South Central Nov-10 - - -

Shanxi Kangxingyuan Pharmaceutical 山西康兴源药业 Northern Mar-11 - - -

Henan Nanyang Guanbao Pharmaceutical 河南南阳冠宝药业 Central Aug-11 - - -

Fujian Jieda Pharmaceutical 福建广药洁达医药 Southern - - - -

Hainan Chenfei Pharmaceutical 海南晨菲医药 Southern - - - -

Sichuan Beili Pharmaceutical 四川省倍立医药有限责任公司 Southwestern Jan-10 24 75%

Suining Western Huayuan Pharmaceutical 遂宁市西部华源医药有限公司 Southwestern Jun-10 17 55% -

Sichuan Jointown Kechuang Pharmaceutical 四川九州通科创医药有限公司 Southwestern 2010 - 51%

Nanjing Jointown Logistics Tech 南京九州通物流技术 Eastern Jan-11 14 100% -

Shandong Jointown Pharmaceutical 山东九州通医药 Central May-11 25 100% -

Henan Xinglin Good Pharmacist Chain Drugstore 河南杏林好药师大药房连锁 Central Jun-11 19 90% -

Wuhu Jointown Pharmaceutical 芜湖九州通医药销售 Eastern Jun-11 9 70% -

Shanxi Jointown Pharmaceutical 山西九州通医药 Northern Aug-11 36 90% -

Beijing Good Pharmacist Chain Drugstore 北京好药师大药房连锁 Beijing Sep-11 1 51% -

Qingdao Jointown Pharmaceutical 青岛九州通医药 Central Nov-11 51 72% -

Guangdong Jointown Pharmaceutical 广东九州通医药 Southern Dec-11 34 79% -

Anhui Yuanchu Chain Drugstore 安徽元初药房连锁 Eastern Jan-12 46 65% -

Hubei Lishizhen Int'l Medicine Trade Port 湖北李时珍国际医药港药业有限公司 Central 1H12 25 83%

North China Pharma Int'l Trading

(JV with North China Pharmaceutical Group Corp.)华北制药国际贸易有限公司 Northern Oct-12 62 49%

Henan Jinbaokang 河南金保康药事服务 Central Jan-10 28 100% -

Nanjing Xingma 南京兴马商贸 Eastern 2010 34 100% -

Jiangsu Kangbao 江苏康宝制药 Eastern Jan-11 NA 53% -

Xinjiang Nanjing Tongrentang 新疆南京同仁堂健康药业 Northwestern Jun-11 10 51% -

Sichuan Yatong 四川省雅通药业 Sourthwestern Jun-11 21 100% -

Xinjiang Production and Construction Corps

Pharmaceutical Retail新疆生产建设兵团医药零售连锁 Northwestern May-11 1 94% -

Zuellig Pharma 永裕(中国)医药 National Nov-10 $470M 100% 0.47x sales

Sichuan Hewei 四川和维医药咨询有限公司Southwestern

(Sichuan)Aug-11 RMB25M 100% -

Wuxi Xishan 无锡锡山药业 Eastern (Jiangsu) Dec-11 - > 80% -

Da Sheng Pharma 浙江大生医药 Eastern (Zhejiang) Jun-12 - 100% -

Investment in Nanjing Pharma 南京医药 Regional Sep-12RMB560M

($91M)12% 35x EV/EBITDA

Cardinal Health

Alliance Boots

ValuationTimeAmount

(RMB M)

Acquired

Interest

TargetRegion

Guangzhou Pharma Holding

China Resources

Nanjing Pharma

Shanghai Pharma

Jointown

Source: Company Reports, Industry News Sources, Oppenheimer & Co. Inc. Research


31

Exhibit 51. Major Manufacturing M&A by China’s Pharma Distributors since 2010

English Chinese

Shanghai Fudan-Zhangjiang Bio-Pharmaceutical 上海复旦张江生物医药 Eastern Jan-10 36 9% -

Shanghai Zhongxi Pharmaceutical 上海中西药业 Eastern Feb-10 - - -

Shanghai New Asiatic Pharmaceutical 上海新亚药业 Eastern Sep-11 1,132 97% 8.8x FY11 PE

Changzhou Kony Pharmaceutical 常州康丽制药 Eastern 1H12 210 70% -

Changzhou Wuxin Pharmaceutical 常州武新制药 Eastern 1H12 - - -

Nantong Zhongbao Pharmaceutical 南通中宝药业 Eastern 1H12 - - -

Huarun Pian Zai Huang Pharmaceutical

(JV with Zhangzhou Pian Zai Huang)华润片仔癀药业 Southern Nov-11

RMB1B by

2 parties51% -

Hubei Jingui TCM Electuary Co. 湖北金贵中药饮片有限公司 Central Apr-11 13 100% -

Hubei Xianglian Pharma 湖北香连药业有限责任公司 Central Jan-11 28 30% -

Hubei Jointown TCM Development

(JV with Jing Brand)湖北九州通中药产业发展有限公司 Central Mar-11 60 60% -

Enshi Jointown TCM Development 恩施九州通中药发展有限公司 Central Aug-11 17 85% -

Nanjing Tongrentang 南京同仁堂药业 Eastern 2011 45 100% -

Hefei Lejia Laopu TCM 合肥乐家老铺中药饮片 Eastern 2011 3 100%

Nanjing Tongrentang Huangshan Pharmaceutical 南京同仁堂黄山精制药业 Eastern 2011 11 100% -

Shanghai Pharma

China Resources

Jointown

Nanjing Pharma

TargetRegion Time

Amount

(RMB M)

Acquired

InterestValuation

Source: Company Reports, Industry News Sources, Oppenheimer & Co. Inc. Research

Exhibit 52. Cash and Debt Balance of Top Public Players

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Sinopharm ShanghaiPharma

Jointown NanjingPharma

GuangzhouPharma Co.

HuadongMedicine

Zhejiang Int'l

Cash Debt

RMB M

Source: Company Reports, Factset, Oppenheimer & Co. Inc. Research

We expect Sinopharm, Shanghai Pharma and China Resources to continue gain market

share from smaller players going forward. We conservatively model the market share of

the top 3 players combined to increase from the current 20.4% to 27.2% in 2017(Exhibit

53). We expect the market shares of other regional players to be maintained at current

levels or even to shrink going forward, due to lack of economies of scale and a slower

pace of geographic expansion.


32

Exhibit 53. Top Distributors’ Market Share Trend

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Sinopharm

Shanghai Pharma

China Resources

Jointown

Guangzhou Pharma

Nanjing Pharma

Source: MOFCOM, Company Reports, Oppenheimer & Co. Inc. Estimates

Synergy Between Manufacturing and Distribution Businesses?

In China, major distributors have some manufacturing business although scale and

revenue contribution vary. Shanghai Pharma and Guangzhou Pharma get more than 10%

of revenue from manufacturing, vs. only 1-3% for Sinopharm, Jointown and Nanjing

Pharma. Kelun Pharmaceutical sells 11% of its products to Sichuan Kelun Medicine &

Trade, its distributing subsidiary.

Synergy between manufacturing and distribution business is more obvious at Shanghai

Pharma: the percentage of manufacturing sales distributed by its own channel increased

from 12% in 2008 to 18% in 2011 and 18.5% in 1H12. The percentage of sales to Kelun

Medicine & Trade from Kelun Pharmaceutical has stayed at the ~11% level for recent

years. For three public companies engaged in pharmaceutical manufacturing under China

Resources, sales to its distribution companies under China Resources represent a small

portion of total revenue. For distribution business at Shanghai Pharma, sales derived from

its own manufacturing business represent only 3.3% of distribution revenue, and most

business comes from externally sourced products.

Meanwhile, greater flexibility in coordinated sales efforts could allow more competitive

product pricing. Although players with both manufacturing and distribution business aim to

further realize the synergy between segments, we believe that at the current stage of

industry development, the “synergy” benefit accrues more to the manufacturing business

rather than to the distribution business.


33

Sinopharm: Competitive Advantages

1. Extensive Distribution Network

Sinopharm„s large distribution network in China differentiates it from peers focusing on

specific geographic regions. As of June 2012, Sinopharm has 50 distribution centers

covering 178 cities in 30 provinces. It covers a total of 9,993 hospitals, and among those,

1,312 are tier-1 (Exhibits 54 and 55). Its hospital penetration is the highest among its

competitors (Exhibit 56), 31% more than Shanghai Pharma‟s, and 5.7 times that of

Jointown. Sinopharm also operates 1,801 stores as of June 2012 (Exhibit 57), ranking

No.3 in the industry, 101 more than Shanghai Pharma and 801 more than China

Resources. To manufacturers, Sinopharm can help their products penetrate a broader

market than other distributors. Its distribution network was built over many years‟ efforts

and that it would be very difficult for a new entrant or even other competitors to achieve

similar scale.

Exhibit 54. Sinopharm’s Hospital Coverage

42.2%

56.8%

72.3% 74.0%

64.2%

85.4%

91.8% 93.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 1H

All Hospitals Tier-1 Hospitals


Exhibit 55. Covered Hospital Number Comparison

9,993

7,600

5,700

1,740

750

0

2,000

4,000

6,000

8,000

10,000

12,000


GuangzhouPharma

Corp.




34

Exhibit 56. Hospital Coverage Comparison by Tiers

45.5%

34.6%

23.9%

11.3%

3.4%

93.8%

57.9%

22.7%22.1%

17.9%

42.2%

33.0%

24.0%

10.5%

2.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sinopharm Shanghai Pharma GuangzhouPharma

Jointown Nanjing Pharma

Total Hospital/National Total Top Tier/Total Top Tier

Hospitals below top tier/Total below top tier

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

Exhibit 57. Retail Drugstores Network Comparison

2,883

2,520

1,8011,700

1,000776

500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Nepstar Chongqing PeaceChain-drugstore

Sinopharm Shanghai Pharma China ResourcesPharma

Jointown Nanjing Pharma


2. Leading Logistics Capabilities

Sinopharm leads its peers in terms of logistics capabilities. Its logistics services consist of

storage, warehousing, local transportation, and delivery. Sinopharm‟s warehouses are

equipped with comprehensive warehouse management systems (WMS), radio-frequency

identification (RFID) tracking systems, and climate control. Sinopharm has four national

logistic hubs, namely, Beijing, Shanghai, Tianjin and Guangzhou, and provincial and local

logistics centers (Exhibit 58). Each center can process 100,000 purchase orders daily.

Sinopharm provides outsourced logistics services for GlaxoSmithKline and Bayer AG. Eli

Lily and Bausch & Lomb are also customers. Sinopharm currently has a total of 50

distribution centers, the most in the industry (Shanghai Pharma: 30; Jointown: 34). Those

centers are in 30 provinces, covering 178 cities. Sinopharm aims to cover 4 national

logistic hubs, 7 regional, 30-40 provincial, and 60-80 city distribution centers by 2015.


