Positive Long-term Outlook, Upgrade to Accumulate

Sinopharm (01099 HK) Health Care Sector Equity Research 股 票 研 究 公 司 报 告 证 券 研 究 报 告 医药行业 Equity Research Report : Sinopharm (01099 HK) 公司报告 : 国药控股 (01099 HK) [Table_Summary] Positive Long-term Outlook, Upgrade to Accumulate 看好长期前景, 上调至 收集 2017 revenue/ net profit was up 7.48% YoY/ 13.68% YoY to RMB277.7 billion/ RMB5.3 billion, respectively. The slowdown in top-line growth was mainly due to assets restructuring and the implementation of the two-invoice system. Thanks to sales structure adjustment, margin expansion was achieved (GM/ NM increased by 0.31 ppt/ 0.10 ppt to 8.31%/ 1.90%). We expect profitability to keep improving but top-line growth to rebound in 2019. As the two-invoice system will have been basically implemented nationwide by 1Q18, negative impact on the Company is expected to be almost completely reflected by mid-2018 and after that, the industry is expected to accelerate concentration. As the biggest pharmaceutical distributor in China, Sinopharm is expected to gain increasing market share to achieve above-average growth and efficiency improvement in the coming years. Nevertheless, we believe top-line growth for 2018 will continue to be depressed by the implementation of the two-invoice system, which will result in a steep decline in indirect sales, despite robust growth expected for retail business and medical device distribution business. However, we expect this to rebound back to low-teen percentage growth in 2019 through market share gain. Continuous profitability improvement is expected, considering that areas with relatively high margins such as direct sales for drug distribution, retail pharmacy, as well as medical device distribution, are expected to take up an increasing proportion of total revenue. Lift TP to HK$45.00, representing 17.1x/ 14.9x FY18F/ FY19F PER, and upgrade investment rating to "Accumulate" to reflect a positive long-term outlook and reduction of policy risks. 2017 年收入 / 净利润同比增长 7.48%/ 13.68% 至人民币 2,777 亿 / 人民币 53 亿 收入增 速放缓主要受资产重组以及两票制实施影响 由于销售结构发生调整, 利润率得到了提高 ( 毛利率 / 净利率上升 0.31 个百分点 / 0.10 个百分点至 8.31%/ 1.90%) 我们预计利润率将继续提升, 但是收入增速将在 2019 年才会反弹 由于两票制已基本于 2018 年 1 季度在全国推行, 对公司的负面影响有望在 2018 年年中基本全部反映, 而行业 有望在此后加速集中 作为中国最大的医药分销商, 国药控股预计将会获得更多市场份额 并在未来几年实现高于行业平均的增速以及效率的提升 然而, 我们认为收入增速在 2018 年依然会承受由两票制 ( 造成调拨业务急剧下滑 ) 带来的压力, 尽管零售业务以及医疗器 械分销业务预计将会有强劲的增长 我们预期销售收入增速将得益于市场份额提高而于 2019 年反弹至低双位数 利润率预计将持续提高, 主要考虑到拥有相对高毛利率的业务 ( 如 药品分销中的纯销业务 零售药店以及医疗器械分销 ) 占总收入的比例将会持续提高 上调目标价至 45.00 港币, 对应 17.1 倍 /14.9 倍 2018 财年 /2019 财年的市盈率 ; 并上调投 资评级至 收集 以反映良好的长期前景及有所减小的政策风险 Rating: Kay Mai 麦梓琪 (86755) 2397 6685 maiziqi@gtjas.com Accumulate Upgraded 评级 : 收集 ( 上调 ) 6-18m TP 目标价 : HK$45.00 Revised from 原目标价 : HK$36.00 Share price 股价 : Stock performance 股价表现 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) [Table_PriceChange] Change in Share Price 股价变动 % of return Abs. % 绝对变动 % Rel. % to HS Index 相对恒指变动 % Avg. share price(hk$) 平均股价 ( 港元 ) 1 M 1 个月 Source: Bloomberg, Guotai Junan International. 