Yum Cha 飲茶. June 2, 2017 TALKING POINT - HK STOCKS TO BENEFIT MORE FROM STOCK CONNECT INDEX RESEARCH NOTES

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index HSCEI Shanghai COMP (0.5) Shenzhen COMP (1.9) Gold (0.2) BDIY (3.2) Crude Oil, WTI(US$/BBL) 47.9 (0.9) Crude Oil, BRENT(US$/BBL) 50.6 (0.3) HIBOR, 3-M 0.8 (0.7) SHIBOR, 3-M RMB/USD 6.8 (0.1) DATA RELEASES DUE THIS WEEK Jun 04 Caixin China PMI Composite Source: Bloomberg June 2, 2017 TALKING POINT - HK STOCKS TO BENEFIT MORE FROM STOCK CONNECT INDEX Top 5 stocks least owned by southbound investors (China 100 index) Company name Last price (HK$) Market cap (HK$m) Estimated free float adjusted index weighting 2017E PER (x) 2018E PER (x) PBR (x) 2017E dividend Southbound yield (%) holdings/freefloat 551 HK Equity Yue Yuen Industrial Holdings Ltd 32 52, % % 1169 HK Equity Haier Electronics Group Co Ltd , % % 683 HK Equity Kerry Properties Ltd , % % 151 HK Equity Want Want China Holdings Ltd , % % 6808 HK Equity Sun Art Retail Group Ltd , % % Top 5 stocks least owned by southbound investors (Overseas 50 index) Company name Last price (HK$) Market cap (HK$m) Estimated free float adjusted index 2017E weighting PER (x) 2018E PER (x) PBR (x) 2017E dividend yield (%) Southbound holdings/freefloat 142 HK Equity First Pacific Co Ltd/Hong Kong , % % 2888 HK Equity Standard Chartered PLC , % % 179 HK Equity Johnson Electric Holdings Ltd , % % 10 HK Equity Hang Lung Group Ltd , % n.a. n.a n.a. 0.13% 20 HK Equity Wheelock & Co Ltd , % % Sources: Bloomberg, CGIS Research Following our discussion on the CSI HK Connect Indexes yesterday, we look at potential beneficiaries (assuming the index funds and ETFs based on these indexes will be launched) from a different angle, based on investor feedback. Currently, some stocks are underowned by southbound investors, but they will benefit from the potential passive purchases in the future. For the CSI HK Connect China 100 Index, the potential Top 5 beneficiaries are Yue Yuen (0551.HK), Haier Electronics (1169.HK), Kerry Properties (0683.HK), Want Want China (0151.HK) and Sun Art Retail (6808.HK). For the CSI HK Connect Overseas 50 Index, the Top 5 beneficiaries may be First Pacific (0142.HK), Standard Chartered (2888.HK), Johnson Electric (0179.HK), Hang Lung Group (0010.HK) and Wheelock (0020.HK). Overall, stocks in the CSI HK Connect Overseas 50 Index will benefit more from the establishment of index funds and ETFs. On average, we estimate southbound investors own only 1.61% of the free float of these 50 stocks. For the CSI HK Connect China 100 Index, the ratio is much higher, at 6.45%. This is reasonable, in our view, because of the so-called home-bias. It s difficult to predict the size of potential index funds/etfs inflow at the moment. In the A-share market, we estimate the amount strictly tracking the CSI300 is about RMB120bn. If we conservatively assume the initial scale is about 20% of the CSI300 funds, the potential funds strictly tracking the CSI HK Connect China 100 Index may reach RMB24bn. The actual size may be larger, as there will also be active management funds using these HK Connect indexes as performance benchmarks. Analyst: Wong Chi-man, CFA RESEARCH NOTES TUL [3933.HK; HK$5.39; HOLD] - As a result of the three biggest 6-APA suppliers price alliance supporting the 6-APA price and recent RMB appreciation, the share price of TUL has risen by 5% since our last report in March. We believe the current share price largely reflects the two favourable factors we mentioned above. On the other hand, we found that sales of its growth engine, insulin, in 5M2017 were below expectations, which will have a bigger impact on its longterm valuation. Thus, we think the recent share price performance is overdone and investors should sell into strength. A better re-entry point may emerge when there is evidence showing that insulin sales will catch up in 2H17 and that 6-APA prices will stabilize at a higher level. Given that the positives for the 6-APA business may be offset by potential weakness in the insulin business, we keep our earnings forecasts unchanged at the moment. Also, we maintain our Target Price of HK$4.93, which is based on the sum-of-the-parts methodology due to TUL s quite different growth prospects for various segments. Maintain HOLD. 1