35

Exhibit 58. Selected Logistics Centers of Sinopharm

Beijing Tianjin

Shanghai Guangzhou

Shenyang Shanxi


3. Providing Value-added Services

Exhibit 59. Value-added Services Provided by Sinopharm

Category Services

Import agency

Customs clearance

Free trade zone warehousing

Pharmaceutical inventory management

Collection services on behalf of the suppliers

Inventory analysis report

Design and establishment of supply chain

Technical support and sales assistance

Inventory tracking and management

Electronic purchase orders and confirmation

Quality inspection for imported pharmaceuticals

Packaging, repackaging and reprocessing services

Product insurance arrangement

Product return or replacement

Delivery of specialty pharmaceutical products

Supplier solutions

Advanced logistics services

Other value-added services


Sinopharm‟s ability to provide value-added services to manufacturers and hospitals is one

of its key advantages. Value-added services include information systems for ordering,

inventory management, dispensing and tracking, information/data connection between

hospital pharmacy and distributor, and pharmaceutical usage analysis, which helps

hospital pharmacies save on labor costs, improve operational efficiency, reduce inventory,

and better control drug dispensing service quality (Exhibits 59-61). Through implementing

these services, Sinopharm can gain timely feedback on hospitals‟ needs and better control

the supply chain, hence improve operational efficiencies and lowering costs.


36

Exhibit 60. China Pharmaceutical Distribution Work Flow

Purchases from domestic suppliers

Purchases from foreign suppliers

Quality CheckCustoms control and

quality inspection

Warehousing in free trade zone

Tax and duty clearance

Warehousing

Receiving Orders

Logistics arrangement and delivery

Direct sales to hospitals

Distribution to other distributors

Distribution to retailers and other customers

Invoicing / collection


Providing value-added services has become a growing trend. Although the revenue

contribution from those services is not significant, it helps Sinopharm to set it apart from

competition, gain market share, save costs and build long-term customer relationships.

Most small players are not capable of offering this kind of service. Sinopharm expects to

see a meaningful revenue contribution in 2-3 years, once the business scales up.


37

Exhibit 61. Value-added Services

Pharmaceutical

ManufacturersSinopharm

Hospital

Pharmacies

Retail

Drugstores

• Import agency and customs clearance

• Free trade zone warehousing

• Inventory tracking and management

• Collection services

• Quality inspection for imported products

• Packaging/repackaging services

• Cold chain logistics

• Sales assistance

• Optimize pharmaceutical products procurement process

• Improve services and efficiency of drug dispensing

• Lower operation and labor cost

• Lower inventory

• Enhance working capital management

• Improve overall operation efficiency

• Enhance quality and safety assurance

• Inventory IT information system upgrade

• Product tracking

• Inventory management and analysis

• Pharmaceutical usage analysis

• Product return or replacement

• Delivery of specialty pharmaceutical products

• Lower cost

• Better inventory management

• Better channel development

Benefits to suppliers

and customers

Benefits to Sinopharm • Build L-T supply/distribution relationships

• Obtain exclusive distribution rights

• Build L-T supply/distribution relationships with hospitals

• Obtain priority distribution rights

Value-added Services


4. Diversified Product Offerings

Sinopharm offers a wide range of products, which includes more than 98,095 categories

of medicines, much more than its peers (Exhibit 62). Its offerings range from branded and

generic Rx drugs and OTC medicines, and healthcare products, to medical devices,

reagents and laboratory supplies. Diversified offerings allow Sinopharm to become a one-

stop shop for customers, and achieve leverage in government tenders and hospital drug

purchases. Shanghai Pharma, the second-largest player, focuses more on high-value

imported drugs, and its product portfolio includes ~18,600 categories, much less than

Sinopharm.

Exhibit 62. Product Offering Comparison

99,095

18,60014,000

8,000

40,000



GuangzhouPharma

Number of Products Distributes



38

Product diversification also allows Sinopharm to adjust product mix to mitigate pricing

pressure. For example, to reduce the negative impact of antibiotics‟ usage restriction,

Sinopharm can adjust the product line to sell fewer antibiotics and focus on unrestricted

substitutes. For a specific dosage form of drugs that are included in an NDRC price cut,

Sinopharm can coordinate with drug manufacturers to use different dosage forms.

Sinopharm‟s products are of high quality. They are sourced from over 3,300

pharmaceutical companies, including both domestic companies and MNCs. Domestic

pharmaceutical companies include 97 of the top 100, such as Jiangsu Hengrui, Harbin

Pharma, and North China Pharma, and MNCs include 30 of the top 50 int‟l pharma

players such as Pfizer, GSK, Merck, Eli Lily, Roche, AstraZeneca, Novo Nordisk, etc.

Growth Strategies

1. Increase Direct Sales to Hospitals

To better mitigate gross margin pressure from drug price cuts, Sinopharm has been

actively adjusting sales mix by channels. Direct sales to hospitals, of which gross margin

is 1-1.5% higher than other channels, have grown rapidly in recent years: they grew 57%

yoy in 2011 and 45% yoy in 1H12, much faster than overall revenue growth of 48% and

39% during the respective periods. Sales contribution from hospital direct sales increased

from 49.4% in 2010 to 51.5% in 1H11 and 53.8% in 1H12 (Exhibit 63). Despite continuing

pressure from drug price cuts, Sinopharm‟s gross margin improved from 8.17% in 1H11 to

8.19% in 1H12, after falling to 8.17% in 2011 from 8.43% in 2010 due to nationwide drug

price declines (Exhibit 63).

Hospitals are the largest customers of pharmaceutical products, accounting for more than

70% of China‟s drug consumption. Sinopharm plans to continue to penetrate the hospital

market and targets increasing the revenue contribution from hospital direct sales from its

current 54% to 62%. A major concern for Sinopharm is the typically long accounts

receivable (A/R) days‟ outstanding of hospital customers (80-190 days). The target for

hospital direct sales‟ contribution could be higher, after public hospital reforms complete in

the future.

Exhibit 63. More Direct Hospital Sales

8.38% 8.20%7.96%

8.37% 8.43%8.17% 8.17% 8.19%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

2006 2007 2008 2009 2010 2011 2011 1H 2012 1H

Gross Margin

49.4%52.4% 51.5%

53.8%

42.1%

35.9% 37.0%

33.7%

4.6%6.3% 6.2% 7.2%

3.9%5.5% 5.3% 5.3%

0%

10%

20%

30%

40%

50%

60%

2010 2011 2011 1H 2012 1H

Hospital Sales Indirect Sales

Sales to Basic Healthcare Institutions Direct Retail Sales



39

2. Expand Distribution Network

Sinopharm has expanded its distribution network over the years through both M&A and

organic growth. Sinopharm‟s city coverage above the prefecture level has increased from

40% (133 cities) in 2010 to 53% (178 cities) in 1H12, with the number of distribution

centers increased from 39 in 2010 to 50 as of June 2012 (Exhibit 64). Sinopharm has

established a strong network layout, not only in top tier cities but also in second- and third-

tier cities. Going forward, Sinopharm plans to further solidify its leading position in top tier

cities and continue to penetrate the lower tier market, where pharmaceutical consumption

grows faster than in the top-tier cities.

Sinopharm targets expanding from 178 to 280 above-prefecture-level cities in the next few

years. The company plans to have a distribution network including 4 national logistics

hubs including Beijing and Shanghai; 7 regional logistic centers including Shenyang,

Tianjin and Xian; 30-40 provincial logistic centers including Haerbin, Changchun,

Shijiazhuang, and Taiyuan; and 60-80 city-level logistics centers including Pingdingshan,

Shangqiu, and Changde, covering all level of cities across China by 2014.

Exhibit 64. Number of Distribution Centers and Cities under Coverage

3946 50

133

174 178

2010 2011 2012 1H

# of Distribution centers # of Cities Under Coverage


3. Grow Retail Pharmacy Business

Sinopharm has been expanding in the retail pharmacy segment, through both organic and

inorganic methods. The number of Sinopharm‟s retail drugstores has doubled in the past

three and a half years from 947 in 2009 to 1,801 in 2012 (Exhibit 65). Sinopharm‟s retail

drugstore network covers over 40 large and medium-size cities in China. Retail drugstore

brands under Sinopharm include Guoda (国大药房), China Accord (一致药店), Dadesheng

(大德生), Tianyitang (天益堂), Guanghua (光华大药房), and Lerentang (乐仁堂).

Sinopharm plans to gradually consolidate the brands that it acquired.

Sinopharm sets different strategies for drugstores according to their locations: drugstores

that are close to hospitals focus on Rx drugs and usually are eligible for healthcare

insurance reimbursement; drugstores in shopping malls usually sell more healthcare

products, cosmetics and consumables; drugstores located in residential communities

promote OTC drugs. Currently, one-fourth to one-fifth (360-450) of Sinopharm‟s retail

drugstores are eligible for reimbursement from a national insurance plan.


40

Although the revenue size of this segment (2.98% of 2011 total revenue) is much smaller

than distribution business (93.41% of sales), the retail pharmacy business is one of

Sinopharm‟s key growth strategies, especially when favorable policies for drugstores

industry emerge. Management aims to increase the number of retail drugstores to 5,000

by the end of 2015.

Sinopharm has improved the operating efficiency (Exhibit 66) and service quality of its

retail pharmacy business. An ERP (enterprise resource planning) system was

implemented in 2010, to the integration of financial, operational, human resources, and

procurement systems.

Exhibit 65. Sinopharm Has Increased Its Number of Retail Pharmacies

947

1,394

1,773 1,801

2009 2010 2011 2012 1H

# of Retail stores


Exhibit 66. Revenue and Operating Margins at Sinopharm’s Retail Pharmacies

1.5%

14.0%

45.6%

23.7%

77.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008 2009 2010 2011

Sales of Retail Segment yoy growth

RMB M

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2006 2007 2008 2009 2010 2011

Operating Margin


4. Grow Through M&A

Sinopharm has been an active industry consolidator (Exhibit 67). Through M&A, it has

expanded its geographic footprint, especially in second- and third-tier cities. It has

acquired more than 100 companies in recent years, including both private entities and

SOEs. Acquisition valuation was at ~8x P/E multiples in 1H10, much more attractive than

12-15x in 2011 and ~10x in 2012. In 2010, Sinopharm reported a RMB16.6B sales

increase, and RMB14.5B, or 88% of the increase, came from the newly consolidated

operations. Analyzing the 38.67% sales growth in 1H12, businesses that existed before

2011 contributed 22.38% while those acquired during 2011 contributed 13.14%, and

companies acquired in 1H12 contributed 3.15%. After several years of aggressive

acquisitions, Sinopharm is now shifting its main focus to integration, yet it will continue to

seek good M&A opportunities. Future M&A targets might be more concentrated in lower


41

tier markets, and acquisition size should be much smaller than previously, according to

management.

Exhibit 67. SinoPharm M&A Activities 2010-1H2012

Region Acquisition TargetAcquired

Interests %

Amount

(RMB M)Valuation

1 Beijing Tianxinpuxin Bio-med Co. (Beijing) 51% - -

2 Hebei Traditional & Herbal Medicine (Hebei) 100% 27 10.4x FY09 PE

3 Local distributors in Inner Mongolia - - -

4 Local distributors in Changzhi and Lvliang - - -

5 SinoPharm Merro (Liaoning Dalian) 70% 54 0.1x FY09 sales

6 Jilin Longtai Pharma (Sinopharm Jilin) 70% - -

7 Likang(Shanghai) 72% - -

8 Shanghai Santa Medical & Science Co. 100% - -

9 Shanghai Huyong (Shanghai) 100% - -

10 Shanghai Peibaokang(Shanghai) - - -

11 Wenzhou BioMedical Supply(Zhejiang) 58% - -

12 JinYun Pharmaceutical (Zhejiang) - - -

13 Local distributors in AnQing and BengBu(Anhui) - - -

14 Local distributors in Fujian and Shandong - - -

Central 15 Local distributors in Henan,Hubei and Hunan - - -

16 Hubei Yi Bao 51% 10 11x FY09 PE

17 Xinjiang Province New & Special National Pharmaceutical (Xinjiang) 36% 409 -

18 Xinjiang Pharmaceutical 80% 736 4x FY09 PE

19 Local distributors in Gansu - - -

Southern 20 Guangdong Dong Fang 100% 95 12.5x FY09 PE

21 ShenZhen Yanfeng Medicine Co. 51% 38 -

22 Sinopharm Holding Shenzhen Chinese Herbal 53% 27 -

23 Local distributors in Yunnan,Guizhou, Sichuan and Chongqing - - -

1,374 -

1 Hunan Guoda Minshengtang Pharmacy Chain Store 51% - -

2 Sinopharm Holding Pingdingshan 60%

3 Henan Guoda Pharmacy Chain Store 51%

4 Sinopharm Holding Hunan Deyuan Pharmaceutical 70% - -

5 Sinopharm Holding Qingdao 100% - -

6 Sinopharm Nutraceuticals (Shanghai) 70% - -

7 Sinopharm Holding Wuxi 70% - -

8 Sinopharm Holding Changzhou 65% - -

9 Liyang Guoda People Pharmacy Store 80% - -

10 Sinopharm Holding Zaozhuang 70% - -

11 Sinopharm Holding Heilongjiang 65% - -

12 Sinopharm Holding Jinzhou 70% - -

13 Sinopharm Holding Tianjin North Pharmaceutical 51% - -

14 Shanxi Wanmin Pharmacy Chain Store 51% - -

15 Sinopharm Holding Tangshan (Xintiandi) 70% - -

16 Sinopharm Holding Handan 70% - -

17 Sinopharm Holding Le Ren Tang Pharmaceutical 60%

18 Lerentang Shijiazhuang Pharmacy Chain Store 60%

19 Neimenggu Guoda Jiuling Pharmacy Chain Store 70% - -

20 Sinopharm Holding Lishui 89% - -

21 Sinopharm Holding Taizhou 75% - -

22 Sinopharm Suzhou Boai Pharmaceutical 70% - -

23 Sinopharm Holding Jinhua 90% - -

24 Foshan City Nanhai Pharmaceutical Group 100% - -

25 Sinopharm Holding Putian 60% - -

26 Sinopharm Holding Lingyun Biological Medicine 55% - -

27 Quanzhou Guoda Pharmacy Chain Store 51% - -

28 Sinopharm Holding Longyan 60% - -

29 Sinopharm Holding Sanming 60% - -

30 Sinopharm Holding Zhangzhou 60% - -

31 Sinopharm Holding Nanping 60% - -

32 Sinopharm Holding Hainan Hongyi 100% - -

33 Sinopharm Holding Ningde 60% - -

Southwestern 34 Sinopharm Holding Anshun 70% - -

Western 35 Sinopharm Holding Qinghai 70% - -

3,282 -

1 Sinopharm Holding Nantong Co.,Ltd. 80% - -

2 Shanghai Meitai Medical Instruments Co., Ltd. 70% - -

3 Sinopharm Holding Wuhu Co.,Ltd. 70% - -

4 Sinopharm Holding Liuan Co.,Ltd. 60% - -

5 Sinopharm Holding Weihai Co.,Ltd. 90% - -

6 Sinopharm Holding Jining Co.,Ltd. 70% - -

7 Zhejiang Intlmedicine Drugstore Co., Ltd. 39% 5 -

8 Sinopharm Holding Suzhou Boai Pharmaceutical Co., Ltd. 30% 12 ~2.0x historical sales

9 Shanghai Donghong Medical Co., Ltd. 45% - -

10 Sinopharm Jiankun (Beijing) Medical Co., Ltd. 51% -

11 Sinopharm Holding Instrument (Beijing) Co., Ltd. 70% - -

12 Sinopharm Holding Wulanchabu Co., Ltd. 19% 2 -

13 Jiangmeng Guoda Jiyuantang Pharmacy Chain Store Co., Ltd. 65% - -

14 Sinopharm Holding Zhaoqing Co., Ltd. 100% - -

15 Sinopharm Holding Jiangmeng Renren Co., Ltd. 100% 56 -

804 -

1H2012

Eastern

300

Total

Total

1,300

North Western

Southern

Central

Eastern

Northeastern

Northern

Southeastern

-

-

2010

2011

Northen

Southern

Eastern

Total

North

North Eastern

Source: Company data, Oppenheimer & Co. Inc. Research.


42

Valuation

Sinopharm is trading at 25x and 20x our 2012 and 2013 EPS estimates of HKD0.97

(RMB0.79) and HKD1.24 (RMB1.00), respectively, 67% above global peers and in line

with domestic peers‟ 21x PE multiple for 2013. Applying a discounted cash flow analysis

(see Exhibit 68), we derived a fair value range of HKD24-26. Believing the valuation quite

rich, we will begin coverage on the sideline and look to become more constructive if

Sinopharm consistently delivers stable margins.

Exhibit 68. DCF Valuation

SinoPharm (1099.HK)DCF Valuation

RMB M except per share data 2011A 2012E 2013E 2014E 2015E 2016E 2017E

Revenue 102,225 131,175 161,300 195,147 234,230 278,891 329,380

EBIT 3,636 4,833 6,028 7,226 8,580 10,082 11,754

Taxes 725 956 1,237 1,541 1,852 2,198 2,582

After-tax EBIT 2,911 3,877 4,791 5,685 6,728 7,884 9,171

Add D&A 460 611 705 815 925 1,035 1,144

Less CAPEX 3,068 2,637 2,637 2,637 2,637 2,637 2,637

Less Change in WC 2,327 2,659 2,752 3,343 3,704 4,380 4,689

FCF (2,023) (807) 106 519 1,311 1,901 2,990

Cost of Capital 8.0%

NPV of cash flows, 2012-2017 3,898

Terminal Growth 3.5%

Terminal value 68,760

NPV of terminal value 46,797

Current net debt 2,707

Equity Value 47,987

Shares outstanding 2,403

Value per Share (RMB) 20.0

Value per Share (HKD) 24.8 Sensitivity Analysis

25 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

6.0% 30 35 40 49 61 81 122

6.5% 26 30 34 40 48 60 80

7.0% 23 26 29 33 39 47 58

7.5% 21 23 25 28 33 38 46

8.0% 18 20 22 25 28 32 37

8.5% 17 18 20 22 24 27 31

9.0% 15 16 18 19 21 24 27

9.5% 14 15 16 17 19 21 23

10.0% 13 14 15 16 17 19 21

Terminal Growth Rate

WA

CC

Source: Company Reports, Oppenheimer & Co. Estimates


43

Exhibit 69. Peers Valuation Comparison Market '11-'13E '11-'13E

Price Cap Sales EPS

Company Ticker Rating Currency 11/13/12 ($M) '12E '13E '12E '13E CAGR CAGR '12E '13E '12E '13E '12E '13E

US Pharmaceutical Distributors

AmerisourceBergen Corp. ABC NC USD 40.28 10,226 2.76 3.13 14.6 12.9 3.6% 5.8% na 0.9 0.1 0.1 7.6 7.4

Cardinal Health Inc. CAH NC USD 39.24 13,535 3.21 3.43 12.2 11.4 -3.9% 5.9% 2.5 1.6 0.1 0.1 6.6 6.2

McKesson Corp. MCK NC USD 92.31 22,005 7.30 7.99 12.6 11.5 1.1% 19.6% 0.4 1.2 0.2 0.2 7.2 6.7

Average 13.2 11.9 0.3% 10.4% 1.5 1.3 0.1 0.1 7.1 6.8

Japanese Pharmaceutical Distributors

Medipal Holdings Corp. 7459-TKS NC Yen 975.00 2,771 88 81 11.1 12.0 2.9% 28.0% 0.1 na 0.1 0.1 3.8 3.7

Suzuken Co. Ltd. 9987-TKS NC Yen 2425.00 2,751 145 188 16.7 12.9 3.0% 45.1% 0.3 0.4 0.1 0.1 3.5 4.0

Toho Holdings Co. Ltd. 8129-TKS NC Yen 1608.00 1,495 148 154 10.9 10.4 3.5% 4.0% 2.6 2.7 0.1 0.1 na na

Alfresa Holdings Corp. 2784-TKS NC Yen 3535.00 2,515 275 259 12.9 13.6 3.2% 41.7% 0.1 na 0.1 0.1 1.1 1.1

Average 12.9 12.2 3.2% 29.7% 0.8 1.6 0.1 0.1 2.8 2.9

Domestic-listed Chinese Pharmaceutical Distributors

Guangzhou Pharmaceutical Co. Ltd. 600332-CN NC RMB 20.20 2,610 0.50 0.66 40.8 30.6 50.7% 36.3% 1.0 0.9 2.3 1.3 18.6 17.4

Shanghai Pharmaceuticals Holding Co. Ltd. 601607-CN NC RMB 10.95 4,668 0.76 0.86 14.4 12.8 20.7% 1.0% na 1.0 0.4 0.4 8.0 7.3

China National Medicines Corp. Ltd. 600511-CN NC RMB 13.66 1,047 0.68 0.80 20.1 17.1 -17.5% -16.6% na 1.0 0.8 0.6 na na

Jointow n Pharmaceutical Group Co. Ltd. 600998-CN NC RMB 12.00 2,745 0.32 0.42 37.5 28.6 na 27.1% 1.6 0.9 na na na na

China National Accord Medicines Corporation Ltd A 000028-CN NC RMB 29.57 1,344 1.61 1.92 18.3 15.4 17.9% 29.4% 0.5 0.8 0.5 0.4 10.4 10.0

Nanjing Pharmaceutical Co. Ltd. 600713-CN NC RMB 5.04 559 na na na na na na na na na na na na

Huadong Medicine Co. Ltd. 000963-CN NC RMB 32.64 2,255 1.13 1.44 28.9 22.7 29.5% 27.9% 1.0 0.8 0.9 0.8 15.7 12.1

