Yum Cha 飲茶. March 24, 2017 TALKING POINT - MSCI: HIGHER CHANCE TO INCLUDE A-SHARES THIS YEAR RESEARCH NOTES

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index HSCEI Shanghai COMP Shenzhen COMP Gold (0.3) BDIY Crude Oil, WTI(US$/BBL) Crude Oil, BRENT(US$/BBL) 50.6 (0.2) HIBOR, 3-M 0.9 (0.2) SHIBOR, 3-M RMB/USD DATA RELEASES DUE THIS WEEK Mar 26 Industrial Profits YoY Source: Bloomberg March 24, 2017 TALKING POINT - MSCI: HIGHER CHANCE TO INCLUDE A-SHARES THIS YEAR MSCI tabled a new proposal to include A-shares in MSCI indices yesterday. The revised proposal suggested that the initial universe will cover only 169 non-ah dual-listed large-cap A- share companies. These stocks will be picked from the Stock Connect stock list. This proposal largely resolves some key issues, including FX control and large-scale trading suspensions of some mid and small caps. The largest obstacle right now is the pre-approval requirements on new and pre-existing financial products linked to A-shares by the stock exchanges. If the Shanghai and Shenzhen Stock Exchanges are willing to remove this requirement, we believe MSCI is more likely to include A-shares in the MSCI indices during the annual review in late June. Although A-shares would account for only 0.5% of the MSCI Emerging Markets Index in the beginning, based on this revised and smaller scale proposal, it would benefit leading local brokers (Haitong International (0665.HK), GTJA International (1788.HK)) and HKEx (0388.HK)) in the medium term, as this new proposal would encourage investors to use the Stock Connect channel, i.e. northbound trading. Analyst: Wong Chi-man, CFA RESEARCH NOTES MEITU [1357.HK; HK$14.98; NOT RATED] - Meitu will announce its 2016 results and hold a post-results conference call today. The headline number for Meitu s 2016 results will not be meaningful, as the Company booked a sizable loss from the conversion of CBs before listing. We expect Meitu to report an operating loss of HK$451.8m in 2016, down from HK$752.7m in We also expect the Company to report about a 100% YoY increase in turnover to HK$1.5bn, driven mainly by sales of Smart Hardware. After the IPO in late Dec 2016, we expect Meitu to report a net cash position of HK$4.7bn in 2016, since the proceeds are still on the balance sheet. We share the view that Meitu s sizable market cap and massive active user base will continue to attract market attention. However, compared with other listed TMT names, Meitu is still at the early stage of monetization, and the Company s ARPU per MAU and ad fill rate is low. Meitu s share price might remain volatile in the near term, given its high valuation. ANHUI CONCH [0914.HK; HK$28.30; DOWNGRADE TO HOLD] - Anhui Conch reported recurring net profit of RMB8.4bn for 2016, up 38% YoY, slightly below our forecast and market expectations, as the non-cement business was weaker than expected. The cement business performance was in line with our forecast and reported strong gross profit per tonne of RMB80 in Q4 2016, up from RMB64 in Q We trim our 2017E/2018E recurring net profit by 3%/2.7% and slightly lower our target price from HK$31.00 (1.75x 2017E PBR) to HK$30.00 (1.7x 2017E PBR/11.9x 2017E PER). Our positive outlook for 2017 remains intact, but we downgrade our rating from BUY to HOLD on the back of only 6% upside. Investors who like the Company may consider Anhui Conch-A ( CH), which offers 21% upside, based on our target price. LI NING [2331.HK; HK$4.70; NOT RATED] - Li Ning reported profit attributable to equity holders of RMB643m for 2016, or RMB330m after adjusting for a one-off gain from the disposal of 10% interest in Double Happiness. This is a significant, though anticipated, turnaround from the past few years. EPS was RMB There was no dividend payment. Within the sector, Li Ning has the best potential to expand its margins. However, the negative sentiment surrounding the sector, and the potential share disposal by TPG means investors should wait for bargain hunting opportunities. TUL [3933.HK; HK$5.14; HOLD] - We believe management s upbeat nd generation insulin sales guidance, optimistic attitude on the newly approved 3rd generation insulin, memantine hydrochloride ( 鹽酸美金剛, for Alzheimer s ( 阿茲海默癥 )), and the 6-APA price trend in 2017 during yesterday s analysts briefing show TUL is on track to stage a strong recovery this year. Our views on intermediates turnaround and positives on the insulin ramp-up remain intact. We largely kept our 2017/18E projections, but changed to the sum-of-the-parts valuation methodology, as the outlooks for different segments diverge significantly. We raise our target price from HK$4.52 to HK$4.93 (Figure 1), implying 19.6/15.7x 2017/18E PER. Maintain HOLD on valuation. 1