3 M 3 个月 HK$42.100 Apr/17 Jul/17 Oct/17 Jan/18 Apr/18 HSI Sinopharm-H 1 Y 1 年 21.0 23.1 15.8 23.1 22.2 (8.4) 37.2 34.9 34.2 国药控股 [Table_ Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) 2016A 258,388 4,647 1.680 23.5 21.0 11.496 3.1 0.500 1.4 15.0 2017A 277,717 5,283 1.909 13.6 16.7 12.742 2.5 0.570 1.8 15.8 2018F 295,718 5,882 2.126 11.4 15.0 14.297 2.2 0.635 2.0 15.7 2019F 331,232 6,754 2.441 14.8 13.0 16.104 2.0 0.729 2.3 16.1 2020F 371,969 7,741 2.797 14.6 11.4 18.172 1.8 0.835 2.6 16.3 [Table_BaseData] Shares in issue (m) 总股数 (m) 2,767.1 Major shareholder 大股东 CNPGC 29.1% Market cap. (HK$ m) 市值 (HK$ m) 116,494.7 Free float (%) 自由流通比率 (%) 43.1 3 month average vol. 3 个月平均成交股数 ( 000) 5,807.0 FY18 Net gearing (%) FY18 净负债 / 股东资金 (%) 3.0 52 Weeks high/low (HK$) 52 周高 / 低 (HK$) 42.350 / 29.850 FY18 Est. NAV (HK$) FY18 每股估值 ( 港元 ) 48.0 See the last page for disclaimer Page 1 of 8

2017 Results Review Sinopharm (the Company ) recorded revenue/ net profit of RMB277.7 billion/ RMB5.3 billion in 2017, up 7.48% YoY/ 13.68% YoY, respectively. The preliminary estimated industry growth rate is 8.54% in 2017, according to the Ministry of Commerce ( MOC ). We attribute the below-average growth in revenue mainly to 1) the impact from assets restructuring and 2) depressive effect on distribution business to sub-distributors triggered by the implementation of the two-invoice system. Confronted with the acceleration in the execution of the two-invoice system and the year-end challenge of 30% cap on the proportion of drug sales to total revenue of the hospital, fourth-quarter revenue only delivered lackluster growth of 5.46%. However, due to higher-than-expected margin expansion, net profit beat our expectations and market consensus. Acceleration in consolidation for pharmaceutical distribution industry is expected after mid-2018. Revenue from distribution business increased by 7.26% YoY to RMB264.3 billion in 2017 (v.s. 13.34% in 2016), with revenue from distribution business to sub-distributors down 9.21% YoY. As most provinces carried out the two-invoice system in late 2017, we expect a continuous shrinking of revenue from distribution business to sub-distributors ("indirect sales") in 2018. Compared to a decline in indirect sales, pharmaceutical distribution sales to class II & III hospitals/ retail pharmacies/ other healthcare institutions (regarded as "direct sales") increased by 9.69% YoY/ 21.95% YoY/ 16.80% YoY. We attribute the fast growth of direct sales to 1) market share gain from sub-distributors; 2)robust growth of medical device distribution business (according to the management, distribution sales of medical devices reached RMB18.3 billion in 2017 with a YoY growth rate of over 30%); and 3) an increase in end-market penetration (number of hospitals/ small-end customers/ retail pharmacies served increased by 5.63% YoY/ 7.00% YoY/ 9.28% YoY). Looking forwards, we expect market consolidation to accelerate after mid-2018 (when the two-invoice system is implemented in all provinces) along with the carrying out of new rounds of provincial tenders, and we expect Sinopharm to be one of the biggest winners with consideration to its strong service capability. We also believe that as an important emerging growth driver for the Company, the medical device distribution business will deliver a CAGR of over 20% in the next five years. Retail business is expected to maintain strong growth momentum as well as to continually improve efficiency. Revenue from retail pharmacy business increased by 21.04% to RMB12.3 billion in 2017, to which Sinopharm Holding Guoda Drug Store Co., Ltd. ("Guoda") contributed RMB10.3 billion (+ 10.12%). The management indicated revenue