Main Board Listing Research

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1 9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: Research: Facsimile: HONG KONG RESEARCH Analyst: Carmen Wong 26 th June 2014 Main Board Listing Research 綠葉製藥集團有限公司 Luye Pharma Group Ltd (02186) Joint Sponsors : UBS Citi CITIC Securities Joint Global Coordinators, Joint Bookrunners and Joint Lead Managers : UBS Citi CLSA Sector : Pharmaceuticals, Biotechnology & Life Sciences Business : Developing, producing, marketing and selling pharmaceutical products in China Total share offer: 999,640,000* shares (30.1 % of the enlarged share capital) Public Offer: 99,964,000 shares (10%) Placing: 899,676,000 shares (90%) Greenshoe: 149,946,000 shares * 999,640,000 shares comprising of 667,540,000 new shares and 332,100,000 sale shares Price: HK$5.38 HK$5.92 per share Market Capitalization: HK$17,867 million HK$19,661 million Historical fully diluted 2013 P/E: 43.2x 47.6x Adjusted NTA per share: HK$1.51 HK$1.62 Staffing: 3,289 (as of 31 st December 2013) HK Public Offer period: 26 th June nd July 2014 noon Receiving bank: Bank of China (Hong Kong) Share registrar: Computershare Hong Kong Investor Services Limited Listing date: 9 th July 2014 Business of Luye Pharma Group Ltd ( Luye or the Group ) Luye Pharma Group Ltd ( Luye or the Group ) focuses on developing, producing, marketing and selling pharmaceutical products in three of the largest and fastest growing therapeutic areas in the PRC, namely i) oncology, ii) cardiovascular system and iii) alimentary tract and metabolism. Its product portfolio consists of 29 products with seven key products. Six of these seven key products have patent protection and are indicated for the treatment or prevention of high prevalence medical conditions, including cancer, cardiovascular diseases and diabetes. The Group generates revenue by selling its pharmaceutical products to distributors who in turn sell its products to hospitals and other medical institutions, either directly or through their sub-distributors. As of 30 th December 2013, the Group has five production facilities in China, with a total of 30 production lines. This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.

2 Shareholders after Listing (Assuming the over-allotment option is not exercised) Luye Pharmaceutical Investment Co. Ltd., of which - 70% owned by Nelumbo Investments Limited, a trustee of a discretionary trust set up by Mr. Liu Dian Bo, the Chairman of the Group; - 15% owned by Mr. Yang Rong Bing, the Executive Director of the Group; and - 15% owned by Mr. Yuan Hui Xian, the Executive Director of the Group 45.4% CPE Greenery Limited jointly owned by CPE China Fund, L.P. (a China-focused private equity fund) and CPE Palm Beach L.P. (an investment fund) 6.8% CDH Flower Limited wholly owned by CDH Fund IV, L.P. (a private equity fund primarily specializing in growth capital, medium-sized market and buyout investments in Greater China) 6.4% Tropical Excellence Infrastructure Pte. Ltd. wholly owned by GIC (Ventures) Pte. Ltd., which is wholly owned by the Minister for Finance, Singapore 5.9% Beyond Border Investment Limited jointly owned by AXA Direct Asia II, L.P. (an Asia- Pacific focused private equity fund) and New Horizon Capital III, L.P. (a private equity fund focusing on the investment of consumer and retail, alternative energy, pharmaceutical and healthcare, and advanced manufacturing sectors) 5.4% Public shareholders 30.1% 100.0% Use of Proceeds Net proceeds from the offer are estimated to be HK$3,592 million (based on the mid-point of the indicative Offer Price of HK$5.65 and assuming the over-allotment option is not exercised) HK$ million To expand its portfolio of pharmaceutical products 718 For research and development 718 For selective acquisitions of domestic or international pharmaceutical companies 718 To construct new production lines and to upgrade and further automate its existing production facilities 718 For working capital and general corporate purposes 360 To expand its sales and marketing network 180 To partially repay its borrowings 180 Financial Highlights Year ended 31 December RMB '000 RMB '000 RMB '000 Revenue 1,774,390 2,135,943 2,515,111 Gross profit 1,473,269 1,784,130 2,101,605 Attributable profit 166, , ,944 Gross margin 83.0% 83.5% 83.6% Net margin 9.4% 8.2% 13.0% 31/12/ /12/ /12/2013 Net Debt to Equity ratio 14.5% 6.7% 21.7% 2

3 Breakdown of Revenue by Product Type Year ended 31 December (RMB '000) Oncology 799, % 940, % 1,102, % Cardiovascular System 613, % 630, % 723, % Alimentary Tract and Metabolism 280, % 451, % 575, % Other products 80, % 113, % 114, % Total 1,774, % 2,135, % 2,515, % Peers Valuation Comparison Name Code Market Cap (HK$ million) 2013 P/E Kingworld Medicines , x China Animal Healthcare , x China Medical System , x Sino Biopharmaceutical , x CSPC Pharmaceutical , x Shanghai Pharmaceuticals , x Sihuan Pharmaceutical , x Sinopharm Group , x Shanghai Fosun Pharmaceuticals , x Average 33, x Luye Pharma ,764* 45.4x* Sources: Bloomberg (*): Based on the mid-point of the Offer Price range (HK$5.65) Strengths/Opportunities Luye focuses on pharmaceutical products within i) oncology, ii) cardiovascular system and iii) alimentary tract and metabolism, which are three of the largest and fastest growing therapeutic areas in the PRC. According to China Medical and Pharmaceutical Economic Information Network ( MENET ) Report, oncology, cardiovascular system and alimentary tract and metabolism was respectively the largest (market share: 18.8%), the third largest (14.4%) and the fourth largest (14.1%) overall therapeutic area for pharmaceutical products in China in 2013, representing compounded annual growth rate (CAGR) of 18.0%, 18.1% and 19.2% between 2008 and In addition, the Group is strategically focusing its research and development (R&D) efforts on central nervous system products, which will become one of its key therapeutic areas. According to MENET Report, the central nervous system market in China grew at a CAGR of 22.3% from 2008 to Its pharmaceutical products have enjoyed strong competitive positioning in the market. For example, Lipusu which contributed 33.7% of the Group s total revenue in 2013 was the second most popular domestically manufactured pharmaceutical product for cancer treatment in China in 2013 with a market share of approximately 38.9%. In addition, with its strong R&D capabilities, Luye has a robust pipeline of product candidates, including eight oncology products, four alimentary tract and metabolism products and ten central nervous system products. The Group targets 17 of these product candidates will be approved for marketing and sale in China by

4 Luye will continue to expand its business through selective strategic acquisitions which involve complementary technologies and will enable the Group to achieve rapid and effective market penetration in new therapeutic areas. In particular, the Group has shown remarkable track record in identifying targets and integrating acquired companies. For instance, Luye acquired Sichuan Baoguang Pharmaceutical Co. Ltd. (now Sichuan Luye) and its Bei Xi product in 2011, which allowed the Group to enter the field of diabetes and add new products in gastroenterology, and strengthened its position in alimentary tract and metabolism. The revenue from sales of Bei Xi was RMB153.7 million in 2012, the first full financial year following its acquisition, and has increased to RMB238.9 million in 2013, representing year-on-year growth of 55.4%. The Group has entered into cornerstone placement agreement with six investors. The cornerstone subscription would represent 11.56% of the enlarged share capital (assuming the IPO price is set at the mid-point (HK$5.65) of the indicative price range and the over-allotment option is not exercised). Details are as follows:- Cornerstone investor Subscription (HK$ million) % of Global Offering # % of total enlarged share capital upon completion of Global Offering # Value Partners Hong Kong Limited (806.HK) % 4.13% OrbiMed Advisors LLC % 2.07% Dragon Billion China Master Fund and LMA SPC % 2.06% TAL China Focus Master Fund % 1.24% Macquarie Funds Management Hong Kong Limited % 1.03% Minmetals Capital (Hong Kong) Limited % 1.03% Total 2, % 11.56% ( # ): Assuming the IPO price is set at the mid-point (HK$5.65) of the indicative price range and the over-allotment option is not exercised. Weaknesses/Threats Luye relies on a limited number of key products. The revenue from the sales of its seven key products accounted for approximately 88.9%, 87.3% and 88.1% of the Group s total revenue in 2011, 2012 and 2013, respectively. If the sales volumes or pricing levels of any or some of these key products drop, the Group s profitability will be materially and adversely affected. Currently, 19 of the Group s pharmaceutical products are included in the national Medical Insurance Catalogue. In 2011, 2012 and 2013, revenue from sales of these 19 products accounted for approximately 54.2%, 55.4% and 56.0% of its total revenue. As the relevant PRC authorities may from time to time, review and revise, or change the scope of reimbursement for, the products that are listed in the Medical Insurance Catalogues, Luye has no assurance that any of its products currently listed in the Medical Insurance Catalogues will remain listed, or that changes on the scope of reimbursement will not negatively affect the sales of its products. Its pharmaceutical products included in the Medical Insurance Catalogues or the National List of Essential Drugs are subject to price controls by the National Development and Reform Commission ( NDRC ), either at the national level or the provincial level. Price controls are mainly in the form of fixed retail prices or maximum retail prices, which indirectly limit the wholesale prices at which the Group can sell the relevant products to distributors. Between 2011 and 2012, the NDRC lowered the maximum retail prices of its several products by 15% to 20%. The patents for each of its key products are for a finite duration. Following the expiration of the relevant patents, its competitors may be able to develop and introduce direct substitute products to its key products with identical formulation. In particular, patents with respect to Maitongna, CMNa, Lipusu and Tiandixin will expire in 2019, 2020, 2021 and 2021, respectively. These are the key products of the Group, with sales accounted for an aggregate of 57.8%, 56.4% and 56.1% of the Group's total revenue in 2011, 2012 and 2013, respectively. 4

5 The 2013 P/E of Luye shares ranges from 43.2x to 47.6x, against its peers average of 27.5x. Given its smaller market capitalization, the valuation of Luye is not cheap. Besides, the sale of shares by its existing shareholders (representing 33.2% of the total number of offer shares in the Global Offering) remains our concerns, which may show a lack of confidence in Luye by the major shareholders including the Group s management. Recommendation: Neutral 5

6 Important Disclosure / Analyst Certification / Disclaimer This report is published by East Asia Securities Company Limited, a wholly-owned subsidiary of The Bank of East Asia, Limited ( BEA ). Each research analyst primarily responsible for the content of this report (whether in part or in whole) certifies that (i) the views on the companies and securities mentioned in this report accurately reflect his/her personal views; and (ii) no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it. Neither this report nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This report is based upon information, which East Asia Securities Company Limited considers reliable, but accuracy or completeness is not guaranteed. The analysis or opinions expressed in this report only reflect the views of the relevant analyst as at the date of the release of this report which are subject to change without notice. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific recipient. This report should not be regarded by recipients as a substitute for the exercise of their own judgment. Investments involve risks and investors should exercise prudence in making their investment decisions and obtain separate legal or financial advice, if necessary. East Asia Securities Company Limited and / or The Bank of East Asia Group accepts no liability whatsoever for any direct or consequential loss arising from any use of or reliance on this report or further communication given in relation to this report. At the time of preparing this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein, while BEA along with its affiliates/associates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report. BEA and its affiliates/associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. BEA and/or any of its affiliates/associates may beneficially own a total of 1% or more of any class of common equity securities of the company or companies mentioned in this report and may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the company or companies mentioned in the report. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction, publication, availability or use would be contrary to law and regulation. 6