2 COMPANY NEWS Meitu, Inc. [1357.HK; HK$14.98; Not Rated] - Reveal the mystery results and management guidance on the outlook for 2017 should attract market attention again. Market Cap: US$8,152m; Free Float: 36.9%; 3-months Average Daily Turnover: US$42.8m Analyst: Mark Po March 24, 2017 The Company. Meitu, Inc. (Meitu) offers mobile application software. The Company researches, produces, and markets image editing, live broadcasting, and other related social media software. Meitu is also involved in mobile design and retailing around the world. Shares of Meitu were listed on the HKEX on 15 Dec 2016 with an IPO price of HK$8.5 per share. The Company sold 574m shares, raising US$629m. Meitu s IPO was the biggest first-time share sale by a technology company in Hong Kong since The current market cap of Meitu is US$8.1bn, based on yesterday closing price of HK$ Business description. Originally, Meitu was a selfie app maker; later it expanded its business into both software and hardware. Meitu provides a portfolio of innovative photo and community apps, smartphones, and a mobile game. Meitu currently operates two business segments: (a) smart hardware, and (b) Internet services and others. Regarding smart hardware, Meitu currently designs and develops Meitu smartphones, and subcontracts smartphone manufacturing to contract manufacturers. Meitu sell most of the smartphones primarily to strategically selected online and offline distributors and retailers to better expand its smartphone market share and geographic coverage results and post-results guidance likely to attract market attention. Meitu will announce its 2016 results and hold a post-results conference call today. Given its short listing history and sizable market cap, Meitu s operating statistics in 2016 and management s guidance are likely to attract market attention. The headline number for Meitu s 2016 results will not be meaningful, as the Company booked a sizable loss from the conversion of CBs before listing. We expect Meitu to report an operating loss of HK$451.8m in 2016, down from HK$752.7m in We also expect the Company to report about a 100% YoY increase in turnover to HK$1.5bn, driven mainly by sales of Smart Hardware. Smart Hardware is expected to account for 94% of the Company s turnover in 2016, up from 90% in After the IPO in late Dec 2016, we expect Meitu to report a net cash position of HK$4.7bn in 2016, since the proceeds are still sit on the balance sheet. SNAP s IPO has stimulated interest in Meitu. We believe that SNAP s IPO in early Mar 2017 has stimulated interest in camera apps in Asia, including Meitu. Snapchat (under SNAP) is one of the leading camera apps, and we believe that the market is looking for proxies to SNAP, like Meitu, since Meitu is a notable camera app in China. Following is the comparison between SNAP and Metiu. Meitu s apps engaged approximately 456m monthly active users (MAUs) in Oct 2016, and users generated about 6bn photos across Meitu s core apps. The average monthly revenue per MAU was RMB0.219 in H1 2016, an increase of % compared to RMB0.094 in H SNAP s revenue stream is mostly ads, while smartphone hardware accounts for the majority of Meitu s sales, representing 95% of 1H16 sales. Comparing Meitu to Snapchat, we note that Snapchat had over 300m MAUs in 2016, which was much lower than Meitu s MAUs. Snapchat is expected to generate US$366.7m in advertising revenue in 2016, based on emarketer s report, while the average advertising revenue per Snapchat MAU is about US$1.22. Meitu generated RMB25.9m in advertising revenue in H1 2016, and the average advertising revenue per MAU was approximately RMB0.057, which is less than US$0.01. Also, most advertising revenue is generated from Meitu and BeautyCam. Meipai, Meitu s major social platform app, ranked second among all short-form video platforms in China, measured by the number of average MAUs in 2016, attracting approximately 110m MAUs in Oct Meipai had the longest daily average user time, minutes, compared to Meitu, which was only 2.9 minutes. Due to the long user [Meitu, Inc. ] (HK$) /16 02/17 Key Financials (in HKDm) Turnover (RHS) Source: Bloomberg, Company Data, CGIS Research Price (LHS) (HK$ million) time and high popularity, Meipai provides higher user stickiness, which is attractive to advertisers. Meipai is expected to be the major platform for Meitu s online advertising development strategy. Meitu is upgrading its ad platform, adding ad inventories, and has launched a live-streaming service and introduced virtual items to monetize its massive active user base, which could translate into meaningful monetization power. We also expect Meitu s turnover to report YoY growth of 134.9% and 40.3% for 2017 and 2018, respectively. The strong turnover growth in 2017 and 2018 will be driven by sales of both Smart Hardware and internet services. If business develops on track, we expect Meitu to make a profit in 2018, but the