Zhejiang Int'l Group Co. Ltd. 000411-CN NC RMB 7.28 243 na na na na na na na na na na na na

Average 26.7 21.2 20.3% 17.5% 1.0 0.9 1.0 0.7 13.2 11.7

HK-listed Chinese Pharmaceutical Distributors

Guangzhou Pharmaceutical Co Ltd 874-HK NC HKD 14.38 1,511 0.60 0.81 23.8 17.9 53.2% 37.2% 0.6 0.5 1.3 0.8 18.6 17.4

Shanghai Pharmaceuticals Holding Co. Ltd. 2607-HK NC HKD 14.78 5,149 0.94 1.06 15.7 14.0 22.2% 2.3% na 1.1 0.5 0.4 8.1 7.4

China NT Pharma Group Co. Ltd. 1011-HK NC HKD 0.78 105 (0.11) (0.05) na na -25.7% na na na 0.5 0.4 na 33.3

Average 19.8 15.9 16.5% 19.8% 0.6 0.8 0.8 0.5 13.3 19.3

Sinopharm Group Co. Ltd. 1099-HK P HKD 24.90 7,859 0.97 1.24 25.7 20.1 25.9% 23.2% 1.4 0.7 0.4 0.3 10.5 8.5

EV/EBITDAEPS PE PEG Price/Sales

Source: Factset, Oppenheimer & Co. Inc. Estimates Note: Factset estimates for Not Covered companies. P Perform NC Not Covered


44

Exhibit 70. Historical Stock Price

0

5,000

10,000

15,000

20,000

25,000

30,000

0

5

10

15

20

25

30

35

40

10/2

3/2

009

11/1

3/2

009

12/0

4/2

009

12/2

4/2

009

1/1

5/2

010

2/0

5/2

010

2/2

6/2

010

3/1

9/2

010

4/0

9/2

010

4/3

0/2

010

5/2

1/2

010

6/1

1/2

010

7/0

2/2

010

7/2

3/2

010

8/1

3/2

010

9/0

3/2

010

9/2

4/2

010

10/1

5/2

010

11/0

5/2

010

11/2

6/2

010

12/1

7/2

010

1/0

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011

1/2

8/2

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2/1

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011

3/1

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4/0

1/2

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4/2

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6/0

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12/0

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12/3

0/2

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1/2

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3/2

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7/2

012

9/2

8/2

012

10/1

9/2

012

10/2

4/2

012

10/2

9/2

012

11/1

/2012

Sinopharm Hang Seng Index

Sinopharm (HKD) Hang Seng IndexSinopharm (HKD) Hang Seng Index

8/23/12, 1H12 earnings

6/7/12, proposal of RMB8B bond

issue

3/20/12, FY11 earnings


5/13/11,compeleted First

Tranche Bond, RMB2B

4/25/11, annoucement of

138M H shares placement5/4/11, completion

Expectation of Weak 1H11 earnings

performance due to drug pricing pressure

1/25/11, cooperative framew ork agreemtn

w ith LeRengTang Pharma


3/24/10, FY09 earningsc

2/25/10, announced acquisitions of 2

drug distributors

3/24/10, announced acquisitions of 4

drug distributors

9/22/09, IPO


Source: Factset, Oppenheimer & Co. Inc. Research Note: These results cannot and should not be viewed as an indicator of future performance.


45

Investment Risks

Upside Risks

1. Major M&A activities could accelerate Sinopharm‟s growth in revenue. Accretive M&A

could accelerate profit growth.

2. Faster-than-expected network expansion.

3. JV partnerships with MNCs or domestic companies.

4. Favorable government policy releases could benefit Sinopharm.

5. Better cash collection period from hospital customers

6. Lower financing costs could help improve profitability.

Downside Risks

1. Failure or hurdles in integration of acquired entities

2. Further unfavorable regulatory changes, such as drug price cuts.

3. Failure to grow effectively through M&A activities.

4. Inflation causing higher labor and other costs, thereby hurting profitability.

5. Financing costs increase and A/R days‟ outstanding increase.

6. Heavy equity ownership by state-owned entities might cause difference in priorities

versus those of public shareholders.


46

Financial Analysis

Revenue

Sinopharm has almost quadrupled its revenue from RMB23.7B in 2006 to RMB 102.2B in

2011. Its distribution business grew at a 34% CAGR during 2006-2011 to RMB102B, both

organically and inorganically. We expect revenue to grow at a 2011-2017 CAGR of 21.5%

to RMB329.4B (Exhibit 71) with the distribution business remaining the major driver.

Exhibit 71. Revenue Growth

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Distribution Retail Other

RMB M 2006-2011 CAGR:Total Sales:34%Distribution: 34%

Retail: 30%Others: 30%

2006-2011 CAGR: 34%

2011-2017E CAGR: 21.5%


Margins

Despite pricing pressure due to industry regulatory changes, Sinopharm has been able to

maintain a stable gross margin at the 8.0-8.4% level (Exhibit 72). In 1H12, gross margin

improved 0.02% yoy to 8.19%, mainly attributable to more direct sales. Going forward, we

believe Sinopharm‟s efforts on channel and product mix shift can partially offset generally

lower mark-ups and drug prices imposed by regulations. We expect Sinopharm‟s gross

margin to gradually decline from 8.17% in 2011 to 8.01% in 2015 and 7.85% in 2017.


47

Exhibit 72. Sinopharm’s Margin Trends

8.4% 8.2% 8.0%8.4% 8.4% 8.2%

2.0%2.5%

3.1%3.6% 3.5% 3.6%

0.4%

1.2%1.5%

1.8% 1.7% 1.5%

2006 2007 2008 2009 2010 2011

Gross Margin Operating Margin Net Margin

Source: Company Reports, Oppenheimer & Co. Research

According to management, gross margin of the distribution business was ~7% in 2011,

comparable to Guangzhou Pharma‟s 6.7% distribution GM. and Shanghai Pharma‟s 6.9%

distribution gross margin, and above Jointown‟s 5.6% and Nanjing Pharma‟s 6.6%.

Exhibit 73. Gross Margins Comparison with Major China and Foreign Peers

0

2

4

6

8

10

12

FY2007 FY2008 FY2009 FY2010 FY2011

Gross Margin - Domestic Players

Sinopharm

Shanghai Pharma

Jointown

Nanjing Pharma

Guangzhou Pharma

Huadong Medicine

Zhejiang Int'l

%

0

2

4

6

8

10

12

FY2007 FY2008 FY2009 FY2010 FY2011

Gross Margin - MNC Players

Mckesson

Cardinal Health

AmerisourceBergen

Medipal

Suzuken

Toho

Alfresa

Sinopharm

%

Source: Company Reports, Factset, Oppenheimer & Co. Inc. Research Note: Shanghai Pharma and Guangzhou Pharma‟s figures are gross margins of distribution/retail segment.

The mark-up for China pharmaceutical distributors is ~7% on average although it varies

significantly across different products. Sinopharm‟s transportation, sales/marketing,

financing and overhead expenses account for 0.4%, 0.4%, 0.9% and 2.6% of revenue,

respectively (Exhibit 74). As a result, its pretax profit margin is 3.1%.


48

Exhibit 74. Estimated Cost Structure of Sinopharm 7%

3.1%

2.6%

0.9%

0.4%

0.4%

Gross profit Transportation Salespromotion

Financing Overhead Profit beforeTax

100%

107% 7%

Ex-Factory Price Sinopharm's Price Mark-Up


Sinopharm has improved its operating margin from only 2.0% in 2006 to 3.88% as of

1H12 (Exhibit 72), thanks to economies of scale, upgraded logistics systems and

improved operating efficiency. In the past few years, Sinopharm has maintained a very

healthy and stable operating margin at around 3-4% with a 10-basis-point increase per

year from 2010-2012. The G&A expense ratio has been declining (Exhibit 75), but the

distribution and selling expense ratio has increased slightly. Compared with domestic and

int‟l peers, Sinopharm‟s SG&A expenses ratio is at the industry average (Exhibit 76).

Exhibit 75. Sinopharm’s Operating Expenses Ratios

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2006 2007 2008 2009 2010 2011

Selling and distribution costs G&A expenses



49

Exhibit 76. SG&A Expenses Ratios Comparison

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2006 2007 2008 2009 2010 2011

Sinopharm

Shanghai Pharma

Jointown

McKesson

Cardinal Health

AmerisourceBergen

Medipal

Suzuken

Toho

Alfresa


Among Sinopharm‟s three business segments, the distribution segment‟s operating

margin is in the middle, although it improved from 1.81% in 2005 to 3.58% in 2009 but

fluctuated afterwards. The “Other “business, the production and sale of pharmaceutical

products, chemical reagents and laboratory supplies (3.6% of 2011 sales), has the highest

operating margin. Retail drugstore (3.0% of 2011 sales) suffers the most from policy

headwinds, reached an operating margin trough in 2009 and has recovered since then.

Even so, Sinopharm‟s operating margin ranks highest among domestic and foreign peers,

including its closest peer, Shanghai Pharma (Exhibits 78 and 79).However, we expect

Sinopharm‟s corporate operating margin to gradually decline over the long term, mainly

dragged down by lower gross margin, partially offset by improving operational efficiency.

Exhibit 77. Sinopharm’s Operating Margin by Segment

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2006 2007 2008 2009 2010 2011

Distribution Retail Other



50

Exhibit 78. Operating Margins Comparison with Major China and Foreign Peers

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY2007 FY2008 FY2009 FY2010 FY2011

Operating Margin - Domestic Players

Sinopharm

Shanghai Pharma

Jointown

Nanjing Pharma

GuangzhouPharma

%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY2007 FY2008 FY2009 FY2010 FY2011

Operating Margin - MNC Players

Mckesson

Cardinal Health

AmerisourceBergenMedipal

Suzuken

Toho

%

Source: Company Reports, Factset, Oppenheimer & Co. Inc. Research Note: Shanghai Pharma and Guangzhou Pharma‟s figures are operating margins of distribution/retail segment.

Exhibit 79. Segment Operating Margin Comparison: Sinopharm vs. Shanghai Pharma

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011

Operating Margin - Distribution Segment

Sinopharm Shanghai Pharma Guangzhou Pharma

%%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2008 2009 2010 2011

Operating Margin - Retail Segment

Sinopharm Shanghai Pharma

%%

Source: Company Reports, Factset, Oppenheimer & Co. Inc. Research

Sinopharm‟s net margin declined from 2009‟s 1.8% to 1.5% in 2011(Exhibits 72 and 80),

mainly due to higher financing costs. Shanghai Pharma had the highest net margin in

2011, followed by Zhejiang In‟tl, which recorded a one-time benefit. Sinopharm‟s net

margin was comparable to Jointown‟s. Nanjing Pharma experienced a net loss in 2011.

Exhibit 80. Net Margins Comparison with Major China and Foreign Peers

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY2007 FY2008 FY2009 FY2010 FY2011

Net Margin - Domestic Players

Sinopharm

Shanghai Pharma

Jointown

Nanjing Pharma

GuangzhouPharmaZhejiang Int'l

%

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY2007 FY2008 FY2009 FY2010 FY2011

Net Margin - MNC Players

Mckesson

Cardinal Health

AmerisourceBergenMedipal

Suzuken

Toho

%

Source: Company Reports, Factset, Oppenheimer & Co. Inc. Research Note: Shanghai Pharma‟s and Guangzhou Pharma‟s figures are OPCO estimates for distribution/retail segment.


51

Financing Costs

Sinopharm‟s net financing costs increased 201% year over year to RMB818M (Exhibit 81)

in 2011, due to higher bank loans and a tight credit market in China (Exhibits 82 and 83).

Sinopharm also uses bill discounting and A/R factoring. With two rounds of interest rate

cuts in June 2012, bank borrowing rates are trending down. In addition, Sinopharm and

CNPGC formed a 20:80 finance JV in June, which could offer interest rates 5% lower than

a commercial bank loan. The current scale of the JV is still small and cooperation limited.

Therefore, Sinopharm doesn‟t expect an immediate significant benefit. However, we

believe the JV should help the company and its subsidiaries to cut financing costs in the

long run.

As of June 2012, Sinopharm has RMB11.7B cash and RMB14.5B debt, making net debt

RMB2.7B (RMB1.13/share). The debt/equity ratio is 67% while the debt/asset ratio is 19%,

which means Sinopharm employs healthy leverage. The company plans to issue the first

tranche of a RMB8B corporate bond in late 2012, to pay back some bank loans borrowed

at higher interest rates previously. The bond issue was delayed from previously planned

3Q12, due to higher than expected rates. Therefore, we expect Sinopharm‟s financing

costs to remain high in 2H12 and 1H13.

Exhibit 81. Finance Cost Hike in 2011

90 133

242 231 272

818

12 18 24 26 76

115 102 151

266 257

349

933

2006 2007 2008 2009 2010 2011

Net Finance Costs Finance income Finance costs



52

Exhibit 82. Sinopharm’s Fund Raising History Time Fund Raising Type Details Use of Proceeds

9/23/2009 IPORaised HKD10.04B($1.3B) by issuing 627.5M H shares at

HKD16($2.1)/share; net proceeds HKD9.8B ($1.3B)

Expand distribution network, upgrade logistic facilities, upgrade

information systems and electronic commerce platform, expand

retail pharmacy operations, purchase imported pharma products

11/23/2010Propose to issue Corporate

Bond

Plan to issue not >RMB5B($645M) medium-term bonds,

maturity: not >5 years, interest rate: NAFund the operational activities, add liquidity, repay bank loans

5/4/2011 H Share PlacingRaised HKD3.4B ($437.4M) by issuing 138M H shares at

HKD25($3.2)/share

Expand pharmaceutical distribution and retail network and liquidity

replenishment

5/13/2011 Issue Corporate BondIssue First Tranche of Bonds announced on 11/23/2010 of

RMB2B ($308M), maturity: 3 years, interest rate: 4.89%Fund the operational activities, repay bank loans

8/23/2011 Issue Corporate BondIssue Second Tranche of Bonds announced on 11/23/2010 of

RMB3B($465M), maturity: 3 years, interest rate 5.53%.Fund the operational activities, repay bank loans

6/7/2012Propose to issue Corporate

Bond

Plan to issue up to RMB8B ($1.3B) corporate bond,

maturity: up to 10 years, interest rate: TBD

Repay bank loans, improve debt structure, supplement working

capital


Exhibit 83. Sinopharm’s Debt and Interest Rates Debt (RMB M) 2010 2011 1H12

Bank borrowings 91 222 261

Bond - 4,961 4,968

Sub-total 91 5,182 5,229

Secured bank borrowings 908 2,551

Unsecured bank borrowings 2,436 6,116

Sub-total 3,344 8,667 9,224

Total Debt 3,435 13,849 14,452

Weighted average effective 4.73%

Interest rate - Bond -

< 1 year 3,344 8,667 9,224

1-2 years 0 46 144

2-5 years 30 62 117

>5 years 61 114 0

Total 3,435 8,888 9,485

Non-Current Debt

Current Debt

Interest Rate

Bank Borrowings Breakdown

9,224

4.89% for 1st tranche RMB2B

5.53% for 2nd tranche RMB3B

5.51%


Increasing A/R Days Are a Challenge to the Industry

Distributors‟ cash cycle is longer in China than in the US and Japan. Accounts receivable

days‟ outstanding and inventory days are significantly higher than those of US peers,

although lower than Japanese peers‟ (Exhibit 85). This is mostly due to the strong

bargaining power that hospitals in China have because they are an important decision-

maker in the drug purchasing process. Even when these hospitals are well-funded, they


53

have often chosen to delay paying distributors or manufacturers. Long A/R days pose a

major challenge to distributors‟ working capital management. According to MOFCOM,

industry average A/R days was 131 days in 2011, with military hospitals at 176 days,

following by second-tier hospitals‟ 136 days and grassroots healthcare institutions‟ 135

days (Exhibit 84). Top-tier hospitals sales have an average as long as 125 days. A/R

days also vary depending on local economic situations, usually more than 3 months for

the coastal regions of eastern China, 5-6 months for the central area and 8-9 months for

western China.

Sinopharm‟s AR days are among the highest in industry, and they are still rising (Exhibits

85 and 87). The large revenue contribution from hospital sales is the major reason. In

addition, its acquisition of subsidiaries with higher A/R days contributed to the increase.

We don‟t expect this situation to improve significantly going forward, until hospitals‟

decision-making power is reduced. Sinopharm‟s inventory days of 38 days are below the

industry average of 46 days (Exhibit 85). The increase in inventory days over recent years

has stemmed from increased purchase of merchandise to support business expansion. Its

overall cash cycle of 26 days is below the domestic average of 44 days. We expect

Sinopharm can mitigate the negative impact of industrywide cash collection trends much

better than its peers. Sinopharm‟s working capital turnover declined to 4.5 in 2009 from

21.4 in 2008 as its cash balance increased significantly in 2009 from IPO fundraising

(Exhibit 86). The turnover improved to 6.4 in 2011 but we expect it to decline to 5.7 in

2012.

Jointown enjoys a much shorter A/R collection period than peers as it generates most

sales from lower-tier markets. Its A/R days were only 13 days in 2008 and 2009; however,

as it expanded its presence to tier 2 hospitals or above, its A/R days more than doubled in

2 years to 29 days in 2011 (Exhibit 85), but still drastically lower than peers‟. We expect

pharma distributors with more hospital customers will continue have longer A/R days.

Exhibit 84. Account Receivables Structure of China’s Pharma Wholesale Distributors, 2011

(RMB Billion) Hospital Types1st (Top) Tier

Hospitals

2nd Tier

Hospitals

Military

Hospitals

Grassroots

Healthcare

Insitutions

Total

72.3 30.8 5.4 11.2 119.7

Total 25.0 11.6 2.6 4.2 43.5

≤90 days 12.7 4.9 1.3 1.8 20.7

90-180 days 7.0 3.1 0.9 1.1 12.1

180-270 days 0.8 0.5 0.1 0.1 1.5

270-360 days 1.8 1.0 0.2 0.6 3.5

>1 year 2.8 2.1 0.1 0.5 5.6

125 136 176 135 131Average A/R days

A/R Structure

Sales to Public Healthcare Institutions (Ex.Tax)



54

Exhibit 85. Cash Cycle Comparison with Peers

Inventory Days A/R Days A/P Days Cash Cycle

Sinopharm 38 79 91 26

Shanghai Pharma 51 67 70 51

Jointown 54 29 21 54

Nanjing Pharma 31 79 53 31

Guangzhou Pharma 72 50 30 72

Huadong Medicine 43 74 63 43

Zhejiang Int'l 32 60 62 32

Average 46 63 56 44

Mckesson 30 28 47 30

Cardinal Health 27 21 41 27

AmerisourceBergen 25 17 42 25

Average 27 22 43 27

Medipal 21 89 116 21

Suzuken 29 89 132 29

Toho 22 91 123 22

Alfresa 21 97 130 21

Average 23 91 125 23

Domestic Peers

US Peers

Japanese Peers

Source: Company Reports, Factset, Oppenheimer & Co. Research

Exhibit 86. Sinopharm’s Working Capital and Turnover

0

5

10

15

20

25

30

35

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2006 2007 2008 2009 2010 2011

Working Capital Working Capital Turnover

RMB M

Source: Company Reports, Factset, Oppenheimer & Co. Estimates

Exhibit 87. Sinopharm’s Cash Cycle

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011

Inventory days Trade receivable days

Trade payable days Cash Cycle

Days

Source: Company Data, Oppenheimer & Co. Inc. Estimates


55

FCF

Sinopharm‟s operating cash flow has been growing at a 10% CAGR from 2006 to 2011,

significantly below revenue and net income CAGRs of 34% and 73.4% during the same

period, mainly due to intensive working-capital needs. We expect OCF to grow at a 33%

CAGR from RMB1.0B in 2011 to RMB5.6B in 2017, driven by net income growth and

better working-capital management (Exhibit 88). Sinopharm‟s free cash flow grew from

only RMB220M in 2006 to RMB344B in 2009 but then went into negative territory in 2010.

The inability to provide free cash flow has been caused by high capex spent for

acquisitions. Sinopharm plans to invest less than RMB3B per year in the next 2 years,

mainly for distributor center build-up, IT system upgrades, and acquisitions. We expect

FCF to turn positive in 2013 (Exhibit 89).

Exhibit 88. Sinopharm’s OCF

-

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

OCF

RMB M


Exhibit 89. Sinopharm’s FCF

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

FCF

RMB M



56

Management

Exhibit 90. Senior Management Team of Sinopharm Name Position Biography

Mr. Yulin Wei

President,

General Manager,

Executive Director

Mr. Wei joined the Company in 2003 and has been the President since Dec. 2009 and an Executive Director since Dec. 2008.

Mr. Wei has over 17 years of management experience in the pharmaceutical and healthcare industry. He's the Chairman of

China National Accord Medicines Corp. and Sinopharm Chemical Reagent Ltd. Mr. Wei obtained MBA from Cheung Kong

Graduate School of Business.

Mr. Jiang Xiuchang CFO

Mr. Jiang joined the Company in 2010 as CFO. During 2002-2010, he was CFO of China National Medicines Co. Previously he

was the deputy head of various departments at China Medicines Corp. He is a director of several subsidiaries of CNPGC and

Sinopharm. Mr. Jiang obtained a BS from Zhongnan University of Economics and Law and received postgraduate education at

University of Int'l Business and Economics.

Mr. Wanjun Ma

Vice President,

Secretary to the Board,

Joint Company

Secretary

Mr. Ma became VP in 2010 and has been the Secretary to the Board and one of the joint company secretaries since 2012.