2 RESEARCH NOTES A-SHARE MONTHLY MODEL PORTFOLIO - External markets may remain an important factor affecting A shares. The uncertain situation in the Korean Peninsula, US President Donald Trump's trade protectionism stance, and recent fluctuations in the RMB/USD exchange rate are elements to consider. We remain relatively cautious about investments in June and recommend a bottom-up strategy for stock picking. The CGS Top 10 portfolio for June 2017: China Merchants Shekou Industrial Zone ( CH), Focus Media ( CH), Huadian Power ( CH), Invt Electric ( CH), Jereh Oilfield Services ( CH), Luzhou Laojiao ( CH), Ping An Insurance ( CH), Sun-Create Electronics ( CH), ST Zhenxing Biopharmaceutical and Chemical ( CH) and Zhengzhou Yutong Bus ( CH). 2

3 The United Laboratories [3933.HK] Potential weakness in insulin to offset 6-APA positives; sell into strength As a result of the three biggest 6-APA suppliers price alliance supporting the 6-APA price and recent RMB appreciation, the share price of TUL has risen by 5% since our last report in March. We believe the current share price largely reflects the two favourable factors we mentioned above. On the other hand, we found that sales of its growth engine, insulin, in 5M2017 were below expectations, which will have a bigger impact on its long-term valuation. Thus, we think the recent share price performance is overdone and investors should sell into strength. A better re-entry point may emerge when there is evidence showing that insulin sales will catch up in 2H17 and that 6-APA prices will stabilize at a higher level. Given that the positives for the 6-APA business may be offset by potential weakness in the insulin business, we keep our earnings forecasts unchanged at the moment. Also, we maintain our Target Price of HK$4.93, which is based on the sum-of-the-parts methodology due to TUL s quite different growth prospects for various segments (Figure 1). Maintain HOLD. Investment thesis 6-APA: Last week the three major 6-APA suppliers were perceived as trying to form a price alliance and stopped quoting 6-APA prices to support the 6-APA price. The market reacted positively. We do not know whether they can build a price alliance at the moment, but if the three biggest players come to an agreement in their interest, we expect the 6-APA price to rebound back to RMB /kg. However, any price above RMB200/kg has the risk of inducing redundant capacity. The major risk of the rebound is whether downstream clients can accept the price lift. We believe the recent price rally reflects this positive. Recent RMB appreciation: TUL reports its financial statements in HK$ while its sales are denominated in RMB. Recent RMB appreciation will help to alleviate RMB depreciation pressure and HK$ denominated debt. 2nd generation Insulin: According to our channel check on sales data in Jan-May, we expect TUL s 2 nd generation insulin sales to grow by 30% in HK$ in 1H2017 to ~HK$260m. This falls behind the Company s guidance to the market in early 2017 of 50% volume growth, which is equivalent to ~42% revenue growth to ~HK$760m (sales growth lower than volume growth due to stable ASP but RMB depreciation translation impact). We see the potential risk of missing the full-year target unless we see progress in two areas 1) 2H2017 sees execution of new tenders from Helongjiang and Jiangsu; and 2) 2H usually accounts for ~60-65% of full year sales, as 1H is affected by the Spring festival, and hospitals usually store inventory in Q4. Nevertheless, the weaker-than-expected 1H17 insulin sales growth will make achieving the full-year target more challenging. Overall, the 2 nd generation insulin business had a segment margin of 16% in 2016, and we expect continued margin improvement from economies of scale. In 2017, we expect Insulin to contribute ~10% of total revenue and 14% of total operating profit. 3rd generation insulin: TUL commenced shipments of 3rd generation insulin in May 2017, but we expect a meaningful revenue contribution only in Currently, it has won five provincial tenders (Fujian, Chongqing, Sichuan, Henan and Liaoning), with Guangdong tenders expected in June. Y/E Dec A 2015A 2016A 2017E 2018E Turnover (HK$ 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 HOLD (unchanged) Close: HK$5.39 (Jun 1, 2017) Target Price: HK$4.93 (-8.5%) Price Performance (HK$) Market Cap Shares Outstanding Auditor US$1125.4m 1,626.9m Deloitte Free Float 32.1% 52W range China Healthcare Sector 3M average daily T/O Major Shareholding Sources: Company, Bloomberg Harry He Analyst (852) harryhe@chinastock.com.hk HK$ US$2.87m Ms Ning Kwai Chun (61.85%) Wong Chi Man, CFA Head of Research (852) Turnover (RHS) cmwong@chinastock.com.hk June 2, 2017 Price (LHS) (HK$ million)