generated from DTP business surged by over 50% YoY to over RMB5 billion in 2017. The number of drug stores operated by Guoda increased by 332 (+9.48%) to 3,834 in 2017, among which 2,801 (+298) were directly operated by the Company and 1,033 were operated by franchisees (+34). Same-store sales for directly-operated drug stores increased 5.0% YoY in 2017, while sales of brick-and-mortar stores in the domestic market increased by 7.5% according to Menet. Margin improvement was spotted, as net profit margin of Guoda improved by 0.05 ppt in to 2.61% in 2017 and operating margin of the whole retail business improved by 0.33 ppt to 3.22%. Looking forward, we expect the Company to continually expand its retail network and thus to keep generating economies of scale. In addition, Guoda plans to introduce a foreign strategic investor, Walgreens Boots Alliance (US WBA), to take a stake of 40% in Guoda, pending approval by the MOC. We believe such plan will assist Guoda in improving its below-average net profit margin in the long run considering that Walgreens Boots Alliance is a industry leader in retail pharmacy, managing the largest network of pharmaceutical chain stores in both the US and the EU. Continuous improvement in gross margin is expected. Gross profit margin was up 0.31 ppt YoY to 8.31% in 2017, thanks to 1) sales structure adjustment of the distribution segment induced by the two-invoice system; and 2) an increase in the proportion of revenue derived from business which has higher gross margin than drug distribution business, such as retail business and medical device distribution business. Margin expansion mainly occurred in 2H17 (up 0.81 ppt to 8.71%), as 1) the Company received a sum of compensation from manufacturers in 4Q17 for the profit lost which resulted from drug price cuts in the year; and 2) the execution of the two-invoice system having accelerated in 2H17. Looking ahead, we believe that the two-invoice system and sales structure optimization (retail business and medical device distribution business are expected to take up larger proportion of total revenue) will continue to drive up the overall gross margin in the coming years. A rise in financial costs ratio is expected in 2018. The implementation of the zero mark-up policy along with the two-invoice system and the expansion of financial leasing business gave rise to a rise in receivables in 2017, resulting in pressure on operating efficiency and cash flow. Net financial costs ratio increased by 0.16 ppt YoY to 0.91% and net cash generated from operating activities decreased by 81.99% YoY to RMB1.67 billion. Due to heavy use of account receivables factoring (outstanding accounts receivables of RMB20.1 billion was derecognized through AR factoring programs without recourse in 2017, up 43.3% YoY), days sales outstanding ("DSO") merely increased by 0.3 day to 95.1 days. Days payables outstanding See the last page for disclaimer Page 2 of 8

