Weekly A-Share Picks. Oct 17, A-Share Market. (Note: This is selected translation from the Chinese version of our A-share research notes)

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1 Weekly A-Share Picks Oct 17, 2016 (Note: This is selected translation from the Chinese version of our A-share research notes) (1) Consumer finance: Explosive growth imminent; banking, targeted platforms and risk-control related stocks all performing well (P.1) A-Share Market (2) Liquid biopsies Detecting clinically relevant tumour mutations and guiding clinical treatment: Precision medicine series reports (II) (P.3) Consumer finance: Explosive growth imminent; banking, targeted platforms and riskcontrol related stocks all performing well In-depth research report on consumer finance With the national strategy being upgraded, consumer finance will face a 1tn-yuan "blue ocean" market Since consumer finance was first brought up in two sessions (a National People s Congress meeting and a People s Political Consultative Conference meeting), a number of documents on consumer finance have been issued, revealing the country's determination to promote it. The rapid development of e-commerce has reduced the cost of consumer finance and also raised the requirements on the safety of consumer finance. The Chinese consumer credit market has grown rapidly. By 2017, the e-consumer finance market is expected to exceed RMB100bn. Wide-ranging developments in the industry and financial capital markets indicates explosive growth in the industry is just around the corner Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk Consumer finance is well developed in overseas markets. Santander, American Express and Rakuten are examples of global consumer finance companies with credit card operations and strong e-commerce platforms. JD.com, the largest direct-sales e-commerce platform in China, is constantly innovating and has formed a complete consumer finance ecosystem. Alibaba is developing a comprehensive layout in Internet finance; its credit products have a clear competitive advantage. Fenqile, an instalment payment e-commerce platform focusing on college students, is creating a closed-loop industry chain. The primary market is establishing an investment layout in all fields of consumer finance. Each round of financing is over RMB10m. Asset-backed securities (ABS) programmes for consumer loans are now ready for trade and have been recognized by the market. Despite a number of strong players in the industry, banks are expected to take the lead 1

2 The long industry chain of consumer finance includes capital suppliers, consumer finance service platforms, product/service suppliers, and risk-management/collection teams. Consumer finance service providers are the core element in the consumer finance industry chain. The banks, as holders of rare, hard -to-get licenses, can capture an advantageous early position. The banking system, with its capital cost advantage and favourable policy support, is expected to become a leader in the industry. However, as commercial banks face various restrictions and problems in the development of the consumer finance services, they need to cooperate with partners to develop this market. Internet consumer finance is the trend, while targeted platforms and risk control are the keys Internet consumer finance is showing strong growth momentum, with the number and value of e- commerce consumer loans constantly rising. Targeted consumer finance platforms have become the industry focus. Consumer finance can provide a valuable entry into big-data-based precision marketing. In the future, having a huge number of users and good data resources will enable core competitiveness and will be the main source of income for consumer finance enterprises. Risk control is a key concern for consumer finance enterprises and important for future credit investigation innovations. Big-data-based credit investigation can make borrowing information more transparent and simplify loan review and antifraud identification. Relevant stocks 1. Banking system: (a) Conant ( CH) made a big investment to acquire MacroFlag to enter the financial services sector; (b) Toocle cooperating with several banks to build loan service platforms for small and medium-sized enterprises. 2. Targeted platforms: (a) Haili Metal One ( CH) creating an Internet consumer finance ecosystem based on a third-party mobile payment platform; (b) Homa creating an integrated Internet consumer finance platform; (c) Newcapec establishing a campus-focused consumer finance ecosystem; (d) ireal expanding its railway-based consumer finance service. 3. Risk control: (a) Inforgem ( CH) rare license, provides big data, digital software and technical support to banks for Internet finance. Risks: Policy risk; slower-than-expected business development progress. 2

3 Liquid biopsies Detecting clinically relevant tumour mutations and guiding clinical treatment: Precision medicine series reports (II) Findings and conclusions of the report The report provides an in-depth study on the liquid biopsy industry, based on cell-free circulating tumor DNA (ctdna), circulating tumor cells (CTC) and exosomes. The main content includes (1) our comprehensive analysis of the principle of liquid biopsies, (2) factors affecting the growth of the industry, (3) the supervision and certification system, and (4) the investment approach of the industry leaders. By analyzing the investment and layout of Illumina, Roche, IBM, Foundation Medicine and Chinese listcos in the liquid biopsy field, we conclude that investors should pay attention to companies with strong distribution channels in the short term, and companies that develop new trapping technology (i.e. capturing tiny cancer cells that break off from the main tumor, which can be used for tests) and have an integrated cancer genome sample database. Liquid biopsies will provide a breakthrough in precision diagnosis and treatment of tumours; market opportunity of over US$10bn. With the rising incidence and death rate of cancer, its prompt and effective diagnosis and treatment have become a key focus in the precision medicine field. As traditional tissue biopsies are invasive procedures requiring local anaesthesia, some patients feel too sick to undergo the biopsy. Liquid biopsies are quick and non-invasive, involving only a blood sample, thus overcoming the drawbacks of traditional early diagnosis and permitting precision, real-time medication guidance and treatment monitoring technology. We forecast that in the next decade the liquid biopsy market will maintain a 21.7% compound growth rate and that the global market will reach US$28.6bn in Cancer genome cognition and trapping technology will promote the development of the liquid biopsy industry chain The liquid biopsy industry chain includes consumables, such as liquid biopsy instruments and kits (upstream) and liquid biopsy service providers (downstream). Cancer genome cognition and trapping technology will accelerate the development of ctdna and CTC detection and analysis technology. We forecast that ctdna-based early diagnosis and recurrence monitoring technology will mature within five years. CTC-based medication guidance and treatment-monitoring technology is of great significance and is expected to be mature in five to ten years. Exosome technology has good prospects. Business model of leading foreign companies: systematic approach building on company strengths Our analysis of the investment approach of Illumina, Roche, IBM and FMI shows that these large companies have focused systematically in the liquid biopsy field building on their respective strengths in the sequencing, cancer drugs, micro-electronics or cancer genome areas. 3

4 Investment strategy and main companies We think that early diagnosis, treatment guidance and cancer monitoring are the core values in the industry chain. Developing high-sensitivity trapping technology and providing comprehensive interpretation of cancer genomes are the keys to the development of the industry chain. Distribution channels and technology R&D strength will determine whether a company succeeds in the market. Distribution strength: BGI, Berry Genomics, Surexam, WuXi AppTec, Endi Biology, BeiLu Pharmaceutical ( CH), Dian Diagnostics ( CH), and Daan Gene ( CH). Trapping technology development: BGI, Berry Genomics, Surexam, GENOSABER, YZY Medical, Endi Biology, Livzon Pharmaceutical ( CH), Amoy Diagnostics, China Sun ( CH), and NKY ( CH); Accumulation of cancer genome samples: BGI, Berry Genomics, WuXi AppTec, Endi Biology, HaploX, and Daan Gene. 4

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