valuation will be as high as 45x 2018 PER. Our view. We share the view that Meitu s sizable market cap and massive active user base will continue to attract market attention. However, compared with other listed TMT names, Meitu is still at early stage of monetization, and the Company s ARPU per MAU and ad fill rate are low. Currently, Meitu relies heavily on sales of smartphones; the Internet services business is losing money. Due to the highly competitive smartphone market in China a) Meitu must continue to provide innovative smartphones to gain market share; and b) the Company needs to report significant growth in revenue of its Internet services and e-commerce business. Meitu s share price might remain volatile in the near term given its high valuation. Catalysts results, news flow on new business development and the launch of new hardware E 2017E Revenue , ,270.9 Change (YoY %) Gross Profit Gross Margin % Net Profit 14.0 (75.3) (634.4) (454.5) (30.6) Net Margin % 16.3 (15.4) (85.5) (30.7) (0.9) EPS (Basic) 0.01 (0.05) (0.32) (0.15) (0.01) Change (YoY %) n.a. n.a. n.a. n.a. n.a. DPS $0.000 $0.000 $0.000 $0.000 $0.000 ROE (%) #DIV/0! (105.3) (7.4) Dividend Yield (%) PER (x) (63.9) (9.6) (21.1) (428.0) PBR (x) (171.8) (3.3) (3.1) FCF Yield (%) -0.74% -5.93% % -8.02% -2.11% Capex (m) (1.7) (17.7) (49.8) (74.2) (118.6) Free cash flow per share (0.0) (0.1) (0.8) (0.2) (0.1) Net Gearing (%) Net Cash Net Cash Net Cash Net Cash Net Cash 0

3 Figure 1: Meitu s MAU Figure 2: Meitu s turnover breakdown MAU (m) Q Q Q Q Q Q Q Q HK$m 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 E-commerce Smart hardware Smart hardware F 2017F 2018F Sources: Company Data, CGIS Research Sources: Company Data, CGIS Research

4 Anhui Conch [0914.HK] Non-cement business weaker than expected; Downgrade to HOLD on Valuation Anhui Conch reported recurring net profit of RMB8.4bn for 2016, up 38% YoY, slightly below our forecast and market expectations, as the non-cement business was weaker than expected. The cement business performance was in line with our forecast and reported strong gross profit per tonne of RMB80 in Q4 2016, up from RMB64 in Q We trim our 2017E/2018E recurring net profit by 3%/2.7% and slightly lower our target price from HK$31.00 (1.75x 2017E PBR) to HK$30.00 (1.7x 2017E PBR/11.9x 2017E PER). Our positive outlook for 2017 remains intact, but we downgrade our rating from BUY to HOLD on the back of only 6% upside. Investors who like the Company may consider Anhui Conch-A ( CH), which offers 21% upside, based on our target price. Investment Highlights Gross margin in Q4 weaker than expected because of non-cement business. Anhui Conch reported a gross margin of 31.5% in Q4 2016, lower than the gross margin of 33.6% in Q Given that the blended gross profit per tonne of the cement business improved significantly from RMB64 in Q to RMB80 in Q4 2016, we believe the weakness was caused mainly by the non-cement business, including (i) sales of materials and other products; and (ii) service income. Cement business performed well in Q The performance of the cement business was largely similar to our forecasts in Q Blended ASP (cement and clinker) rose from RMB188/tonne in Q to RMB225/tonne in Q Blended gross profit per tonne increased by RMB16 QoQ to RMB80 in Q4 2016, implying the ASP hike was large enough to offset the higher coal cost, allowing margin expansion. Overseas business reported pre-tax profit in Although the Company s overseas business is still small (only 1.4% of total revenue, mainly in southeast Asia), it reported a pre-tax profit of RMB102m (0.9% of the total) in 2016, a big improvement from a pre-tax loss of RMB212m in guidance. After reporting 8% volume growth in 2016, the Company aims to achieve about 6% volume growth this year. Meanwhile, its capex guidance for 2017 is RMB9bn, higher than the capex of RMB7.1bn in This may imply the Company will continue to expand its overseas business. Potential to raise dividends? Thanks to its strong free cash flow generation, the Company s net debt/equity dropped further from 7% at end-2015 to 1% at end The Company s dividend payout ratio remained largely unchanged at about 30% in As it is likely to become a net cash company this year, it remains to be seen whether management will consider a higher dividend payout ratio in the future. Y/E Dec E 2018E Turnover (RMB m) 60,759 50,976 55,932 66,297 68,112 Recurring net profit (RMB m) 10,951 6,073 8,408 12,192 12,218 Net margin (%) Recurring EPS (RMB) % Change 15 (45) PER (x) PBR (x) EV/EBITDA (x) Sources: Company, CGIS Research HOLD (downgrade from BUY) Close: HK$28.30 (Mar 23, 2017) Target Price: HK$30.0 (+6%) Price Performance (HK$) Market Cap Shares Outstanding Auditor US$17,435m 5,299.3m KPMG Free Float 55.0% 52W range China Cement Sector 3M average daily T/O Major Shareholding Sources: Company, Bloomberg HK$ US$36.4m Conch Holdings (36.78%) Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Livy Lyu Research Assistant (852) livylyu@chinastock.com.hk March 24, 2017 (HK$ million) Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Turnover (RHS) Price (LHS) Source: Bloomberg 1