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 ("DPO") was down 1.4 days to 95.6 days and day sales of inventory ("DSI") was up 0.6 days to 37.6 days. Therefore, cash conversion cycle ("CCC") increased by 2.2 days YoY to 37.2 days. Even though capital demand of the Company has been partially alleviated through capital increase in financial leasing business through the introduction of strategic investors, we believe that the Company will continue to face rising financial costs in 2018, considering that 1) DSO or AR factoring is expected to increase with direct sales accounting for a larger proportion of total distribution sales resulted from the acceleration in industry consolidation; and 2) the impact of the removal of markup on drugs is not expected to be completely eliminated in 2018. We estimate that net financial costs ratio will increase in 2018 but drop afterwards. Table-1: Sinopharm s 2017 Results Review RMB million 2016 2017 YoY 2H16 2H17 YoY Revenue 258,388 277,717 7.48% 131,589 139,949 6.35% - Pharmaceutical distribution 246,459 264,352 7.26% 125,740 132,652 5.50% --- to class II & III hospitals 153,223 168,075 9.69% 78,559 86,421 10.01% --- to national and provincial sub-distributors 52,151 47,345-9.21% 25,061 19,939-20.44% --- to retail pharmacies 18,361 22,391 21.95% 10,297 12,144 17.94% --- to other healthcare institution 22,724 26,541 16.80% 11,823 14,148 19.67% - Retail pharmacy 10,239 12,392 21.04% 5,329 6,691 25.56% - Others 4,441 3,962-10.79% 1,980 2,161 9.16% Gross profit 20,671 23,077 11.64% 10,397 12,184 17.19% Shareholder's profit 4,647 5,283 13.68% 2,112 2,518 19.25% EPS (RMB) 1.68 1.91 13.68% 0.76 0.91 19.25% Gross margin 8.00% 8.31% 0.31 ppt 7.90% 8.71% 0.81 ppt D&S expense ratio 2.56% 2.66% 0.10 ppt 2.64% 2.91% 0.27 ppt G&A expenses ratio 1.59% 1.51% -0.08 ppt 1.62% 1.63% 0.01 ppt Financial costs ratio - net 0.75% 0.91% 0.16 ppt 0.79% 1.10% 0.31 ppt Net profit margin 1.80% 1.90% 0.10 ppt 1.60% 1.80% 0.19 ppt Cash conversion cycle 35.0 37.2 2.2 34.3 45.7 11.4 -Days sales of inventory 37.1 37.6 0.6 38.8 36.5-2.3 -Days sales outstanding 94.8 95.1 0.3 96.0 106.3 10.3 -Days payables outstanding 97.0 95.6-1.4 100.5 97.1-3.4 Figure-1: Sinopharm's Quarterly Revenue 80,000 RMB Mn 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 25% 20% 15% 10% 5% 0% Figure-2: Sinopharm's Quarterly Gross Margin and Net Margin 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Quarterly Revenue YoY Growth Gross Profit Margin (LHS) Net Profit Margin (RHS) Earnings Revisions, Valuation & Outlook Key adjustments for Sinopharm 1) Fine adjustments to FY18F/ FY19F revenue of -0.7%/ 1.4%, respectively, mainly to reflect 1) the strong outlook of the See the last page for disclaimer Page 3 of 8

medical device distribution business; and 2) capital increase in financial leasing business. 2) Revise up gross margin for FY18F/ FY19F by 0.4 ppts/ 0.5 ppts, respectively, to factor in 1) business which has higher gross margin than drug distribution business such as retail business and medical device distribution business will take up a larger proportion of total revenue in the coming years; and 2) compensation for profit lost triggered by drug price cuts will continue to be made by manufacturers. 3) Lift D&S expenses ratio by 0.3 ppts/ 0.4 ppts to support revenue structure adjustment. 4) Revise down net financial costs ratio for FY18F/ FY19F by 0.1 ppts/ 0.2 ppts, respectively, to reflect partial alleviation of capital demand. 5) Trim down CCC for FY18F/ FY19F by 25.2 days/ 33.8 days, with consideration to heavy usage of AR factoring and discount of note receivables. FY18F/ FY19F shareholders profit forecasts have been fine-tuned by 4.4%/ 7.9% to RMB5,882 million/ RMB6,754 million, respectively, with EPS for FY18F/ FY19F revised by 4.4%/ 7.9% to RMB2.126/ RMB2.441, respectively. The new EPS projections for FY18F/ FY19F/ FY20F indicates YoY growth of 11.3%, 14.8% and 14.6%, respectively. Table-2: Key Earnings Adjustments for Sinopharm New Old Change RMB million FY18F 2019F 2020F FY18F 2019F FY18F FY19F Revenue 295,718 331,232 371,969 297,838 326,646-0.7% 1.4% Gross profit 25,549 29,058 33,064 24,405 27,058 4.7% 7.4% Operating profit 13,247 15,024 17,010 13,086 14,708 1.2% 2.1% Shareholders profit 5,882 6,754 7,741 5,635 6,258 4.4% 7.9% EPS (RMB) 2.126 2.441 2.797 2.036 2.261 4.4% 7.9% Gross margin 8.6% 8.8% 8.9% 8.2% 8.3% 0.4 ppt 0.5 ppt Operating margin 4.5% 4.5% 4.6% 4.4% 4.5% 0.1 ppt 0.0 ppt Net margin 2.0% 2.0% 2.1% 1.9% 1.9% 0.1 ppt 0.1 ppt Cash Conversion Cycle (days) 42.9 44.0 44.0 68.6 77.8-25.7-33.8 Source: Guotai Junan International. We expect that profitability will improve from 2018 onwards and top-line growth will rebound in 2019. As the two-invoice system will have been basically implemented nationwide by 1Q18, negative impact to the Company is expected to be almost completely reflected by mid-2018 and the industry is expected to accelerate concentration after that. As the biggest pharmaceutical distributor in China, Sinopharm is expected to gain increasing market share to achieve above-average growth and efficiency improvement in the coming years. Nevertheless, we believe that top-line growth for 2018 will continue to be depressed by the implementation of the two-invoice system, which will result in a steep decline in indirect sales, despite robust growth expected for retail business and medical device distribution business. However, we expect this to rebound back to low-teen percentage growth in 2019 through market share gain. Continuous profitability improvement is expected, considering that areas with relatively high margins, such as direct sales for drug distribution business, retail pharmacy as well as medical device distribution business, are expected to take up an increasing proportion of total revenue. We expect that deferring payments from hospitals will be carried over to 2018, driving up Sinopharm's financial costs. However, the increase in the amount of financial costs is expected to be much less than our previous projection since the capital increase in financial leasing business has partially alleviated the Company's capital demand. Therefore, we lift TP to HK$45.00 representing 17.1x/ 14.9x FY18F/ FY19F PER, and upgrade investment rating to "Accumulate" to reflect a long-term positive outlook for Sinopharm. See the last page for disclaimer Page 4 of 8

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Figure-3: Forward PE Band of Sinopharm Figure-4: Forward PB Band of Sinopharm 50 45 40 35 30 25 20 15 10 5 0 (x) Sinopharm 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 (x) Sinopharm PER (historical mean) PER (current) PER (High) PBR (historical mean) PBR (current) PBR (High) PER (Low) PER curve PBR (Low) PBR curve Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International. Risks 1) Slower-than-expected replacement of sub-distributors by the Company. 2) Lower-than-expected industry average growth triggered by the new upcoming medical reimbursement standards. 3) Higher-than-expected borrowing amount and interest rates. 4) Increasing competition caused by the entry of new rivals from the logistics industry. See the last page for disclaimer Page 5 of 8