4 Figure 1: Sum-of-the-Parts valuation HKm$ Revenue % Revenue Source: CGIS research Mutiple on segment profit before net Finance cost Target Mkt Cap* Finished (excl. insulin) 2, % 14 5,399 Insulin % 25 1,945 Bulk 2, % 14 1,850 Intermediates 1, % 14 1,158 Total 7, % 10,351 Net debt (HK$m) 2,331 Market cap (HK$) 8,021 No. of Shares outstanding (m) Price(HK$) 4.93 Figure 2: Peer comparison Price Mkt Cap PER(x) PBR(x) ROE(%) EV/EBITDA (x) Company Ticker HK$ 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 4

5 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) (797.2) 25.2 Others Core EPS 37.3 (43.4) (118.7) (797.2) 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 C ash at the end o f the year 1,003 1,115 1,983 2,712 3,210 Inventory turnover days Total debt to equity ratio (%) Source: Company, CGIS Research estimates 5

6 A-Share Monthly Portfolio June 2, 2017 Remain Cautious and Identify Quality Stocks Investment Portfolio for June 2017 May performance. The CGS Top 10 portfolio registered a loss of 5.11% in May 2017, underperforming the CSI 300 Index by 6.29ppts. The weak portfolio was attributable mainly to a mismatch in sector allocation. The cumulative return of the CGS monthly portfolio from Jan 2013 to May 2017 was %. June outlook. External markets may remain an important factor affecting A shares. The uncertain situation in the Korean Peninsula, US President Donald Trump's trade protectionism stance, and recent fluctuations in the RMB/USD exchange rate are elements to consider. The Chinese economy is expected to be largely stable. Structural overheating reached an end in the near term due to more regulatory measures in the financial sector and further tightening in the property sector. Monetary policy will remain stable, and liquidity at the macro-level will likely be slightly tight. Fiscal policy and reforms will continue to play a bigger role. We expect a range-bound trading pattern in the stock market. Investors should be aware of potential black swan events. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk This is a summary translation of the Chinese report titled 依旧谨慎优选个股 2017 年 5 月份投资组合报告 contributed Stay cautious in June; follow a bottom-up stock-picking strategy. We are relatively cautious about investments in June and recommend a bottom-up strategy for stock picking. Our portfolio covers the following sectors: media, food and beverage, power equipment, machinery, auto, IPPs, military and defence, property, pharmaceuticals and insurance. June stock portfolio (in alphabetical order): China Merchants Shekou Industrial Zone ( CH), Focus Media ( CH), Huadian Power ( CH), Invt Electric ( CH), Jereh Oilfield Services ( CH), Luzhou Laojiao ( CH), Ping An Insurance ( CH), Sun-Create Electronics ( CH), ST Zhenxing Biopharmaceutical and Chemical ( CH) and Zhengzhou Yutong Bus ( CH). by the following: Hong Liang Strategy Analyst (8610) hongliang@chinastock.com.cn Practicing Certificate No.: S Table: CGS March Investment Portfolio (closing prices on June 1, 2017) Stock Code Stock Discription EPS (RMB) PE (X) 2015A 2016A 2017E 2018E 2015A 2016A 2017E 2018E CH China Merchants Shekou CH Focus Media CH Huadian Power CH Invt Electric CH Jereh Oilfield Services CH Luzhou Laojiao CH Ping An Insurance CH Sun-Create Electronics CH ST Zhenxing Biopharmaceutical CH Zhengzhou Yutong Bus Sources: China Galaxy Securities Research 6

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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: