Challenges Brought About by Unfavorable Industry Environment on Operations, Downgrade to Neutral

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1 股 票 研 究 公 司 报 告 证 券 研 究 报 告 医 药 行 业 Equity Research Health Care Sector Equity Research Report : Sinopharm (01099 HK) Kay Mai 麦梓琪 公司报告 : 国药控股 (01099 HK) maiziqi@gtjas.com Challenges Brought About by Unfavorable Industry Environment on Operations, Downgrade to Neutral 不利的行业环境为业务带来挑战, 下调评级至 中性 Sinopharm delivered single-digit YoY revenue growth (8.49%) in 1Q17, below our expectation, due to 1) absent contribution to top-line growth from pharmaceutical manufacturing assets, which changed in 1Q17 from subsidiaries to associates and 2) the slowdown of the pharmaceutical distribution industry. Better-than-expected bottom-line YoY growth of 22.50% in 1Q17 as a result of 1) the decrease in overall expenses as well as the effective tax rate and 2) the acquisition of additional interests in certain subsidiaries. Increasing financial burden induced by 1) delayed payment from hospitals and 2) expansion of the financial leasing business. Net gearing ratio increased in 1Q17 by ppts YoY to 38.92% with surging outflow of OCF. Downgrade our investment rating to Neutral and lower TP to HK$36.00 with consideration to short-term challenges brought by the slowdown of the pharmaceutical distribution industry, the uncertainty in government policies and the impact of the unfavorable industry environment on operations. New TP represents 17.2x FY17F PER and 15.5x FY18F PER. In view of the concerns about Sinopharm's liquidity and growth potential in the short run, we revise down target FY17F PER to 17.2x from 19.0x. Current price level is equivalent to 16.3x FY17F PER and 14.7x FY18F PER. 国药控股 2017 财年第一季度收入录得单位数同比增长 (8.49%), 低于我们的预期, 是由于 1) 医药工业资产于 2017 财年第一季度从子公司变成联营企业不再影响收入增长以及 2) 医药分销行业增速的放缓所致 2017 财年第一季度利润同比增长 22.50% 超出预期, 是由于 1) 整体费用率和有效税率的下降与 2) 收购部分子公司额外股权所致 财务负担持续增长, 是由于 1) 医院回款延迟以及 2) 融资租赁业务的扩张所致 2017 财年第一季度净负债率同比上升 个百分点至 38.92%, 同时经营性现金流流出激增 下调投资评级至 中性 并稍下调目标价至港币 36.00, 考虑到医药分销行业增速放缓, 政策的不稳定性以及不利的行业环境对业务运作的影响所带来的短期挑战 新的目标价对应 17.2 倍 2017 财年的市盈率以及 15.5 倍 2018 财年的市盈率 考虑到对于国药控股短期流动性以及增速的忧虑, 我们把 2017 财年目标市盈率从 19.0 倍下调至 17.2 倍 目前公司价格对应 16.3 倍 2017 财年市盈率以及 14.7 倍 2018 财年市盈率 Rating: Neutral Downgraded 评级 : 中性 ( 下调 ) 6-18m TP 目标价 : HK$36.00 Revised from 原目标价 : HK$39.60 Share price 股价 : Stock performance 股价表现 (5.0) % of return HK$ (10.0) May/16 Aug/16 Nov/16 Feb/17 May/17 HSI Change in Share Price 股价变动 Abs. % 绝对变动 % Rel. % to HS index 相对恒指变动 % Avg. share price(hk$) 平均股价 ( 港元 ) 1 M 1 个月 Sinopharm-H 3 M 3 个月 1 Y 1 年 (4.2) (7.8) 3.8 (6.8) (13.6) (19.7) Source: Bloomberg, Guotai Junan International. 国药控股 Sinopharm (01099 HK) Year End 年结 Turnover 收入 Net Profit 股东净利 EPS 每股净利 EPS 每股净利变动 PER 市盈率 BPS 每股净资产 PBR 市净率 DPS 每股股息 Yield 股息率 ROE 净资产收益率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) 2015A 228,673 3, A 258,388 4, F 281,694 5, F 309,878 5, F 340,535 6, Shares in issue (m) 总股数 (m) 2,767.1 Major shareholder 大股东 CNPGC 29.06% Market cap. (HK$ m) 市值 (HK$ m) 94,496.3 Free float (%) 自由流通比率 (%) month average vol. 3 个月平均成交股数 ( 000) 4,854.8 FY17 Net gearing (%) FY17 净负债 / 股东资金 (%) Weeks high/low (HK$) 52 周高 / 低 / FY17 Est. NAV (HK$) FY17 每股估值 ( 港元 ) Source: the Company, Guotai Junan International. See the last page for disclaimer Page 1 of 8

2 1Q17 Results Review Top-line YoY growth sank to record lows in 1Q17, weaker than our expectation. Revenue grew by only 8.49% YoY to RMB68,425 million in 1Q17, compared with 13.47% in 1Q16. We attribute such disappointing results to 1) the Company s disposal of pharmaceutical manufacturing subsidiaries and 2) the slowdown of pharmaceutical distribution business which was affected by a series of government policies about the healthcare reform. Adjusted YoY revenue growth in 1Q17 is estimated to be approximately 10% if the impact from the disposal of pharmaceutical manufacturing assets is excluded. China National Pharmaceutical Group Corporation ( CNPGC, Sinopharm s parent company) has been restructuring assets since 2016 in order to eliminate competition among its subsidiaries and to achieve better efficiency. As a subsidiary of CNPGC, Sinopharm and its subsidiary Sinopharm Accord ( CH) has disposed of equity interests in certain pharmaceutical manufacturing subsidiaries to Shyndec Pharma ( CH), another subsidiary of CNPGC with major business in pharmaceutical manufacturing, in exchange for equity interests in Shyndec Pharma. As of 1Q17, such pharmaceutical manufacturing companies have been regarded as associates rather than subsidiaries of Sinopharm/Sinopharm Accord, and no longer contributes to Sinopharm s revenue. Therefore, we adjust the YoY revenue growth of Sinopharm in 1Q17 by excluding the estimated 1Q16 revenue generated by the above-mentioned pharmaceutical manufacturing companies from the revenue generated in 1Q16 by the Company and calculating adjusted YoY revenue growth of approximately 9.4% in 1Q17. Table-1: Details of the Disposal of Pharmaceutical Manufacturing Assets related to Sinopharm Target Sinopharm A-Think Sanyi Pharmaceutical Zhijun Pharmaceutical Pingshan Pharmaceutical Zhijun Pharmaceutical Trade Company Seller Sinopharm Sinopharm Accord Relationship with Sinopharm before Disposal Direct subsidiary Direct subsidiary Indirect subsidiary Indirect subsidiary Indirect subsidiary Relationship with Sinopharm after Disposal Sinopharm Sinopharm Sinopharm Accord Sinopharm Accord Sinopharm Accord Interest Owned by Seller before the Disposal Interest Disposed Interest Owned by Seller after the Disposal Reported Revenue of Target in 1-4M16 (RMB mn) Estimated Revenue of Target in 1Q16 (RMB mn) 75.0% 26.0% 49.0% % 51.0% 49.0% % 51.0% 49.0% % 51.0% 49.0% % 51.0% 49.0% Buyer Shyndec Pharma Total Source: the Company, Shyndec Pharma, Guotai Junan International. Notes; 1. Reported revenue of targets in 1-4M16 were sourced from the assets acquisition and shares issuance plan of Shyndec Pharma released in September As associates, such pharmaceutical manufacturing assets will contribute only to Sinopharm s bottom-line growth through the accounting item of Share of Profits and Losses of Associates in FY17. Revenue of Sinopharm is expected to outpace the industry average in FY17F. Management indicated that revenue growth of the industry was estimated to be 7%-8% in 1Q17, which is at the low end of our forecasted range in our last report. Management also maintained growth guidance of +3 ppts above the industry for FY17F. We think that such a growth target for Sinopharm is achievable, considering that 1) the plan to expand its distribution network in FY17F through penetration into more than 40 uncovered prefecture-level cities was only one third complete in 1Q17; 2) proactive expansion of its pharmaceutical retail business is expected to lead to higher revenue growth of the Company in 2Q17-4Q17; 3) Sinopharm continues to benefit from further industry consolidation triggered by the gradual implementation of multiple policies related to healthcare reform, especially the two-invoice system which provides Sinopharm with market share gains; and 4) innovative businesses such as financial leasing and agent services, which offers long-term growth potential. Better-than-expected bottom-line growth in 1Q17. Shareholder's profit was up 22.50% YoY to RMB1,252 million, and EPS surged by 21.62% YoY to RMB The better-than-expected bottom-line growth mainly resulted from 1) the decrease in overall expenses as well as the effective tax rate and 2) the acquisition of minority interests in certain subsidiaries. Stable operating margin in 1Q17. A decrease in non-financial expense ratios partially offset the negative impact brought by the decrease in gross margin to stabilize the operating margin. Gross margin decreased by 0.31 ppt YoY to 7.73% in 1Q17, mainly resulting from drug price cuts and the disposal of the Company's pharmaceutical manufacturing business. Overall expense ratio of Sinopharm decreased by 0.38 ppt YoY to 4.64% in 1Q17 by taking advantage of the low interest rate of borrowings and the decrease in the G&A expenses induced by economies of scale. Going forward, we think that the overall pharmaceutical distribution industry will continue to suffer from margin erosion pressure triggered by drug price cuts. However, See the last page for disclaimer Page 2 of 8

3 we believe that Sinopharm can stabilize its operating margin at the current level of about 4.0%, given 1) the sophistication in cost control, 2) the room available for further efficiency improvement of the retail pharmacy business, and 3) the expansion of innovative business with relatively high operating margin. Increasing financial burden. A surge in outflow of cash generated from operating activities to RMB10,909 million was spotted in 1Q17, compared to RMB4,534 million in 1Q16, which management attributed to the delay in payment collection from hospitals induced by the implementation of the zero mark-up policy and the expansion of Sinopharm's financial leasing business. The disposal of Sinopharm s pharmaceutical manufacturing business also had a slightly negative impact on the OCF. Net gearing ratio surged to 38.92% (vs. 9.14% in FY16) and DSO remained at a similar level (102.1 in 1Q17 vs in 1Q16). Management also expects increasing interest rates going forward, which will also result in further pressure on the Company's financial situation. We expect that further AR factoring or debt raising will be implemented within the year to relieve the financial burden of the Company. Table-2: Sinopharm s 1Q17 Results Review under the PRC GAAP RMB million 1Q16 1Q17 YoY Revenue 63,070 68, % Gross profit 5,072 5, % Profit before tax 2,040 2, % Taxation (477) (505) 5.97% Profit after tax 1,563 1, % Shareholder's profit 1,022 1, % EPS % Gross margin 8.04% 7.73% (0.31) ppt PAT margin 2.48% 2.65% 0.17 ppt Net profit margin 1.62% 1.83% 0.21 ppt Net gearing ratio 8.76% 38.92% ppts Cash conversion cycle (days) Days sales of inventory (days) Days sales outstanding (days) (0.9) -Days payable outstanding (days) (0.9) Source: the Company, Guotai Junan International. Industry Update Short-term industry growth will face challenges from the implementation of certain policies and the acceleration of the provincial tender process. As we all know, the Chinese government has introduced a series of policies to reduce spending on drugs by patients, most of which are required by the Chinese government to be implemented nationwide in 2017 and With the acceleration of tender processing, the policy mix related to healthcare reform will ratchet up pressure on prices and especially the sales volume of most drugs, leading to growth slowdown of the pharmaceutical distribution industry. Table-3: Policies of Healthcare Reform Having Significant Impacts on the Pharmaceutical Distribution Industry Policy Latest Status Impact/Estimated Impact on Drug Sales 30% cap on the proportion of drug sales to total revenue of the hospital New round of provincial tenders Zero mark-up policy Medical reimbursement standards ( 医保支付标准 ) Source: Government websites, Guotai Junan International. Public hospitals in healthcare reform pilot cities are required to control the proportion of drug sales to total revenue of the hospital to be less than 30% by the end of September Certain provinces/municipalities carried out new round of tender in 1Q17 Implementation nationwide by the end of 2017 It is still in the drafting process. Pilot projects will be implemented in Decrease in sales volume of most drugs is expected. Moderate downward pressure on drug prices is spotted in 1Q17. Pressure on payment collection from hospitals is spotted in 1Q17. Decrease in both sales volume and price of drugs is expected once such policy is released and implemented. Even though Sinopharm will benefit from the industry consolidation caused by the healthcare reform in China in the long run, the Company is facing short-term challenges on its operations in 2017 brought about by the industry See the last page for disclaimer Page 3 of 8

4 environment, as a result of 1) the slowdown in revenue growth induced by the decrease in both drug sales volume and price in hospital sales terminals; 2) the increase in financial burden triggered by the rise in interest rates and delayed payments from hospitals, which is a result of the implementation of the zero mark-up policy nationwide; and 3) operational risks brought by the uncertainty in government policies such as renegotiation on drug prices and medical reimbursement standards. Earnings Forecast We revise down top-line growth and earnings forecast. We forecast revenue to grow YoY by 9.0%, 10.0% and 9.9% in FY17F, FY18F and FY19F, respectively, considering the disposal of certain interests in pharmaceutical manufacturing subsidiaries and the low industry growth in 1Q17. We expect that operating margin will remain stable at the level of around 4.0%. An increase in financial costs induced by higher interest rates and capital requirements is expected to partially offset profit contribution from the pharmaceutical manufacturing associates. We expect shareholders profit to be RMB5,161 million, RMB5,721 million and RMB6,408 million in FY17F, FY18F and FY19F, respectively, representing EPS of RMB1.865, RMB2.067 and RMB2.316, respectively. Table-4: Key Figure Revisions for Sinopharm RMB million New Old Change FY17F FY18F 2019F FY17F FY18F 2019F FY17F FY18F FY18F Revenue 281, , , , , , % -5.7% -7.9% YoY 9.0% 10.0% 9.9% 12.8% 12.7% 12.6% (3.7) ppt (2.6) ppt (2.5) ppt Gross profit 21,690 23,861 26,221 23,317 26,275 29, % -9.2% -11.3% Operating profit 11,286 12,497 13,822 11,524 13,004 14, % -3.9% -5.7% Shareholders profit 5,161 5,721 6,408 5,136 5,845 6, % -2.1% -3.1% EPS (RMB) % -2.1% -3.1% Gross margin 7.7% 7.7% 7.7% 8.0% 8.0% 8.0% (0.3) ppt (0.3) ppt (0.3) ppt Operating margin 4.0% 4.0% 4.1% 4.0% 4.0% 4.0% 0.0 ppt 0.0 ppt 0.1 ppt Net margin 1.8% 1.8% 1.9% 1.8% 1.8% 1.8% 0.0 ppt 0.0 ppt 0.1 ppt Cash conversion cycle (days) Source: Guotai Junan International. Valuation and Rating We downgrade our investment rating to Neutral, and lower TP to HK$36.00 with consideration to short-term challenges brought by the slowdown of the pharmaceutical distribution industry, the uncertainty in government policies and the impact of unfavorable industry environment on operations. New TP represents 17.2 FY17F PER and 15.5x FY18F PER. In view of the concerns about Sinopharm s liquidity and growth potential in the short run, we revise down target FY17F PER to 17.2x from 19.0x. However, we believe that Sinopharm will continue to solidify its leading position in China through proactively picking up more market share and optimizing its business structure to achieve higher growth than the industry average and maintain current operating margin. Current price level is equivalent to 16.3x FY17F PER and 14.7 FY18F PER. Figure-1: Forward PE Band of Sinopharm Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Forward PE since Jan 14 Average Forward PE Average Forward PE + 1 x SD Average Forward PE - 1 x SD Source: the Company, Bloomberg, Guotai Junan International. Figure-2: Forward PB Band of Sinopharm Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Forward PB since Jan 14 Average Forward PB Average Forward PB + 1 x SD Average Forward PB - 1 x SD Source: the Company, Bloomberg, Guotai Junan International. See the last page for disclaimer Page 4 of 8

5 Risks 1) Lower-than-expected industry growth triggered by multiple policies aiming to reduce patients' expenditure on drugs and acceleration of provincial tenders 2) Uncertainty in government policies related to healthcare reform 3) Margin erosion triggered by further drug price cuts 4) Higher-than-expected borrowing rate and financial costs 5) Increasing competition caused by the entry of new rivals from the logistics industry See the last page for disclaimer Page 5 of 8

6 Table-5: Peers Group Comparison of Sinopharm Company Stock Code Currency Last price Market Cap PE (fiscal year) PB (fiscal year) ROE(%) ROA(%) EV/EBITDA HKD mil 16A 17F 18F 19F 16A 17F 18F 19F 17F 17F 17F 18F HK - Listed Pharmaceutical Distributors and Retailers Sinopharm 1099 HK HKD , China Resources Pharma 3320 HK HKD , Shanghai Pharma-H 2607 HK HKD , GZ Baiyunshan Pharma 874 HK HKD , China Pioneer Pharma 1345 HK HKD , n.a. n.a. n.a. n.a n.a. n.a. Charmacy Pharm 2289 HK HKD n.a n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Universal Health Int 2211 HK HKD n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sinco Pharma 6833 HK HKD n.a. n.a. n.a. 1.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Kingworld Medicines 1110 HK HKD n.a. n.a. n.a. 0.6 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Wanjia Group 401 HK HKD n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Simple Average Weighted Average China - Listed Pharmaceutical Distributors and Retailers Shanghai Pharma-A CH CNY , Huadong Medicine CH CNY , n.a. n.a. Jointown Pharma CH CNY , China National Med CH CNY ,605 n.a. n.a. n.a. n.a. n.a n.a. n.a. Realcan Pharma CH CNY , GX Liuzhou Pharma CH CNY , n.a n.a. n.a. n.a. Nanjing Pharma CH CNY ,082 n.a n.a n.a. n.a. Sinopharm Accord CH CNY , Zhejiang Huatong CH CNY ,848 n.a n.a n.a. n.a. Zhejiang Zhenyuan CH CNY ,936 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Beijing Tongrentang CH CNY , n.a. n.a. Tasly Pharma CH CNY , YN Hongxiang Yixintang CH CNY , n.a n.a. n.a. Laobaixing Pharmacy CH CNY , n.a. n.a. Yifeng Pharmacy CH CNY , n.a n.a. n.a. China Meheco CH CNY , n.a. n.a. Simple Average Weighted Average Global Pharmaceutical Distributers and retailers Mckesson Corp MCK US USD , Cardinal Health Inc CAH US USD , Amerisourcebergen Corp ABC US USD , Henry Schein Inc HSIC US USD , Patterson Cos Inc PDCO US USD , WBA WBA US USD , Celesio CLS1 GY EUR , n.a n.a n.a Medipal Holdings Corp 7459 JP JPY 1, , Alfresa Holdings Corp 2784 JP JPY 2, , Suzuken Co Ltd 9987 JP JPY 3, , Sigma Pharma SIP AU AUD 1.32 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a. Australian Pharma API AU AUD , Simple Average Weighted Average Source: Bloomberg, Guotai Junan International. See the last page for disclaimer Page 6 of 8

7 Financial Statements and Ratios Income Statement Cash Flow Statement Year end Dec (RMB mn) 2015A 2016A 2017F 2018F 2019F Year end Dec (RMB mn) 2015A 2016A 2017F 2018F 2019F Revenue 228, , , , ,535 PBT 7,469 8,925 9,560 10,596 11,869 Cost of sales (209,953) (237,717) (260,004) (286,017) (314,313) D&A 1,006 1, ,013 1,061 Other adjustments 4,232 2,584 1,726 1,900 1,953 Gross Profit 18,720 20,671 21,690 23,861 26,221 Changes in WC 2,487 (1,273) (9,950) (2,889) (6,114) Other income Income tax paid (1,782) (2,046) (2,390) (2,649) (2,967) Distribution expenses (6,025) (6,619) (7,042) (7,693) (8,395) Operating Cash Flow 13,412 9,258 (86) 7,972 5,802 Administrative expenses (3,712) (4,110) (3,662) (4,000) (4,365) Capex (1,915) (3,504) (1,796) (1,845) (1,977) Opt. Profit 9,227 10,214 11,286 12,497 13,822 Others 272 1, (41) 3 Other gain-net Investing Cash Flow (1,643) (1,606) (1,774) (1,886) (1,974) Net finance costs (1,988) (1,932) (2,273) (2,538) (2,687) Share of profit of associates&jv Issues of shares Profit before tax 7,469 8,925 9,560 10,596 11,869 Debt paid/raised (522) 4,523 4, ,666 Taxation (1,728) (2,033) (2,082) (2,308) (2,585) Dividends paid (858) (1,135) (1,384) (1,548) (1,716) Others (5,707) (5,451) (2,716) (3,062) (3,320) Profit After Tax 5,741 6,892 7,478 8,289 9,284 Financing Cash Flow (7,086) (2,063) 778 (4,433) (2,370) Minority Interest (1,969) (2,244) (2,317) (2,568) (2,876) Net Profit 3,772 4,647 5,161 5,721 6,408 Net Increase in Cash 4,683 5,589 (1,081) 1,654 1,457 EPS (RMB) Cash at bgn of Yr 15,232 19,966 25,573 24,492 26,146 FX adjustments Dividend 1,135 1,384 1,548 1,716 1,922 Cash at end of Yr 19,966 25,573 24,492 26,146 27,603 DPS (RMB) Balance Sheet Margins and Efficiency Year end Dec (RMB mn) 2015A 2016A 2017F 2018F 2019F 2015A 2016A 2017F 2018F 2019F PP&E 7,642 6,752 7,109 7,483 7,876 Gross margin (%) 8.2% 8.0% 7.7% 7.7% 7.7% Other non-current assets 13,887 18,199 21,387 24,197 27,541 EBITDA margin (%) 4.6% 4.6% 4.5% 4.6% 4.6% Non-current Assets 21,530 24,952 28,496 31,680 35,418 Operating margin (%) 4.0% 4.0% 4.0% 4.0% 4.1% Net Profit margin (%) 1.6% 1.8% 1.8% 1.8% 1.9% Cash and cash equivalents 19,966 25,573 24,492 26,146 27,603 Dividend Payout Ratio (%) 30.1% 29.8% 30.0% 30.0% 30.0% Inventories 22,553 25,760 26,954 30,250 31,752 Inventory days Trade receivables 65,033 69,245 80,554 87,544 96,252 Receivable days Other current assets 10,348 12,182 13,537 15,165 16,866 Payable days Current Assets 117, , , , ,472 Total Assets 139, , , , ,890 Growth and Profitability(%) 2015A 2016A 2017F 2018F 2019F Long-term debts ,135 5,770 5,811 6,225 Revenue 0.7% 13.0% 9.0% 10.0% 9.9% Other LT liabilities 2,321 2,306 2,490 2,708 2,943 EBITDA 0.6% 14.0% 7.3% 10.5% 10.4% Non-current Liabilities 2,929 13,442 8,261 8,519 9,168 Operating profit 0.6% 10.7% 10.5% 10.7% 10.6% Net Profit 0.3% 23.2% 11.1% 10.8% 12.0% Short-term debts 28,355 22,363 32,699 32,929 35,274 ROE (%) 12.5% 15.0% 15.3% 15.2% 15.2% Trade payables 59,563 66,746 71,448 80,259 86,112 ROA (%) 2.7% 3.1% 3.1% 3.1% 3.2% Other current liabilities 7,703 10,629 11,090 11,961 12,893 ROIC (%) 16.1% 17.0% 15.7% 16.1% 15.9% Current liabilities 95,622 99, , , ,279 Financial Ratios Equity to Shareholders 30,110 31,811 35,588 39,761 44, A 2016A 2017F 2018F 2019F Minority Interest 10,768 12,722 14,947 17,356 19,990 Net Debt/Equity (%) 14.6% 9.1% 23.9% 16.5% 16.4% Total Equity 40,879 44,532 50,535 57,117 64,443 Liabilities/Assets (%) 70.7% 71.8% 71.0% 70.1% 69.0% Total Liability and Equity 139, , , , ,890 Current ratio (x) 1.2x 1.3x 1.3x 1.3x 1.3x BVPS (RMB) Interest coverage (x) 4.5x 5.3x 4.8x 4.9x 5.1x Source: the Company, Guotai Junan International. See the last page for disclaimer Page 7 of 8

8 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for SMI Holdings Group Limited (00198 HK), Guotai Junan International Holdings Limited (01788 HK), Binhai Investment Company Limited (02886 HK), Link Holdings Limited (08237 HK), GFI MSCI A I-R (CNY) (83156 HK), GFI MSCI A I (03156 HK) and CAM SCSMALLCAP (03157 HK), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report. (6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no an officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 8 of 8