Table-3: Peers Group Comparison of Sinopharm ROE ROA PE (fiscal year) PB (fiscal year) EV/EBITDA Company Stock Code Currency Last price Market Cap PEG (%) (%) HKD mil 17A 18F 19F 20F 17A 18F 19F 20F 18F 18F 17A 18F 19F HK - Listed Pharmaceutical Distributors and Retailers Sinopharm 1099 HK HKD 42.10 116,495 19.1 16.0 14.0 12.1 2.8 2.3 2.1 1.7 1.0 15.5 3.7 7.8 8.2 7.0 China Resources Pharma 3320 HK HKD 11.94 75,037 21.7 18.8 16.3 14.1 1.8 1.5 1.4 1.5 1.2 8.0 3.5 8.4 8.3 7.8 Shanghai Pharma-H 2607 HK HKD 21.75 78,799 14.4 12.0 10.5 9.2 1.4 1.3 1.2 1.2 0.7 11.1 4.1 10.3 10.5 9.1 GZ Baiyunshan Pharma 874 HK HKD 24.60 56,971 16.8 14.8 13.1 9.9 1.8 1.6 1.4 1.3 1.1 11.4 6.2 9.5 17.5 14.1 China Pioneer Pharma 1345 HK HKD 2.60 3,416 10.2 n.a. n.a. n.a. 2.4 n.a. n.a. n.a. n.a. n.a. n.a. 7.2 n.a. n.a. Charmacy Pharm 2289 HK HKD 8.75 945 18.3 11.7 9.6 n.a. 1.7 1.5 1.4 n.a. 0.3 13.6 2.5 n.a. n.a. n.a. Universal Health Int 2211 HK HKD 0.15 437 n.a. n.a. n.a. n.a. 0.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sinco Pharma 6833 HK HKD 0.55 931 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Kingworld Medicines 1110 HK HKD 1.32 822 13.9 n.a. n.a. n.a. 1.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Wanjia Group 401 HK HKD 0.15 95 n.a. n.a. n.a. n.a. 0.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Simple Average 16.4 14.7 12.7 11.3 1.5 1.6 1.5 1.4 0.9 11.9 4.0 8.6 11.2 9.5 Weighted Average 18.1 15.5 13.5 11.5 2.0 1.7 1.6 1.4 1.0 12.0 4.2 8.8 10.4 8.9 China - Listed Pharmaceutical Distributors and Retailers Shanghai Pharma-A 601607 CH CNY 24.49 78,799 18.7 16.4 14.4 13.3 1.9 1.8 1.7 1.5 1.2 10.9 4.1 10.3 10.5 8.8 Huadong Medicine 000963 CH CNY 66.06 80,192 36.1 29.1 23.7 19.1 7.7 6.3 5.2 4.2 1.2 22.4 12.3 19.5 20.3 16.4 Jointown Pharma 600998 CH CNY 19.75 46,308 27.1 24.6 19.4 n.a. 2.6 2.4 2.1 n.a. 1.3 10.4 3.0 16.0 13.5 11.0 China National Med 600511 CH CNY 30.99 29,679 20.0 n.a. n.a. n.a. 2.9 2.5 2.2 1.9 n.a. 13.6 6.5 n.a. n.a. n.a. Realcan Pharma 002589 CH CNY 15.39 28,918 23.1 17.3 13.7 n.a. 2.8 2.4 2.1 n.a. 0.6 14.1 4.1 14.1 11.0 9.0 GX Liuzhou Pharma 603368 CH CNY 50.10 11,577 23.1 18.2 14.8 12.1 2.7 2.4 2.1 1.8 0.7 13.1 6.4 15.7 n.a. n.a. Nanjing Pharma 600713 CH CNY 5.50 7,154 20.6 n.a. n.a. n.a. 1.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sinopharm Accord 000028 CH CNY 58.09 29,119 23.5 20.0 17.5 15.7 2.6 2.4 2.1 1.9 1.2 11.4 5.3 10.5 14.1 12.3 Zhejiang Huatong 002758 CH CNY 10.57 2,772 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Zhejiang Zhenyuan 000705 CH CNY 7.75 3,234 43.1 n.a. n.a. n.a. 1.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Beijing Tongrentang 600085 CH CNY 35.58 60,935 48.0 42.5 37.9 36.3 5.8 5.4 5.0 4.5 3.4 11.9 6.8 19.2 18.6 16.7 Tasly Pharma 600535 CH CNY 44.41 59,919 35.0 30.3 26.1 22.1 5.5 4.8 4.2 3.5 1.9 16.4 7.5 19.0 18.9 16.1 YN Hongxiang Yixintang 002727 CH CNY 25.98 18,420 35.3 29.6 25.0 n.a. 4.9 4.3 3.7 n.a. 1.6 16.1 6.6 n.a. n.a. n.a. Laobaixing Pharmacy 603883 CH CNY 73.27 26,071 53.1 44.1 35.3 29.0 9.2 6.2 5.2 4.4 2.0 15.1 6.6 n.a. n.a. n.a. Yifeng Pharmacy 603939 CH CNY 59.44 26,921 68.8 52.5 40.7 30.2 6.8 6.0 5.3 4.7 1.7 11.6 7.9 37.1 n.a. n.a. China Meheco 600056 CH CNY 24.01 32,036 19.8 16.7 13.6 10.5 3.3 2.8 2.4 2.0 0.8 17.2 6.5 n.a. n.a. n.a. Simple Average 33.0 28.4 23.5 20.9 4.2 3.8 3.3 3.0 1.5 14.2 6.4 17.9 15.3 12.9 Weighted Average 32.7 28.3 23.6 21.3 4.6 4.0 3.5 3.2 1.6 14.5 6.7 17.3 15.8 13.3 Global Pharmaceutical Distributers and retailers Mckesson Corp MCK US USD 139.81 226,422 6.1 11.0 10.4 9.5 2.7 2.4 2.4 2.3 n.a. 20.4 3.1 4.8 8.2 7.6 Cardinal Health Inc CAH US USD 61.01 150,697 15.0 11.2 9.9 9.1 2.8 2.6 2.4 2.3 0.5 23.5 3.9 10.0 8.5 7.6 Amerisourcebergen Corp ABC US USD 82.67 142,533 49.5 12.6 11.2 10.2 8.7 5.6 4.9 3.7 0.1 56.4 4.9 12.8 8.1 7.3 Henry Schein Inc HSIC US USD 65.83 79,727 25.4 16.1 14.8 13.5 3.6 2.9 2.5 2.5 0.5 20.5 7.9 12.4 11.0 9.8 Patterson Cos Inc PDCO US USD 21.40 15,895 11.9 12.5 11.5 10.6 1.5 1.3 1.3 1.2 6.8 11.9 4.7 14.2 9.3 9.2 WBA WBA US USD 63.10 491,125 16.6 10.6 9.7 8.9 2.4 2.2 2.0 1.9 0.3 19.8 8.4 13.3 8.4 7.7 Celesio CLS1 GR EUR 26.80 52,574 n.a. n.a. n.a. n.a. 2.9 n.a. n.a. n.a. n.a. n.a. n.a. 15.4 n.a. n.a. Medipal Holdings Corp 7459 JP JPY 2,154.00 38,915 16.8 14.7 16.4 15.9 1.1 1.0 1.0 0.9 10.6 7.5 3.7 6.2 n.a. n.a. Alfresa Holdings Corp 2784 JP JPY 2,312.00 40,146 16.2 15.7 16.3 15.5 1.3 1.2 1.1 1.1 n.a. 8.1 n.a. 5.8 n.a. n.a. Suzuken Co Ltd 9987 JP JPY 4,325.00 33,023 19.9 24.7 24.4 22.3 1.1 1.0 1.0 1.0 n.a. 4.2 2.3 7.1 11.0 10.8 Australian Pharma API AU AUD 1.47 4,363 13.7 13.4 12.6 12.3 1.3 1.3 1.2 1.2 2.9 9.8 3.7 6.3 5.7 5.4 Simple Average 19.1 14.3 13.7 12.8 2.7 2.1 2.0 1.8 3.1 18.2 4.7 9.8 8.8 8.2 Weighted Average 18.9 12.1 11.2 10.3 3.2 2.6 2.4 2.2 0.9 23.3 5.9 10.7 8.6 7.9 Source: Bloomberg, Guotai Junan International. See the last page for disclaimer Page 6 of 8

Financial Statements and Ratios Income Statement Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Total Revenue 258,388 277,717 295,718 331,232 371,969 Cost of Sales (237,717) (254,640) (270,169) (302,174) (338,905) Gross Profit 20,671 23,077 25,549 29,058 33,064 Balance Sheet Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F PPE 6,752 7,796 8,438 9,056 9,640 Others 18,199 16,900 17,966 19,317 20,863 Total Non-current Assets 24,952 24,696 26,404 28,373 30,503 Other Income 272 400 414 464 521 D&S expenses (6,619) (7,383) (8,280) (9,534) (11,007) G&A expenses (4,110) (4,187) (4,436) (4,964) (5,568) Operating Profit 10,214 11,906 13,247 15,024 17,010 Other Gain-Net 411 359 215 216 216 Net Finance Costs (1,932) (2,534) (2,976) (3,181) (3,389) Share of Profit of Associates & JV 232 441 716 805 906 Profit Before Tax 8,925 10,173 11,202 12,863 14,742 Income Tax (2,033) (2,305) (2,442) (2,804) (3,214) profit After Tax 6,892 7,868 8,760 10,059 11,529 Non-controlling Interest (2,244) (2,585) (2,878) (3,305) (3,788) Shareholders' Profit / Loss 4,647 5,283 5,882 6,754 7,741 Basic EPS 1.680 1.909 2.126 2.441 2.797 Dividend 1,384 1,577 1,756 2,016 2,311 Cash & Cash Equivalents 25,573 29,011 29,301 31,948 35,297 Bank Deposits and Restricted Cash 5,018 4,858 5,193 5,808 6,514 Inventories 25,760 26,769 28,543 32,084 36,164 Trade receivables 69,245 75,529 84,205 94,270 105,517 Others 7,164 8,676 9,241 10,247 11,391 Total Current Assets 132,760 144,843 156,483 174,357 194,884 Total Assets 157,712 169,539 182,888 202,730 225,387 Short-term Borrowings 22,363 30,163 30,343 30,421 30,500 Trade Payables 66,746 66,613 71,055 79,472 89,132 Others 10,629 14,101 14,449 16,050 17,886 Total Current Liabilities 99,737 110,876 115,846 125,943 137,519 Long-term Borrowings 11,135 5,441 5,355 5,368 5,382 Others 2,306 1,952 2,067 2,234 2,421 Total Non-current Liabilities 13,442 7,393 7,421 7,603 7,804 Total Liabilities 113,179 118,269 123,268 133,545 145,322 Cash Flow Statement Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F PBT 8,925 10,173 11,202 12,863 14,742 D&A 1,068 1,015 1,088 1,153 1,219 Other Adjustments 1,439 (4,923) 2,232 2,347 2,453 Changes in WC (128) (2,284) (6,084) (4,485) (4,886) Income tax paid (2,046) (2,314) (2,800) (3,216) (3,686) Cash from Operating Activities 9,258 1,667 5,637 8,663 9,842 Capital Expenditure (1,948) (1,859) (1,889) (1,945) (1,994) Others 342 (689) 303 20 12 Cash from Investing Activities (1,606) (2,547) (1,585) (1,926) (1,982) Issues of shares 0 0 0 0 0 Debt Paid/Raised 2,325 2,014 0 0 0 Dividends Paid (1,135) (1,384) (1,577) (1,756) (2,016) Others (3,218) 3,672 (2,185) (2,335) (2,495) Cash from Financing Activities (2,027) 4,302 (3,762) (4,091) (4,511) Net Changes in Cash 5,625 3,422 290 2,647 3,349 Cash at Beg of Year 19,966 25,573 29,011 29,301 31,948 FX Adjustments (18) 16 0 0 0 Cash at End of Year 25,573 29,011 29,301 31,948 35,297 Total Shareholders' Equity 31,811 35,258 39,562 44,560 50,285 Minority Interest 12,722 16,012 20,058 24,624 29,779 Total Equity 44,532 51,270 59,620 69,184 80,064 [Table_FinancialRatio] Financial Ratios 2016A 2017A 2018F 2019F 2020F Margins and Efficiency Gross Margin 8.0% 8.3% 8.6% 8.8% 8.9% EBITDA Margin 4.7% 5.1% 5.3% 5.3% 5.3% Operating Margin 4.0% 4.3% 4.5% 4.5% 4.6% Net Profit Margin 1.8% 1.9% 2.0% 2.0% 2.1% Dividend Payout Ratio 29.8% 29.9% 29.9% 29.9% 29.9% DSI 37.1 37.6 37.4 36.6 36.8 DSO 94.8 95.1 98.6 98.3 98.0 DPO 97.0 95.6 93.0 90.9 90.8 Growth and Profitability Revenue 13.0% 7.5% 6.5% 12.0% 12.3% EBITDA 14.1% 15.0% 11.2% 12.6% 12.6% Operating Profit 10.7% 16.6% 11.3% 13.4% 13.2% Net Profit 23.2% 13.7% 11.3% 14.8% 14.6% ROE 15.0% 15.8% 15.7% 16.1% 16.3% ROA 4.6% 4.8% 5.0% 5.2% 5.4% ROIC 17.5% 18.6% 18.4% 18.9% 19.4% Financial Ratios Net Debt/Equity 9.1% 4.9% 3.0% -4.4% -11.8% Liabilities/Assets 71.8% 69.8% 67.4% 65.9% 64.5% Current Ratio 1.3x 1.3x 1.4x 1.4x 1.4x Interest Coverage Ratio 5.4x 5.0x 4.8x 5.0x 5.3x See the last page for disclaimer Page 7 of 8

[Table_CompanyRatingDefinition] Company Rating Definition The Benchmark: Time Horizon: 6 to 18 months Rating Hong Kong Hang Seng Index Definition Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable. Accumulate 收集 Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. [Table_IndustryRatingDefinition] Sector Rating Definition The Benchmark: Time Horizon: 6 to 18 months Rating Hong Kong Hang Seng Index Definition Outperform 跑赢大市 Relative Performance>5%; or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable. [Table_DISCLOSUREOFINTERESTS] 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 GREENLAND BROAD (01253 HK), KAISA GROUP (01638 HK), GUOTAI JUNAN I (01788 HK),BINHAI INVESTMENT (02886 HK),GFI MSCI A I (03156 HK), ZHENRO PPT (06158 HK),LINK HOLDINGS (08237 HK),MR CSI300 ETF-R (CNY) (83127 HK),GFI MSCI A I-R (CNY) (83156 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 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. 2018Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) 2509-9118 Fax: (852) 2509-7793 Website: www.gtja.com.hk See the last page for disclaimer Page 8 of 8