5 Key financials Anhui Conch (00914.HK) Income Statement (RMB'000, except for per share amount) E Year ended 31 Dec 1H 2H 1H 2H 1H 2H E 2018E Revenue 24,223,323 26,752,713 23,973,109 31,958,792 30,665,495 35,631,628 60,758,501 50,976,036 55,931,901 66,297,123 68,111,560 COGS (17,635,061) (19,631,931) (16,790,431) (21,605,854) (19,946,413) (23,186,523) (40,560,092) (37,266,992) (38,396,285) (43,132,936) (44,764,145) Gross profit 6,588,262 7,120,782 7,182,678 10,352,938 10,719,082 12,445,105 20,198,409 13,709,044 17,535,616 23,164,186 23,347,414 Operating expenses (2,687,472) (3,602,073) (2,948,751) (3,479,325) (3,148,013) (3,950,717) (5,624,252) (6,289,545) (6,428,076) (7,098,729) (7,439,266) Operating profit 3,900,790 3,518,709 4,233,927 6,873,613 7,571,069 8,494,388 14,574,157 7,419,499 11,107,540 16,065,457 15,908,148 Other income and gains 689, , , , , , ,763 1,260, , , ,068 EBIT 4,590,441 4,089,592 4,725,324 7,279,002 7,969,720 8,886,336 15,565,920 8,680,033 12,004,326 16,856,056 16,651,215 Net finance costs (246,654) (263,739) (255,004) (174,276) (168,597) (100,513) (618,937) (510,393) (429,280) (269,110) (28,325) Profits from associates and JCEs 33,428 (71,607) (67,595) (29,315) 50,000 73,000 (59,478) (38,179) (96,910) 123, ,000 Non-recurrent items 1,887,285 66, ,031 97, ,537 1,954, , Income before tax 6,264,500 3,821,020 4,526,756 7,172,573 7,851,124 8,858,823 14,927,042 10,085,520 11,699,329 16,709,946 16,745,891 Income tax expense (1,514,374) (926,098) (1,063,906) (1,638,657) (1,884,270) (2,126,117) (3,360,183) (2,440,472) (2,702,563) (4,010,387) (4,019,014) Minority interests (35,638) (70,710) (104,303) (318,595) (238,674) (269,308) (585,942) (106,348) (422,898) (507,982) (509,075) Net income 4,714,488 2,824,212 3,358,547 5,215,321 5,728,180 6,463,397 10,980,917 7,538,700 8,573,868 12,191,577 12,217,802 Recurring net income 3,299,024 2,774,132 3,265,524 5,142,450 5,728,180 6,463,397 10,951,264 6,073,156 8,407,973 12,191,577 12,217,802 EPS (RMB) Recurring EPS (RMB) DPS (RMB) Depreciation and amortization 2,175,521 2,282,536 2,331,110 2,420,555 2,335,756 2,644,576 3,827,769 4,458,057 4,751,665 4,980,332 5,319,782 EBITDA 6,799,390 6,300,521 6,988,839 9,670,242 10,355,477 11,603,912 19,334,211 13,099,911 16,659,081 21,959,389 22,093,997 Cement and clinker ASP (Rmb/tonne) Cement and clinker vol. ('000 tonnes) 115, , , , , , , , , , ,276 Cost per tonne (Rmb) Gross profit per tonne (Rmb) Growth Rates: Revenue -16% -16% -1% 19% 28% 11% 10% -16% 10% 19% 3% EBIT -44% -44% 3% 78% 69% 22% 13% -44% 38% 40% -1% EBITDA -33% -31% 3% 53% 48% 20% 11% -32% 27% 32% 1% Core net income -43% -46% -1% 85% 75% 26% 15% -45% 38% 45% 0% Recurring EPS -43% -46% -1% 85% 75% 26% 15% -45% 38% 45% 0% Margins and Ratios: Gross margin 27.2% 26.6% 30.0% 32.4% 35.0% 34.9% 33.2% 26.9% 31.4% 34.9% 34.3% Net margin 13.8% 10.6% 14.1% 17.1% 19.5% 18.9% 19.0% 12.1% 15.8% 19.2% 18.7% EBIT margin 19.0% 15.3% 19.7% 22.8% 26.0% 24.9% 25.6% 17.0% 21.5% 25.4% 24.4% EBITDA margin 28.1% 23.6% 29.2% 30.3% 33.8% 32.6% 31.8% 25.7% 29.8% 33.1% 32.4% Effective tax rate 24% 24% 24% 23% 24% 24% 23% 24% 24% 24% 24% Sources: Company data, CGIS Research estimates Figure 1: Quarterly results highlights Y/E Dec (RMB '000) Q Q Q Q Q Q Q Q Q Q Q Q Turnover 12,571,606 16,212,877 14,808,295 17,165,723 11,181,618 13,041,705 13,659,068 13,093,645 10,561,949 13,411,160 13,890,129 18,068,663 Gross Profit 4,439,897 5,745,593 4,364,936 5,647,983 3,240,900 3,347,362 3,172,171 3,948,611 2,596,368 4,586,310 4,665,984 5,686,954 Margin 35.3% 35.4% 29.5% 32.9% 29.0% 25.7% 23.2% 30.2% 24.6% 34.2% 33.6% 31.5% Operating profit 3,332,341 4,449,046 3,016,401 3,776,369 1,974,797 1,925,993 1,789,941 1,728,768 1,210,636 3,023,291 3,056,176 3,817,437 Net Profit 2,473,498 3,337,363 2,351,558 2,818,498 1,713,524 3,000,964 1,397,375 1,426,837 1,155,094 2,128,798 2,613,502 2,601,819 Adjusted net profit 2,476,458 3,337,363 2,347,664 2,791,090 1,662,015 1,637,009 1,462,193 1,311,939 1,108,801 2,156,723 2,334,773 2,807,677 YoY Change 155% 50% 1% -30% -33% -51% -38% -53% -33% 32% 60% 114% Sales volume ('000 tonne) 48,000 65,543 65,000 70,568 50,500 64,860 70,590 70,635 57,640 70,040 71,650 77,744 YoY Change 3.7% 15.0% 10.9% 6.8% 5.2% -1.0% 8.6% 0.1% 14.1% 8.0% 1.5% 10.1% ASP (Rmb/tonne) YoY Change 16.3% 5.0% -2.6% -10.3% -14.0% -18.7% -15.1% -23.7% -17.3% -4.8% 0.2% 25.4% Gross profit per ton Sources: Company, CGIS Research 2

6 Key financials Anhui Conch (00914.HK) Balance Sheet (RMB'000, except for per share amount) Statement of Cash Flow As at 31 Dec E 2017E 2018E Year ended 31 Dec E 2017E 2018E Inventories 4,375,977 4,238,039 4,800,000 5,000,000 5,100,000 Profit before tax 14,927,042 10,085,520 12,068,569 17,030,742 17,027,670 Trade receivables 333, , , , ,000 Depreciation & Amortization 3,783,908 4,263,028 4,554,874 4,984,767 5,278,207 Bills receivable 3,885,568 4,465,734 5,000,000 5,600,000 6,000,000 Change in w orking capital 3,467,025 (371,713) (284,491) (500,000) (250,000) Others 2,663,578 3,015,143 3,046,744 3,146,744 3,246,744 Others / adjustments (5,653,167) (5,032,916) (1,982,963) (3,822,019) (4,174,825) Bank balances and cash 14,012,121 14,285,034 16,677,393 22,695,372 28,809,905 Net operating cash flow 16,524,808 8,943,919 14,355,990 17,693,490 17,881,051 Total current assets 25,270,491 26,426,002 30,024,137 37,042,116 43,806,649 Capex (6,222,740) (8,726,158) (6,500,000) (7,000,000) (6,000,000) PPE, net 62,469,127 64,107,776 66,139,396 68,154,629 68,876,422 Others 1,371,626 (3,993,109) Prepaid lease payments 4,043,759 4,489,095 4,489,095 4,489,095 4,489,095 Net investing cash flow (4,851,114) (12,719,267) (6,500,000) (7,000,000) (6,000,000) Others 10,469,720 10,758,519 10,240,377 10,278,377 10,366,377 Total non-current assets 76,982,606 79,355,390 80,868,868 82,922,101 83,731,894 Change in debt (2,274,301) (733,273) (3,184,930) (2,000,000) (2,000,000) Dividends (1,854,756) (3,444,547) (2,278,700) (2,675,512) (3,766,519) Total assets 102,253, ,781, ,893, ,964, ,538,543 Others (1,526,938) (253,249) Net financing cash flow (5,655,995) (4,431,069) (5,463,630) (4,675,512) (5,766,519) Trade payables 4,014,855 3,872,683 4,500,000 4,800,000 4,900,000 Other payables 7,188,773 7,506,032 7,800,000 8,000,000 8,300,000 Increase / Decrease in cash 2,871, ,913 2,392,359 6,017,979 6,114,532 Bank and other borrowings 2,329,168 8,445,248 7,000,000 6,000,000 5,000,000 Net cash/(debt) (5,904,123) (4,899,896) 677,393 8,695,372 16,809,905 Others 864, ,198 1,037,528 1,340,888 1,340,703 Total current liabilities 14,397,007 20,402,161 20,337,528 20,140,888 19,540,703 Finance Ratios Bank and other borrowings 17,587,076 10,739,682 9,000,000 8,000,000 7,000, E 2017E 2018E Others 1,041,930 1,095,040 1,095,040 1,095,040 1,095,040 Valuation Total non-current liabilities 18,629,006 11,834,722 10,095,040 9,095,040 8,095,040 PE(x) EPS grow th (%) Total liabilities 33,026,013 32,236,883 30,432,568 29,235,928 27,635,743 Yield (%) PEG (x) 0.67 n.a Shareholders' equity 65,849,976 70,147,570 76,787,241 86,666,793 95,453,072 EV/EBITDA (x) Minority interests 3,377,108 3,396,939 3,673,195 4,061,496 4,449,727 PB(x) Operational Revenue grow th (%) Gross margin (%) Net profit margin (%) Days receivables Days payables Days inventories Current ratio (x) Quick ratio (x) Asset/Equity (x) Net debt/equity (%) EBITDA interest coverage (x) (1,253.8) Core ROE (%) Sources: Company data, CGIS Research estimates Figure 2: Cement Prices in East China (RMB/tonne) East China Figure 3: Cement Prices in South Central China (RMB/tonne) South Central China 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sources: Digital Cement, CGIS Research Sources: Digital Cement, CGIS Research 3

7 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan Figure 4: Cement Inventory Level in East China Figure 5: Cement Inventory Level in South Central China East China South Central China Sources: Digital Cement, CGIS Research Sources: Digital Cement, CGIS Research Figure 6: Rolling Forward PER Range Figure 7: Rolling Forward PBR Range Rolling forward PER (x) Average +1 Standard deviation -1 Standard deviation Sources: Bloomberg, CGIS Research P/B trend (x) 1 Standard deviation -1 Standard deviation Average Sources: Bloomberg, CGIS Research Figure 8: EV/EBITDA Range EV/EBITDA (x) Average (x) +1 Standard deviation -1 Standard deviation Sources: Bloomberg, CGIS Research 4

8 COMPANY / INDUSTRY NEWS 24 MARCH 2017 Li Ning (2331.HK) 2016 Results Analysts: Johnson Cheung (johnsoncheung@chinastock.com.hk: Tel ) Li Ning reported profit attributable to equity holders of RMB643m for 2016, or RMB330m after adjusting for a one-off gain from the disposal of 10% interest in Double Happiness. This is a significant, though anticipated, turnaround from the past few years. EPS was RMB There was no dividend payment. Within the sector, Li Ning has the best potential to expand its margins. However, the negative sentiment surrounding the sector, and the potential share disposal by TPG means investors should wait for bargain hunting opportunities. Li Ning s revenue was up 13% to RMB8,015m in 2016, almost back to the 2011 level. Its gross profit margin has expanded. The Company also sold a 10% equity interest in Shanghai Double Happiness Co, which generated a profit of RMB313m. Some 52% of the Company s revenue is still from wholesale, though the percentage has steadily declined in the past 5 years from 74%. Li