He's the Director of various Sinopharm's subsidiaries. Previously, he served various senior management roles at China

National Pharmaceutical Tianjin Corp. Mr. Ma obtained BS in chemistry from Nankai University and EMBA degree from China

Europe International Business School.

Mr. Guangpu Li Vice President

Mr. Li joined the company in 2010 as VP. He was the GM of China National Group Corp. of Traditional & Herbal Medicine, and

the Vice Chairman of China Association of Traditional Chinese Medicine. He is the executive director of Sinopharm Logistics

Co. Mr. Li obtained BS in Chinese medicine from Guangzhou University of Chinese Medicine and a MBA degree from Jinan

University.

Ms. Linian Shen Vice President

Ms. Shen joined the Company in 2003 as VP. She was the Chairman of various Sinopharm's subsidiaries during 2010-2011.

Prior to that, she served as the Deputy GM of China National Pharmaceutical Group Shanghai. Ms. Shen obtained MBA

degrees from Maastricht School of Management and Shanghai Jiaotong University, and received postgraduate education at

Jiangsu Province Administration Institute.

Mr. Jun Lu Vice President

Mr. Lu joined the company in 2003 and became a VP in 2004. He's currently the Chairman of various Sinopharm's

subsidiaries. Previously Mr. Lu served as the GM of several Sinopharm's subsidiaries. Mr. Lu obtained MBA degrees from the

Maastricht School of Management and Shanghai Jiaotong University.

Mr. Anmin Wu Vice President

Mr. Wu joined the Company in 2003 as CFO and became VP in 2006. He has 18 years of experience in financial

management. Mr. Wu served as the Director of various Sinopharm's subsidiaries. He was the CFO of VV Food & Beverage

Co.(a domestic-listed company) during 1999-2003. He obtained BS in technical economy from Hunan University and MBA

degree from Shanghai Jiaotong University.

Mr. Jinming Shi Vice President

Mr. Shi joined the Company in 2003 and became VP in 2009. He's the Chairman/Director of China National Accord Medicines

Corp and Executive Director of two Sinopharm's subsidiaries. He also has served as Chairman of various Sinopharm's

subsidiaries. Mr. Shi obtained BS in Economics from Shanghai University of Finance and Economics and EMBA degree from

Sun Yat-sen University.

Mr. Yong Liu Vice President

Mr. Liu joined the Company in 2003 and became VP in 2009. He's the Chairman of various subsidiaries of Sinopharm and has

served as GM of various Sinopharm's subsidiaries previously. Mr. Liu obtained BS in business administration of

pharmaceutical enterprises from China Pharmaceutical University and MBA degree from Fudan University.

Mr. Zhiming Li Vice President

Mr. Li joined the Company in 2010 as VP. He's currently the Chairman of various subsidiaries of Sinopharm. Previously he

held various senior management positions at Xinjiang Pharmaceutical Group. Mr. Li graduated from economic management

discipline of the Urumuqi Branch of Xi‟an Military Academy.

Mr. Zhongxi Cai Vice President

Mr. Cai joined the Company as VP in 2010. Mr. Cai has served various senior management roles in China National

Pharmaceutical Group Shanghai Corp. and was a doctor during 1989-1991. Mr. Cai graduated from Second Military Medicine

University, and obtained Master and Doctorate degrees in business administration from Maastricht University of the

Netherlands and Southwestern University of the US respectively.

Mr. Shuangjun Xu Vice President

Mr. Xu became VP of the Company in 2011. He has been the Chairman/GM of Le Ren Tang Pharmaceutical Group Co. Ltd.

since 2005. Previously, he held several management positions at Shijiazhuang City Medicines and Herbs Co. and Hebei

Zhongrui Medicines Co. He obtained BS in medicine from Second Military Medical University and MBA from Macau University

of Science and Technology.



57

Financial Statements

Exhibit 91. Semi-annual Income Statement

1H 2H 1H 2H 1H 2H 1H 2H E 1H E 2H E 1H E 2H E

Revenue 23,294 29,374 32,356 36,878 48,000 54,225 66,562 64,613 81,371 79,928 98,891 96,257

Distribution 21,701 27,590 30,069 34,731 44,888 50,601 62,889 60,721 77,354 75,598 94,372 91,473

Retail 656 730 877 838 1,369 1,676 1,769 1,827 1,999 2,101 2,299 2,353

Other 937 1,053 1,409 1,308 1,743 1,948 1,904 2,065 2,018 2,230 2,220 2,431

COGS (21,436) (26,825) (28,965) (34,433) (44,080) (49,790) (61,109) (59,342) (74,750) (73,425) (90,893) (88,473)

Gross profit 1,858 2,549 3,390 2,445 3,920 4,435 5,453 5,270 6,621 6,504 7,997 7,784

Other income 20 35 25 53 59 110 107 133 109 109 112 112

Selling and distribution costs (521) (883) (796) (1,164) (1,317) (1,605) (1,771) (1,861) (2,059) (2,199) (2,483) (2,628)

G&A (455) (710) (607) (938) (839) (1,125) (1,210) (1,289) (1,471) (1,587) (1,772) (1,896)

Operating profit 902 990 2,012 397 1,822 1,814 2,580 2,253 3,200 2,827 3,854 3,372

Other gains/(losses) 104 76 33 139 69 133 (9) 100 20 20 20 20

Finance income 12 14 51 25 47 68 54 65 60 60 63 63

Finance costs (117) (140) (152) (197) (392) (542) (674) (539) (620) (620) (614) (614)

Share of results of associates 33 35 43 47 45 62 65 72 72 72 76 76

Pre-tax income 934 975 1,987 411 1,592 1,535 2,016 1,951 2,732 2,359 3,399 2,916

Tax (239) (227) (287) (280) (389) (336) (487) (469) (665) (572) (831) (710)

Net income 696 748 1,699 131 1,203 1,199 1,529 1,482 2,067 1,788 2,568 2,206

Minority interests (201) (276) (283) (339) (419) (423) (570) (553) (771) (666) (957) (823)

Net income to shareholders 494 473 1,417 (208) 784 776 959 930 1,296 1,121 1,611 1,384

Diluted EPS(RMB) 0.30 0.23 0.63 (0.09) 0.34 0.32 0.40 0.39 0.54 0.46 0.66 0.57

Diluted EPS(HKD) 0.34 0.26 0.74 (0.11) 0.42 0.40 0.50 0.48 0.67 0.58 0.82 0.71

Diluted shares outstanding(in millions) 1,637 2,032 2,265 2,265 2,309 2,309 2,403 2,403 2,413 2,413 2,423 2,423

% of Revenue

Distribution 93.2% 93.9% 92.9% 94.2% 93.5% 93.3% 94.5% 94.0% 95.1% 94.6% 95.4% 95.0%

Retail 2.8% 2.5% 2.7% 2.3% 2.9% 3.1% 2.7% 2.8% 2.5% 2.6% 2.3% 2.4%

Other 4.0% 3.6% 4.4% 3.5% 3.6% 3.6% 2.9% 3.2% 2.5% 2.8% 2.2% 2.5%

Gross margin 8.0% 8.7% 10.5% 6.6% 8.2% 8.2% 8.2% 8.2% 8.1% 8.1% 8.1% 8.1%

Selling and distribution costs 2.2% 3.0% 2.5% 3.2% 2.7% 3.0% 2.7% 2.9% 2.5% 2.8% 2.5% 2.7%

G&A expenses 2.0% 2.4% 1.9% 2.5% 1.7% 2.1% 1.8% 2.0% 1.8% 2.0% 1.8% 2.0%

Operating margin 3.9% 3.4% 6.2% 1.1% 3.8% 3.3% 3.9% 3.5% 3.9% 3.5% 3.9% 3.5%

Pre-tax margin 4.0% 3.3% 6.1% 1.1% 3.3% 2.8% 3.0% 3.0% 3.4% 3.0% 3.4% 3.0%

Effective Tax Rate 26.5% 24.1% 14.8% 77.0% 25.2% 22.8% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Net margin 3.0% 2.5% 5.3% 0.4% 2.5% 2.2% 2.3% 2.3% 2.5% 2.2% 2.6% 2.3%

Net margin (attributable to shareholders) 2.1% 1.6% 4.4% -0.6% 1.6% 1.4% 1.4% 1.4% 1.6% 1.4% 1.6% 1.4%

YoY Change

Revenue 38.9% 25.5% 48.4% 47.0% 38.7% 19.2% 22.2% 23.7% 21.5% 20.4%

Distribution 38.6% 25.9% 49.3% 45.7% 40.1% 20.0% 23.0% 24.5% 22.0% 21.0%

Retail 33.6% 14.8% 56.1% 99.9% 29.2% 9.0% 13.0% 15.0% 15.0% 12.0%

Other 50.5% 24.2% 23.7% 48.9% 9.3% 6.0% 6.0% 8.0% 10.0% 9.0%

COGS 35.1% 28.4% 52.2% 44.6% 38.6% 19.2% 22.3% 23.7% 21.6% 20.5%

Gross profit 82.4% -4.1% 15.6% 81.3% 39.1% 18.8% 21.4% 23.4% 20.8% 19.7%

Other income 23.3% 52.8% 139.2% 108.6% 81.5% 21.1% 2.0% -18.4% 3.0% 3.0%

Selling and distribution costs 52.7% 31.8% 65.4% 38.0% 34.4% 15.9% 16.3% 18.1% 20.6% 19.6%

G&A 33.2% 32.0% 38.4% 20.0% 44.1% 14.6% 21.6% 23.1% 20.5% 19.5%

Operating profit(EBIT) 123.2% -59.9% -9.5% 357.3% 41.6% 24.2% 24.1% 25.5% 20.4% 19.2%

Pre-tax income 112.7% -57.8% -19.8% 273.3% 26.6% 27.1% 35.5% 20.9% 24.4% 23.6%

Net income 144.3% -82.5% -29.2% 816.2% 27.1% 23.6% 35.2% 20.6% 24.2% 23.4%

Net income to shareholders 186.6% na -44.6% na 22.3% 19.8% 35.2% 20.6% 24.2% 23.4%

Diluted EPS(RMB) 107.2% na -45.7% na 17.5% 19.9% 34.6% 20.1% 23.7% 22.9%

2013E 2014E

Income Statement(RMB millions, except per share data)

2009 2012E2011A2010

Source: Company Data, Oppenheimer & Co. Estimates


58

Exhibit 92. Annual Income Statement

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Revenue 23,737 31,110 38,192 52,668 69,234 102,225 131,175 161,300 195,147 234,230 278,891 329,380

Distribution 21,927 28,997 35,745 49,292 64,801 95,489 123,610 152,952 185,845 223,954 267,638 317,166

Retail 823 836 952 1,386 1,715 3,045 3,596 4,100 4,651 5,231 5,831 6,441

Other 986 1,277 1,495 1,990 2,718 3,691 3,969 4,248 4,651 5,045 5,422 5,773

COGS (21,747) (28,560) (35,153) (48,261) (63,398) (93,870) (120,451) (148,175) (179,366) (215,475) (256,783) (303,534)

Gross profit 1,990 2,550 3,040 4,407 5,836 8,355 10,724 13,125 15,781 18,755 22,108 25,846

Other income 17 24 70 54 77 169 240 218 224 247 271 298

Selling and distribution costs (779) (945) (966) (1,404) (1,960) (2,923) (3,632) (4,258) (5,111) (6,076) (7,179) (8,413)

G&A (748) (840) (970) (1,166) (1,544) (1,965) (2,499) (3,057) (3,669) (4,345) (5,118) (5,978)

Operating profit 480 789 1,174 1,892 2,409 3,636 4,833 6,028 7,226 8,580 10,082 11,754

Other gains/(losses) (46) 124 93 180 171 202 91 40 40 41 42 42

Finance income 12 18 24 26 76 115 119 120 126 139 152 168

Finance costs (102) (151) (266) (257) (349) (933) (1,214) (1,240) (1,228) (1,350) (1,485) (1,634)

Share of results of associates 19 40 54 68 90 107 138 144 151 166 183 201

Pre-tax income 363 820 1,079 1,909 2,398 3,128 3,967 5,092 6,315 7,576 8,974 10,531

Tax (182) (284) (259) (465) (568) (725) (956) (1,237) (1,541) (1,852) (2,198) (2,582)

Net income 181 536 820 1,444 1,830 2,403 3,011 3,855 4,774 5,723 6,776 7,949

Minority interests (81) (155) (232) (477) (622) (842) (1,123) (1,437) (1,780) (2,134) (2,526) (2,963)

Net income to shareholders 100 381 588 967 1,209 1,561 1,889 2,418 2,994 3,590 4,250 4,985

Diluted EPS(RMB) 0.06 0.23 0.36 0.53 0.53 0.66 0.79 1.00 1.24 1.48 1.75 2.06

Diluted EPS(HKD) 0.06 0.25 0.41 0.61 0.63 0.82 0.97 1.24 1.53 1.84 2.18 2.55

Diluted shares outstanding(in millions) 1,637 1,637 1,637 1,809 2,265 2,356 2,403 2,413 2,423 2,423 2,423 2,423

% of Revenue

Distribution 92.4% 93.2% 93.6% 93.6% 93.6% 93.4% 94.2% 94.8% 95.2% 95.6% 96.0% 96.3%

Retail 3.5% 2.7% 2.5% 2.6% 2.5% 3.0% 2.7% 2.5% 2.4% 2.2% 2.1% 2.0%

Other 4.2% 4.1% 3.9% 3.8% 3.9% 3.6% 3.0% 2.6% 2.4% 2.2% 1.9% 1.8%

Gross margin 8.4% 8.2% 8.0% 8.4% 8.4% 8.2% 8.2% 8.1% 8.1% 8.0% 7.9% 7.8%

Selling and distribution costs 3.3% 3.0% 2.5% 2.7% 2.8% 2.9% 2.8% 2.6% 2.6% 2.6% 2.6% 2.6%

G&A expenses 3.2% 2.7% 2.5% 2.2% 2.2% 1.9% 1.9% 1.9% 1.9% 1.9% 1.8% 1.8%

Operating margin 2.0% 2.5% 3.1% 3.6% 3.5% 3.6% 3.7% 3.7% 3.7% 3.7% 3.6% 3.6%

Pre-tax margin 1.5% 2.6% 2.8% 3.6% 3.5% 3.1% 3.0% 3.2% 3.2% 3.2% 3.2% 3.2%

Effective Tax Rate 53.0% 36.4% 25.3% 25.3% 24.6% 24.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Net margin 0.8% 1.7% 2.1% 2.7% 2.6% 2.4% 2.3% 2.4% 2.4% 2.4% 2.4% 2.4%

Net margin (attributable to shareholders) 0.4% 1.2% 1.5% 1.8% 1.7% 1.5% 1.4% 1.5% 1.5% 1.5% 1.5% 1.5%

YoY Change

Revenue 31.1% 22.8% 37.9% 31.5% 47.7% 28.3% 23.0% 21.0% 20.0% 19.1% 18.1%

Distribution 32.2% 23.3% 37.9% 31.5% 47.4% 29.4% 23.7% 21.5% 20.5% 19.5% 18.5%

Retail 1.5% 14.0% 45.6% 23.7% 77.5% 18.1% 14.0% 13.5% 12.5% 11.5% 10.5%

Other 29.5% 17.0% 33.1% 36.6% 35.8% 18.1% 7.0% 9.5% 8.5% 7.5% 6.5%

COGS 31.3% 23.1% 37.3% 31.4% 48.1% 28.3% 23.0% 21.1% 20.1% 19.2% 18.2%

Gross profit 28.2% 19.2% 45.0% 32.4% 43.2% 28.4% 22.4% 20.2% 18.8% 17.9% 16.9%

Other income 41.2% 191.7% -22.2% 42.0% 118.4% 42.1% -9.3% 3.0% 10.0% 10.0% 10.0%

Selling and distribution costs 21.3% 2.2% 45.4% 39.6% 49.1% 24.3% 17.2% 20.0% 18.9% 18.1% 17.2%

G&A 12.3% 15.5% 20.2% 32.5% 27.2% 27.2% 22.4% 20.0% 18.4% 17.8% 16.8%

Operating profit(EBIT) 64.6% 48.7% 61.2% 27.3% 51.0% 32.9% 24.7% 19.9% 18.7% 17.5% 16.6%

Pre-tax income 126.3% 31.5% 77.0% 25.6% 30.4% 26.8% 28.3% 24.0% 20.0% 18.5% 17.4%

Net income 197.1% 52.9% 76.2% 26.7% 31.3% 25.3% 28.0% 23.9% 19.9% 18.4% 17.3%

Net income to shareholders 283.1% 54.2% 64.5% 25.0% 29.1% 21.0% 28.0% 23.9% 19.9% 18.4% 17.3%

Diluted EPS(RMB) 283.1% 54.2% 48.9% -0.2% 24.1% 18.7% 27.5% 23.3% 19.9% 18.4% 17.3%

Income Statement(RMB millions, except per share data)



59

Exhibit 93. Balance Sheet

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Assets:

Land use right 398 385 416 584 665 933 1,048 1,163 1,278 1,393 1,508 1,623

Investment properties 78 82 71 164 150 154 154 154 154 154 154 154

PP&E 1,088 1,193 1,263 1,794 3,331 4,431 5,073 6,052 7,032 8,011 8,991 9,971

Intangible assets 216 217 204 423 1,592 4,642 4,676 4,710 4,743 4,777 4,810 4,844

Investment in associates 217 255 307 314 486 671 671 671 671 671 671 671

Available for sale f inancials 36 57 53 56 56 58 58 58 58 58 58 58

Deferred income tax assets 148 139 143 193 234 284 360 462 573 688 815 956

Other non-current assets 13 5 5 12 638 222 222 222 222 222 222 222

Total non-current assets 2,193 2,332 2,462 3,540 7,151 11,395 12,262 13,492 14,731 15,974 17,229 18,499

Inventories 2,043 2,634 3,155 5,301 7,530 12,214 14,441 18,349 21,344 26,340 30,485 36,669

Trade receivables 4,872 6,110 7,914 11,980 17,752 26,592 31,748 39,990 46,801 57,371 66,664 79,808

Prepayments and other receivables 519 606 597 1,022 1,373 3,136 4,025 4,949 5,988 7,187 8,557 10,106

Available-for-sale f inancial assets 0 0 0 1 1 1 1 1 1 1 1 1

Short-term loan receivable 0 0 0 2,906 0 0 0 0 0 0 0 0

Pledged bank deposits 125 649 286 330 732 1,199 1,199 1,199 1,199 1,199 1,199 1,199

Cash and cash equivalents 1,839 1,956 1,712 7,568 7,475 13,091 9,321 12,602 9,172 9,243 10,534 12,513

Total current assets 9,398 11,955 13,664 29,107 34,863 56,233 60,735 77,089 84,504 101,341 117,440 140,296

Total assets 11,590 14,287 16,125 32,647 42,014 67,628 72,996 90,582 99,236 117,315 134,669 158,795

Borrow ings 178 158 130 51 91 5,182 12,229 12,229 15,229 16,229 18,229 20,229

Deferred income tax liabilities 70 67 68 110 266 518 656 843 1,045 1,254 1,485 1,743

Post-employment benefit obligation 242 250 303 403 369 435 435 435 435 435 435 435

Other non-current liabilities 241 247 330 642 816 813 813 813 813 813 813 813

Non-current liabilities 730 722 831 1,206 1,541 6,948 14,133 14,320 17,522 18,731 20,962 23,220

Trade payables 5,630 7,210 9,053 13,703 19,831 27,054 31,458 40,521 46,609 58,039 66,601 80,681

Accruals and other payables 872 997 864 1,886 2,333 4,270 5,479 6,737 8,151 9,783 11,648 13,757

Dividents payable 0 464 364 35 14 12 15 19 23 28 33 39

Current income tax liabilities 63 115 96 126 233 289 367 471 584 700 829 973

Borrow ings 1,704 1,522 1,504 1,668 3,344 8,667 557 5,557 557 557 557 557

Loans from parent company 0 640 0 0 0 0 0 0 0 0 0 0

Current liabilities 8,270 10,947 11,881 17,418 25,754 40,292 37,874 53,304 55,923 69,106 79,668 96,007

Total liabilities 9,000 11,669 12,712 18,624 27,295 47,240 52,008 67,624 73,446 87,837 100,630 119,226

Total equity 2,590 2,618 3,413 14,023 14,719 20,388 20,989 22,958 25,790 29,479 34,039 39,569

Total equity and liabilities 11,590 14,287 16,125 32,647 42,014 67,628 72,996 90,582 99,236 117,315 134,669 158,795

Balance Sheet(RMB millions)



60

Exhibit 94. Cash Flow Statement

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Pre-tax income 364 820 1,079 1,909 2,398 3,128 3,967 5,092 6,315 7,576 8,974 10,531

Adjustment:

Share of profit from associates (19) (40) (54) (68) (90) (107) (138) (144) (151) (166) (183) (201)

Asset impairment 52 51 1 53 39 65 65 65 65 65 65 65

Depreciation 88 96 126 187 231 323 474 568 678 788 898 1,007

Amortisation 39 39 48 62 70 137 137 137 137 137 137 137

Gain on disposal of land use right and plant and

equipment (5) (15) (4) 4 24 (57) - - - - - -

Gain on disposal of partial interests in subsidiaries - (91) (76) (137) - - - - - - - -

Write-back of certain liabilities - - - (53) (48) (33) - - - - - -

Gain on disposal of available-for-sale f inancial assets - - - - (38) (4) - - - - - -

Loss on transfer for no consideration of certain

interests in tw o subsidiaries 82 - - - - - - - - - -

Dividend income on available-for-sale f inancial assets (1) (0) (0) (0) - - - - - - - -

Finance income (12) (18) (24) (26) - - - - - - - -

Finance cost 96 139 241 225 312 847 1,133 1,160 1,140 1,255 1,380 1,518

Gain on fair value re-measurement of existing stake in

connection w ith acquisitions - - - - (29) (0) - - - - - -

Gain on disposal of subsidiaries - (5) 11 - (4) (124) - - - - - -

Gain on fair value re-measurement of retained interest

in connection w ith disposal of controlling interest in a

subsidiary

- - - - (42) - - - - - - -

Subtotal 321 155 269 247 425 1,047 1,671 1,785 1,869 2,078 2,296 2,526

Changes in working capital:

Inventories (112) (586) (453) (940) (1,562) (3,014) (2,227) (3,908) (2,995) (4,996) (4,145) (6,184)

Trade receivables (1,044) (1,280) (1,747) (2,088) (3,484) (5,550) (5,156) (8,242) (6,812) (10,570) (9,292) (13,145)

Prepayments and other receivables (34) (64) (52) (103) (373) (1,703) (888) (924) (1,039) (1,199) (1,370) (1,549)

Trade payables 1,155 1,594 1,918 2,428 3,917 4,767 4,404 9,064 6,088 11,429 8,562 14,080

Accruals and other payables 137 32 (58) 96 454 3,174 1,209 1,258 1,414 1,632 1,865 2,109

Net change in working capital 103 (304) (393) (607) (1,048) (2,327) (2,659) (2,752) (3,343) (3,704) (4,380) (4,689)

Cash from operation 788 672 955 1,549 1,775 1,847 2,980 4,125 4,841 5,949 6,890 8,368

Income tax paid (149) (231) (301) (432) (507) (828) (1,038) (1,328) (1,645) (1,972) (2,335) (2,739)

Operating cash flow, Net of tax 638 441 654 1,118 1,268 1,019 1,942 2,797 3,196 3,977 4,555 5,629

Proceeds from disposal of land use right 7 23 7 - 0 0 - - - - - -

Proceeds from disposal of PP&E 40 81 36 50 66 148 - - - - - -

Proceeds from disposal of available fo sale f inancials 5 3 0 7 47 4 - - - - - -

Proceeds from disposal of associates - - - 35 2 - - - - - - -

Proceeds from disposal of equities in associates 1 2 26 - - - - - - - - -

Proceeds from disposal of investment properties - - - - 0 12 - - - - - -

Proceeds from disposal of equities in subsidiaries - 104 83 156 - - - - - - - -

Proceeds from disposal of subsidiaries, net of cash - (49) 6 - (67) (0) - - - - - -

Dividends received from associates 15 30 25 43 49 85 - - - - - -

Dividends from available for sale f inancials 1 0 0 0 - 3 - - - - - -

Payment/Disposal of loan receivable 2,585 - - - - - - -

Interest received 11 13 24 26 - - - - - - - -

Payment for acquisition - - - - (296) (191) - - - - - -

Purchase of land use right (68) (22) (29) (54) (87) (103) (115) (115) (115) (115) (115) (115)

Purchase of PP&E (180) (236) (269) (534) (1,429) (997) (1,116) (1,116) (1,116) (1,116) (1,116) (1,116)

Purchase of intangibles (11) (2) (7) (10) (15) (30) (34) (34) (34) (34) (34) (34)

Purchase of investment properties - - - - - (2) - - - - - -

Acquisition of available-for-sale f inancial assets (1) - - - - (16) - - - - - -

Disposal/acquisition of short-term loan receivable - - - (2,906) - - - - - - - -

Short term investment - - - - - - - - - - - -

Acquisition of subsidiaries, net of cash acquired (19) 55 (25) (79) (2,321) (1,386) (1,372) (1,372) (1,372) (1,372) (1,372) (1,372)

Consideration paid for prior year acquisitions - - - - - (145) - - - - - -

Increased equity investment in subsidairies (42) (16) (11) - - - - - - - - -

Acquisition of associates (29) - (15) (46) - (190) - - - - - -

Acquisition of non-controlling interests of subsidiaries - - - - (433) (24) - - - - - -

Cash from investing activities (271) (14) (148) (3,312) (1,897) (2,831) (2,637) (2,637) (2,637) (2,637) (2,637) (2,637)

Increase in restricted cash (24) (525) 363 (35) (402) (466) - - - - - -

Banking borrow ings 1,774 1,436 1,416 5,738 4,820 14,353 3,000 3,000 3,000 3,000 3,000 3,000

Borrow ings from parent company - 640 1,680 1,850 - - - - - - - -

Repayment of borrow ings (1,383) (1,691) (1,497) (6,021) (3,658) (13,167) (8,667) (2,000) (5,000) (2,000) (1,000) (1,000)

Repayment of borrow ings from parent company (350) - (2,320) (1,850) - - - - - - - -

Retirement of bonds - - - - - - - - - - - -

Issue of bond, net of expense - - - - - 4,954 4,000 4,000 - - - -

Issue of shares, net of expense - - - 8,845 - 2,835 - - - - - -

Payment of share issuance and listing expenses - - - (317) (26) - - - - - - -

Proceeds from equity holders 310 - - - - - - - - - - -

Capital injection from minority holders of subsidiaries 16 7 10 20 143 435 - - - - - -

Dividends to equity holders (101) - (128) (1,074) (23) (363) (439) (562) (697) (835) (989) (1,160)

Dividends to non-controlling interest of subsidiaries (26) (38) (31) (133) (102) (207) (276) (353) (437) (524) (621) (728)

Interest paid (96) (139) (244) (228) (314) (750) (692) (963) (855) (909) (1,017) (1,126)

Distribution of subsidiary acquired under common

control prior to acquisition - - - (7) (40) (45) - - - - - -

SinoPharm's investment in acquired subsidiaries under

common control before acquisition - - - 625 - - - - - - - -

Sw ine f lu special reserve from government - - - 286 138 (151) - - - - - -

Cash from financing activities 120 (310) (749) 7,699 536 7,428 (3,075) 3,121 (3,989) (1,268) (627) (1,013)

Net increase in cash and cash equivalents 487 117 (243) 5,504 (93) 5,616 (3,770) 3,281 (3,430) 72 1,291 1,979

Cash and cash equivalents at beginning of year 1,351 1,839 1,956 2,064 7,568 7,475 13,091 9,321 12,602 9,172 9,243 10,534

Cash and cash equivalents at end of year 1,839 1,956 1,712 7,568 7,475 13,091 9,321 12,602 9,172 9,243 10,534 12,513

Cash Flow Statement(RMB millions)



61

Stock prices of other companies mentioned in this report (as of 11/13/2012):

AstraZeneca (AZN-NYSE, $45.46, Not Covered)

Bayer AG (BAYN-DE, EUR66.66, Not Covered)

Celesio (CLS1-FRA, EUR14.86, Not Covered)

Eli Lily (LLY-NYSE, $47.14, Not Covered)

GlaxoSmithKline (GSK-NYSE, $42.81, Not Covered)

Jiangsu Hengrui (600276-CN, RMB28.88, Not Covered)

Merck (MRK-NYSE, $43.68, Not Covered)

Novo Nordisk (NVO-NYSE, $155.56, Not Covered)

Pfizer (PFE-NYSE, $24.05, Not Covered)

Roche (ROG-VX, CHF180.2, Not Covered)

E


62

Investment ThesisSinopharm, as the largest pharmaceutical distributor in China, continues to gain market share as the industry consolidates. China'spharmaceutical wholesalers are facing declining margins owing to tightening regulations; however, Sinopharm has been able to maintainstable margins by adjusting its distribution channels and product portfolio. We forecast Sinopharm to grow revenue/net income at21.5%/21.4% CAGRs during 2011-2017. However, we view the current valuation as fair and will wait until valuation becomes more attractivebefore becoming more enthusiastic on the shares.

Important Disclosures and CertificationsAnalyst Certification - The author certifies that this research report accurately states his/her personal views about thesubject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no partof his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views containedin this research report.Potential Conflicts of Interest:Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firmincluding the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensationbased upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any researchanalyst and any member of his or her household from executing trades in the securities of a company that such researchanalyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an officer,director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in coveredcompanies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long positionof less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options,futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoingarrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co.Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories,please write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department,Business Manager.

Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:


63

Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.

Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.

Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.

Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflictof interest.

Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:

Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/orthe ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.

Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to aperceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higherrated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressivetrading accounts might decide to liquidate their positions to employ the funds elsewhere.

Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceivedin the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.

Distribution of Ratings/IB Services Firmwide

IB Serv/Past 12 Mos.

Rating Count Percent Count Percent

OUTPERFORM [O] 312 54.07 141 45.19

PERFORM [P] 260 45.06 86 33.08

UNDERPERFORM [U] 5 0.87 2 40.00

Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do notcorrelate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assignedbuy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.

Company Specific Disclosures1066.HK, 1928.HK, 1128.HK: This research report is intended for use only by institutions to which the subject security orsecurities may be sold pursuant to an exemption from state securities registration in the state in which the institution is located.

Oppenheimer & Co. Inc. makes a market in the securities of MCK.

Additional Information Available

Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: EquityResearch Department, Business Manager.

Other DisclosuresThis report is issued and approved for distribution by Oppenheimer & Co. Inc. Oppenheimer & Co. Inc transacts Business on all PrincipalExchanges and Member SIPC. This report is provided, for informational purposes only, to institutional and retail investor clients ofOppenheimer & Co. Inc. and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdictionwhere such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors.This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer& Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solelyon investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits andrisks of investments. The analyst writing the report is not a person or company with actual, implied or apparent authority to act on behalf


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of any issuer mentioned in the report. Before making an investment decision with respect to any security recommended in this report,the recipient should consider whether such recommendation is appropriate given the recipient's particular investment needs, objectivesand financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourageinvestors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtueof their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied,is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report andthe income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investmentsin such securities, including the loss of investment principal. Oppenheimer & Co. Inc. accepts no liability for any loss arising from theuse of information contained in this report, except to the extent that liability may arise under specific statutes or regulations applicable toOppenheimer & Co. Inc. All information, opinions and statistical data contained in this report were obtained or derived from public sourcesbelieved to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate orcomplete (with the exception of information contained in the Important Disclosures section of this report provided by Oppenheimer & Co.Inc. or individual research analysts), and they should not be relied upon as such. All estimates, opinions and recommendations expressedherein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal,accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation shouldnot be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications,clients should consult with their own independent tax adviser. This report may provide addresses of, or contain hyperlinks to, Internet websites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contentsthereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked thirdparty web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or followsuch hyperlinks do so at their own risk.

This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright© Oppenheimer & Co. Inc. 2012.


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Sinopharm Group Co Ltd PERFORM - jrj.com.cnpg.jrj.com.cn/acc/Res/HK_RES/STOCK/2012/11/15/a8b7... · 15/11/2012 · market share from 7.1% in 2006 to 10.8% in 2011 (Exhibit 3). Exhibit