Ning differs from other sportswear companies in that 48% of its revenue comes from its own sales channels. The fastest-growing channel was e-commerce, which accounted for 15% of the Company s revenue. Li Ning has aggressively trimmed its product lines. Fifty per cent of its products are priced in the RMB range. Better inventory management, including aggressive price-cutting of slow-moving merchandise, helped to restore sell-through. Channel inventory was down to only 4.5 months, and only 22% of overall inventory was over 12 months. Bad-debt provisions were only RMB60m. Less than 15% of its distributors are loss-making. Li Ning has 6,440 outlets in the country, which represents growth of approximately 300 POS YoY. About 1,510 of these outlets were directly operated by Li Ning. The Company states that it aims to further expand its distribution network, but we believe that the increase will likely be outlets a year.. For 2017, Q has been relatively sluggish, with SSS growth flat or slightly negative. On-line sales have remained healthy. The Company will invest in new product lines, including: (i) Danskin, a professional dancewear brand for women in the US, yoga and training products; (ii) Young and Kids, children s clothing lines, which Li Ning previously licensed to a third party, and which already have more than 300 outlets; and (iii) Lining, which is positioned as a fast fashion label for second-tier cities, with about 40 POS. The development of these brands will cost over RMB80m in Better economies of scale, e-commerce, lower provisions and A&P savings should boost the Company s profitability. Li Ning Company Ltd Share Price Year End Dec E 2018E Revenue (RMBm) 6,047 7,089 8,015 9,085 10,124 YoY % 3.8% 17.2% 13.1% 13.3% 11.4% Gross profit (RMBm) 2,718 3,193 3,705 4,328 4,905 Gross margin 44.9% 45.0% 49.5% 47.9% 46.2% Operating profit (RMBm) (397) ,059 1,408 Operating margin -6.6% 2.2% 4.8% 11.7% 13.9% Reported net profit (RMBm) (782) YoY % -200% % % -9.9% 45.6% Adjusted net profit (RMBm) (782) YoY % -171% -122% 89.9% 80.8% 42.4% Net margin -12.9% 2.5% 4.1% 6.6% 8.4% Adjusted EPS (RMB) (0.48) YoY % -178% % 125.7% 74.5% 38.5% DPS (RMB) Payout ratio 0.0% 0.0% 0.0% 0.0% 11.1% (HK$) (HK$ million) Dividend yield (%) PER (x) na na PBR (x) Sources: Bloomberg, CGIS Estimates 2 0 Date 6/22/2016 9/19/ /14/2016 3/15/2017 Turnover (RHS) Price (LHS) ` 1

9 Advertising and Promotion Expenses With the termination of the CBA agreement, there is scope for cost savings. The Company hopes that spending on A&P will continue to come down, from 14% in 2015 to 10% in This could be significant against the current net margin of 4%. Financial Position The Company s working capital has continued to improve. Trade receivables were down 24% YoY, Net cash was up RMB1.7bn in the past two years, as Li Ning reduced its cash conversion cycle to only 59 days. TPG s stake TPG has reduced its Li Ning exposure. In January, it sold its holding of 114m shares at HK$4.75. TPG still has 168.6m shares in the Company after the conversion of an outstanding CB in early February. Given TPG s earlier action, we believe that it is possible for TPG to dispose of the rest of its stake, which is equivalent to HK$1.33bn. Li Ning s stake Mr Li Ning, the founder and chairman of the company, still has a position in various ordinary shares and outstanding convertible securities, which if fully converted, would be equivalent to 555m shares, or 23% of the Company. His interests are owned principally by Viva China (8032.HK). Valuation The whole sportswear sector has seen a substantial sell-off in March. 361 Degree s 2016 results were below expectations, Xtep was hit with a RMB222m provision for doubtful debts, and Anta s share price dropped by nearly 10% after it placed out 175m existing shares to raise HK$3.8bn. The shares are down 5% to 11% MTD. Figure 1: Peer Comparison Sportswear Companies Bloomberg Mkt. Cap. Price 52 Wk 52 Wk PER (x) P/B(x) Price change (%) Rec. Dist. (%) Year End Dec Code (US$ mil) 3/23/2017 High Low FY15 FY16 FY17E FY18E FY16 WTD MTD YTD BUY HOLD SELL ANTA SPORTS PRODUCTS LTD 2020 HK 7, (9) (7) (6) LI NING CO LTD 2331 HK 1, (11) (9) (3) XTEP INTERNATIONAL HOLDINGS 1368 HK 1, (15) (11) (3) DEGREES INTERNATIONAL 1361 HK (1) (5) (7) MEDIAN Sources: Bloomberg, CGI Estimates Anta Sports valuation is still the highest in the sector, trading at 19.3x 2017 PER. The two smaller sportswear companies are trading at x 2017 PER. All these companies are expected to generate 10%-20% EPS growth this year. Li Ning, which is currently 17.6x PER, should show the strongest EPS growth. We believe the earnings momentum can persist into Risks Anemic top-line growth, sizable bad risk provisions, and higher A&P expenditure could impede Li Ning s recovery. ` 2

10 Figure 3: Four-Year Consolidated Income Statement Income Statement (RMB mn) Revenue 5,824 6,047 7,089 8,015 Cost of Goods Sold (3,230) (3,329) (3,897) (4,310) Gross Profit 2,594 2,718 3,193 3,705 Other income and gains, net Other operating expenses (2,910) (3,393) (3,067) (3,393) Operating profit (169) (643) Finance costs (131) (116) (108) (84) Other gains/ (expenses) (17) (19) (19) (14) Profit before tax (317) (778) Income tax expense (42) (52) (74) (74) Profit after tax (359) (744) Attributable profit to shareholder (392) (781) Minority interest (208) (218) (231) (58) Sources: Bloomberg, Company Accounts, CGI Estimates Figure 4: Four-Year Consolidated Balance Sheet Balance Sheet (RMB mn) Non-current assets PPE 1,142 1, Intangible assets Others ,210 Total non-current assets 2,055 2,077 1,414 2,130 Current assets Inventories 942 1, Account receivables 1,371 1,260 1,440 1,370 Bank balances and cash 1,281 1,031 1,813 1,954 Others , Total current assets 3,962 3,963 5,484 4,650 Total assets 6,017 6,040 6,897 6,780 Current liabilities Account payables ,047 ST borrowings Others 837 1,105 1, Total current liabilities 2,018 2,679 2,472 2,674 Non-current liabilities LT borrowings 968 1, Other non-current liabilities Total non-current liabilities 1,107 1,191 1, Total liabilities 3,125 3,870 3,487 2,783 Total shareholders?equity 2,684 1,952 3,180 3,995 Minority interest Total equity 2,892 2,169 3,411 Sources: Bloomberg, Company Accounts, CGI Estimates 3,997 ` 3

11 The United Laboratories [3933.HK] Strong insulin growth potential; 2017/18 recovery remains intact We believe management s upbeat nd generation insulin sales guidance, optimistic attitude on the newly approved 3 rd generation insulin, memantine hydrochloride ( 鹽酸美金 剛,for Alzheimer s ( 阿茲海默癥 )), and the 6-APA price trend in 2017 during yesterday s analysts briefing show TUL is on track to stage a strong recovery this year. Our views on the intermediates turnaround and positives on the insulin ramp-up remain intact. We largely kept our 2017/18E projections, but changed to the sum-of-the-parts valuation methodology, as the outlooks for different segments diverge significantly. We raise our target price from HK$4.52 to HK$4.93 (Figure 1), implying 19.6/15.7x 2017/18E PER. Maintain HOLD on valuation. Strong growth of 2 nd generation insulin to continue in 2017: Second-generation insulin reported sales of HK$535m, missing the Company s target of HK$600m primarily due to RMB depreciation. However, volume growth was solid, up 56% YoY to 11.1m vials. Management targeted 50% YoY growth (volume >15m vials) for 2 nd generation insulin in Given 1) 2 nd generation insulin was upgraded from catalogue II ( 乙類 ) to catalogue I ( 甲類 ) in the 2017 version of the NRDL; and 2) expected new tenders from Heilongjiang, Jiangsu, etc., we believe the 50% YoY growth target looks achievable at this stage. The insulin business had a net margin of 16% in 2016, and management expects continued margin improvement from economies of scale. In 2017, we expect Insulin to contribute ~10% of total revenue and 14% of total operating profit (Figure 1). Intermediates and bulk medicines: Management expects the 6-APA price to be stable in 2017 because more stringent environmental regulations are expected. We basically share the same view, since 6-APA capacity of Huabei Pharmaceutical and Harbin Pharmaceutical has faded out, and they are unlikely to resume production again. If 6-APA remains at RMB /kg (including 17% VAT), we project that TUL s intermediates and bulk medicines will achieve a segment margin of ~5%, contributing 9/14% of total operating profit in 2017/2018, respectively (Figure 1). Sum-of-the-parts valuation: To evaluate the Company more effectively because of the different pace of growth for different segments, we use the sum-of-the-parts valuation methodology (Figure 1). We give its insulin business 35x 2017E PER for its fast top-line growth and margin expansion potential. We give 16x to TUL s intermediates, bulk, and finished drugs (excluding insulin), which is comparable to its peers 2017 average (Figure 2). HOLD (unchanged) Close: HK$5.14 (Mar 23, 2017) Target Price: HK$4.93 (-4.1%) Price Performance (HK$) Market Cap Shares Outstanding Auditor US$1076.5m 1,626.9m Deloitte Free Float 32.1% 52W range China Healthcare Sector 3M average daily T/O Major Shareholding Sources: Company, Bloomberg Mar 24, 2017 (HK$ million) /3/ /9/ /3/2017 Turnover (RHS) Price (LHS) HK$ US$3.01m Ms Ning Kwai Chun (61.85%) 2016 results highlights: The results were largely in line with the profit warning. The net loss of HK$311m was due mainly to one-off items. Adding back one-offs, the core business lost HK$59m, mainly due to loss-making intermediates as a result of the weak 6-APA price in 2H16. Finished drugs remained the key profit contributor, providing HK$653m in operating profit (111% of the total). The 2 nd generation insulin sales ramp-up is on track. Y/E Dec A 2015A 2016A 2017E 2018E Turnover (HK$ m) 8,030 7,694 7,063 7,351 7,822 Net profit (HK$ m) (311) Core net profit (HK$ m) (59) Core net margin (%) (0.8) Core EPS (HK$) (0.036) % Change 37 (43) (119) n.a 25 PER (x) n.a PBR (x) Core ROE(%) EV/EBITDA (x) Sources: Company, CGIS Research estimate Harry He Analyst (852) harryhe@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk 1

12 Figure 1: 2017E revenue breakdown, segment profit breakdown and sum-of-the-parts valuation HKm$ Revenue % Revenue Profit margin Segment profit % Operating profit Important assumptions: 1) Net finance cost is allocated in proportion to operating profit. 2) All unallocated expenses allocated to finished drugs. 3) Tax is allocated according to operating profit weight. Allocated 2017 net finance cost Allocated 2017 net unallocated expense Allocated 2017 tax Segment net profit Finished (excl. insulin) 2, % 26.0% % (172) (156) (74) ,282 Insulin % 18.0% % (37) 0 (16) ,700 Bulk 2, % 5.0% % (38) 0 (16) ,257 Intermediates 1, % 5.0% % (23) 0 (10) Total 7, % 951 (270) (156) (116) 410 8,026 PER(x) Target Mkt Cap* No. of Shares outstanding (m) Price(HK$) 4.93 Source: CGIS research Figure 2: peer comparison Price Mkt Cap PER(x) PBR(x) ROE(%) EV/EBITDA (x) Company Ticker HK$ HK$m E 2018E E 2018E E 2018E E 2018E THE UNITED LABOR* ,362 n.a (0.9) FOSUN PHARMA-H , CSPC PHARMACEUTI , LUYE PHARMA GROU , LIVZON PHARM-H , SSY GROUP LTD , n.a n.a n.a HUA HAN HEALTH I ,814 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a SHANGHAI FUDAN-H , DAWNRAYS PHARMAC , n.a n.a n.a CONSUN PHARMACEU , n.a n.a n.a n.a n.a n.a LEE'S PHARM , n.a n.a n.a Simple average Median * Estimated by CGIS research Source: Company 2

13 Key financials B alance Sheet P ro fit and Lo ss A s at D ec 31 Year ended D ec 31 (H K$ m) 2014A 2015A 2016A 2017E 2018E (H K$ m) 2014A 2015A 2016A 2017E 2018E Cash & cash equivalents 1,003 1,115 1,983 2,712 3,210 Intermediates 1,357 1,680 1,435 1,654 1,657 Inventories 1,418 1,415 1,072 1,307 1,334 Bulk medicines 3,940 3,272 2,871 2,643 2,677 Accounts receivable 2,982 2,195 2,180 2,400 2,538 Finished products 2,732 2,742 2,757 3,054 3,488 Others 1,221 1,036 1,167 1,098 1,055 R evenue 8,030 7,694 7,063 7,351 7,822 C urrent assets 6,624 5,761 6,402 7,517 8,138 Cost of goods sold (4,801) (4,733) (4,546) (4,392) (4,634) Property, plant and equipment 9,617 9,264 8,201 7,854 7,381 Gro ss pro fit 3,228 2,961 2,517 2,959 3,187 Investment properties 1,634 1,483 1,262 1,262 1,262 M arketing expenses (1,252) (1,290) (1,236) (1,254) (1,321) Intangible assets R&D expenses (148) (73) (86) (104) (107) Others Admin & other expenses (858) (864) (808) (837) (878) N o n-current assets 12,294 11,647 10,267 9,948 9,502 Operating pro fit Other gains / (losses) (39) T o tal assets 18,918 17,408 16,669 17,465 17,640 Net interest income / (expense) (340) (306) (249) (270) (255) Non-operating items (52) (248) (253) 0 0 Accounts payable 3,570 3,295 3,320 3,382 3,259 Pretax income (155) ST borrowings 4,558 4,110 3,614 4,034 3,862 Income taxes 18 (125) (157) (116) (145) Others 786 1, N et pro fit (311) C urrent liabilities 8,914 8,458 7,479 7,962 7,667 Long-term debts 1, ,105 1, C o re net pro fit (59) Others 1,700 1,319 2,112 2,112 2,112 Lo ng-term liabilities 3,035 2,231 3,217 3,120 3,077 EBIT 1, EBITDA 1,717 1, ,655 1,798 T o tal liabilities 11,949 10,689 10,696 11,082 10,744 EPS (HK$) Shareholders' equity 6,969 6,719 5,973 6,383 6,896 C o re EP S (H K$ ) T o tal equity 6,969 6,719 5,973 6,383 6,896 DPS (HK$) B VP S(H K$ ) C ash F lo w Key R atio s Year ended D ec A 2015A 2016E 2017E 2018E Year ended D ec A 2015A 2016A 2017E 2018E (H K$ m) Gro wth (% Yo Y) Profit before tax (155) Sales 5.0 (4.2) (8.2) Depr & amortization Operating profit 46.8 (25.3) (56.0) Change in working cap (392) (288) EBITDA 3.8 (20.6) (32.0) Income tax paid (170) (166) (157) (116) (145) Core net profit 37.3 (43.4) (118.7) n.a 25.2 Others Core EPS 37.3 (43.4) (118.7) n.a 25.2 Operating cash flo w 1,750 1,810 1,153 1,147 1,365 P ro fitability (%) Gross margin Capex (692) (723) (449) (500) (400) Operating margin Others (374) 348 (177) EBITDA margin Investment cash flo w (1,066) (375) (625) (439) (360) Core net profit margin (0.8) ROA (0.3) Net change in debt (409) (733) (421) 324 (215) ROE (core) (0.9) Others (336) (545) 761 (302) (292) B alance sheet ratio s F inancing cash flo w (745) (1,278) (507) Current ratio (X) Quick ratio (X) N et change in cash (61) Cash ratio (X) Cash at beginning of the year 1,081 1,003 1,115 1,983 2,712 Trade & bill receivables days Effect from foreign exchange (17) (45) Trade & bill payable days Source: C ash at Company, the end o f the CGIS year Research 1,003estimates 1,115 1,983 2,712 3,210 Inventory turnover days Total debt to equity ratio (%)

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: