Outlook of China healthcare 2013 by Deutsche Bank

Deutsche Bank Markets Research
Asia

China
Health Care

Industry

Date

China Healthcare

26 September 2012

Health Care

Industry Update
Jack Hu, Ph.D

Remaining sanguine on sector outlook
Remaining sanguine due to solid fundamentals We anticipate the sector continuing to perform in 2H12 and 2013, based on strong demand growth and mild policy headwinds. We highlight that 1) July data suggest that the growth acceleration is continuing; 2) medical device names are likely to benefit from growth acceleration in hospital patient visits; 3) drug names are likely to differentiate themselves, as blockbusters may enjoy more sustainable growth. We reiterate our top picks including Mindray Medical (MR.N), Sino Biopharm (1177.HK) and United Lab (3933.HK). Acceleration in demand growth continues July data indicated that 1) hospital drug sales rose 24% in July, vs. 21% in 2Q12 and 24% in 1Q12, and vs.17% for full-year 2011; 2) inpatient and outpatient volume growth rates were 18% and 11% for July 2012, respectively, vs. 15% and 13% for June 2012, and vs. 8% and 7.4% YoY for full-year 2011. While we attribute inpatient and outpatient volume growth to hospital bed capacity and the number of physicians, respectively, we have greater conviction that demand growth will remain robust in the near future. After the infrastructure build-up cycle during 2009-11, we believe hospital bed capacity will be released gradually over the next few years, which is positive for drug names such as Shanghai Pharma, equipment and medical consumables names, including Mindray (MR.N) Events to watch for 2H12 and 2013: focus on profit growth We anticipate 1) that drug performance will diverge: the days when all drugs grew more or less by the industry average will be long gone, while innovative drugs and first-to-market generics will significantly outgrow the market, and non-differentiated drugs will gradually disappear; 2) that the widespread practice of increasing ex-manufacturing prices will likely continue across the sector for the next few quarters, artificially inflating top-line growth and gross margin; as such, we would focus on net profit growth and anticipate more stringent policy on price mark-ups; 3) 2013 NRDL expansion and 2012 EDL expansion; and 4) 2012/2013 RDL drug tenders, as the province of Hainan has now started this after a quiet period of five months without any tendering. Policy remains a key catalyst We think healthcare value chain components are likely to be affected differently by new policies after the leadership transition. We anticipate that coverage expansion, particularly coverage of serious diseases, is likely to benefit selective participants. However, we also expect more stringent pricing control for non-differentiated drugs, which is likely to further lower margins for generic makers without sufficient blockbusters in the product mix, such as Shanghai Pharma (2607.HK). Multiples-based valuation preferred; risks relate mainly to policy/regulations We use a multiples-based valuation approach in light of the sustainable growth that we expect from the sector. Industry risks relate mainly to government policies and regulatory changes in China, particularly healthcare reforms, which could negatively affect pricing. Additional risks generally relate to rising raw material costs and overexposure to the EDL and RDL. Deutsche Bank AG/Hong Kong

Research Analyst (+852) 2203 6208 jack.hu@db.com

Top picks The United Laboratories (3933.HK),HKD3.75 Mindray Medical (MR.N),USD35.09 Sino Biopharmaceutical (1177.HK),HKD2.89 Companies Featured The United Laboratories (3933.HK),HKD3.75 P/E (x) EV/EBITDA (x) Price/book (x) Sihuan Pharmaceutical (0460.HK),HKD2.94 P/E (x) EV/EBITDA (x) Price/book (x) Sino Biopharmaceutical (1177.HK),HKD2.89 P/E (x) EV/EBITDA (x) Price/book (x) Buy 2011A 2012E 2013E 121.2 28.8 15.6 19.6 8.4 7.1 1.1 0.9 1.0 Buy 2011A 2012E 2013E 20.3 12.7 10.9 11.9 6.6 5.5 1.7 1.6 1.5 Buy 2011A 2012E 2013E 20.1 18.8 15.9 8.9 8.0 6.8 3.0 3.3 3.1 Buy Buy Buy

Shanghai Pharmaceuticals Hold (2607.HK),HKD14.02 2010A 2011E 2012E P/E (x) – 16.2 15.1 EV/EBITDA (x) – 7.5 4.9 Price/book (x) 0.0 1.2 1.2 WuXi PharmaTech (WX.N),USD14.71 Buy 2011A 2012E 2013E P/E (x) 12.0 11.1 9.8 EV/EBITDA (x) 7.0 5.5 4.5 Price/book (x) 1.5 1.8 1.4 Related recent research Risk.reward favors long Show me the alpha Date 16 May 2012 28 Jun 2012

________________________________________________________________________________________________________________ All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.

26 September 2012 Health Care China Healthcare

Table Of Contents

Solid fundamentals; increasing conviction .................................... 6
Remaining sanguine on the sector due to strong fundamentals....................................... 6 Valuation appears relatively attractive ............................................................................... 7 Events to watch .................................................................................................................. 8 Top picks: Mindray, United Lab and Sino Biopharma ....................................................... 9

Sector valuation............................................................................ 11
Valuation looks relatively attractive ................................................................................. 11

Growth recovery continues .......................................................... 14 Analysis of sector data ................................................................. 16
Key takeaways: 2Q growth slowing ................................................................................. 16 Top-line weaker than expected in 2Q12 .......................................................................... 16 Profit in 2Q12 .................................................................................................................... 18 Margins are stable ............................................................................................................ 20 Earnings quality remains a key issue ............................................................................... 21 Analysis by subsector ....................................................................................................... 22 Valuation and Risks .......................................................................................................... 30

Page 2

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Model updated:28 August 2012

Fiscal year end 31-Dec

2009
0.08 0.09 0.04 0.5 4,528 5,121 3,765 13.4 12.9 4.50 6.5 3.3 1.2 4.6 5.0

2010
0.09 0.12 0.08 0.8 4,854 14,323 12,273 33.4 25.3 3.85 0.8 2.7 3.0 12.9 14.2

2011
0.13 0.09 0.07 0.8 4,952 12,663 11,379 20.1 27.4 2.98 3.3 2.7 2.0 8.9 9.9

2012E
0.15 0.16 0.06 0.9 4,941 14,281 13,134 18.8 18.3 3.32 4.1 2.2 1.7 8.0 8.9

2013E
0.18 0.18 0.11 0.9 4,941 14,281 13,241 15.9 15.6 3.05 7.2 3.8 1.4 6.8 7.6

2014E
0.21 0.21 0.13 1.0 4,941 14,281 13,397 13.7 13.5 2.80 8.4 4.4 1.2 5.9 6.6

Running the numbers Asia Hong Kong Health Care

Financial Summary
DB EPS (HKD) Reported EPS (HKD) DPS (HKD) BVPS (HKD) Weighted average shares (m) Average market cap (HKDm) Enterprise value (HKDm)

Sino Biopharmaceutical
Reuters: 1177.HK Bloomberg: 1177 HK

Valuation Metrics

Buy
Price (25 Sep 12) Target Price 52 Week range Market Cap (m) HKD 2.89 HKD 3.30 HKD 1.86 - 3.14 HKDm 14,281 USDm 1,842

P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x)

Company Profile
Sino Biopharmaceutical, as a holding company and through its subsidiaries, is engaged in the R&D and production of hepatitis B and cardio-cerebral vascular (CCV) drugs in China. The company's products are in the chemical and modern Chinese medicine format. Additionally, its product portfolio serves other therapeutics such as analgesic, orthopedic, anti-infective and oncology.

Income Statement (HKDm)
Sales revenue Gross profit EBITDA Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit 3,235 2,654 819 58 2 759 13 1 18 9 799 135 267 0 397 -15 382 4,086 3,384 951 82 3 865 13 -1 200 11 1,088 228 292 0 567 -138 429 5,782 4,671 1,284 132 4 1,148 26 -4 -188 15 996 167 366 0 463 166 629 7,801 6,414 1,639 167 3 1,468 51 2 36 5 1,562 347 433 0 781 -21 760 9,671 7,813 1,949 202 3 1,744 53 2 15 5 1,819 404 502 0 913 -16 897 11,544 9,301 2,277 239 3 2,035 57 2 15 5 2,114 470 585 0 1,060 -16 1,044

Price Performance
3.6 3.2 2.8 2.4 2.0 1.6 Sep 10Dec 10Mar 11 Jun 11Sep 11Dec 11Mar 12 Jun 12
Sino Biopharmaceutical HANG SENG INDEX (Rebased)

Cash Flow (HKDm)
Cash flow from operations Net Capex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital 687 -352 335 0 -170 -101 -120 -56 -23 503 -393 110 1,104 -389 138 -1,082 -120 -291 933 -520 413 0 -389 0 -421 -397 -197 1,136 -546 590 0 -318 0 -271 1 -174 1,555 -532 1,023 0 -536 0 -414 73 -8 1,781 -577 1,203 0 -626 0 -522 55 -46

Margin Trends
26 24 22 20 18 16
09 10 11 12E 13E
EBIT Margin

Balance Sheet (HKDm)
14E
EBITDA Margin

Growth & Profitability
50 40 30 20 10 0 09 10 11 12E 13E 14E
ROE (RHS)

25 20 15 10 5 0

Cash and other liquid assets Tangible fixed assets Goodwill/intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net debt

1,739 895 187 172 773 3,766 1 737 738 2,474 554 3,028 -1,738

1,619 1,243 303 1,240 1,216 5,621 155 1,164 1,319 3,648 654 4,302 -1,464

2,018 1,688 327 292 1,970 6,295 85 1,434 1,519 3,836 940 4,776 -1,933

2,019 2,067 376 313 2,434 7,210 85 1,724 1,809 4,300 1,101 5,401 -1,934

2,091 2,397 521 313 2,980 8,303 85 2,262 2,347 4,676 1,280 5,956 -2,006

2,147 2,735 725 313 3,382 9,303 85 2,617 2,703 5,109 1,491 6,600 -2,062

Sales growth (LHS)

Key Company Metrics
Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates 42.3 30.6 25.3 23.5 42.8 16.9 10.9 5.9 -57.4 nm 26.3 4.8 23.3 21.2 68.6 18.5 10.7 5.1 -34.0 nm 41.5 43.8 22.2 19.9 74.9 12.4 9.0 3.8 -40.5 nm 34.9 21.1 21.0 18.8 40.7 19.2 7.0 3.2 -35.8 nm 24.0 18.0 20.1 18.0 58.8 20.3 5.5 2.6 -33.7 nm 19.4 16.4 19.7 17.6 59.1 21.7 5.0 2.4 -31.2 nm

Solvency
0 -10 -20 -30 -40 -50 -60 -70 09 10 11 12E 13E 14E

Net debt/equity (LHS)

Net interest cover (RHS)

Jack Hu, Ph.D
+852 2203 6208 jack.hu@db.com

Deutsche Bank AG/Hong Kong

Page 3

26 September 2012 Health Care China Healthcare
Fiscal year end 31-Dec

Model updated:09 August 2012

2009
1.30 1.30 0.19 5.8 109 2,894 2,691 20.4 20.4 5.83 4.0 0.7 4.2 14.3 16.7

2010
1.45 1.45 0.19 8.4 114 3,607 3,173 21.8 21.8 3.14 2.3 0.6 4.5 15.8 18.5

2011
1.57 1.57 0.29 9.9 115 3,042 2,533 16.8 16.8 2.58 3.4 1.1 2.9 11.5 13.6

2012E
1.81 1.81 0.39 11.3 117 4,044 3,418 19.4 19.4 3.09 3.7 1.1 3.2 12.9 15.3

2013E
2.03 2.03 0.39 12.9 120 4,044 3,359 17.3 17.3 2.71 2.6 1.1 2.6 11.0 12.7

2014E
2.29 2.29 0.44 14.8 122 4,044 3,215 15.3 15.3 2.38 4.7 1.3 2.2 9.1 10.5

Running the numbers Asia China Health Care

Financial Summary
DB EPS (USD) Reported EPS (USD) DPS (USD) BVPS (USD) Weighted average shares (m) Average market cap (USDm) Enterprise value (USDm)

Mindray Medical
Reuters: MR.N Bloomberg: MR US

Valuation Metrics

Buy
Price (24 Sep 12) Target Price 52 Week range Market Cap (m) USD 35.09 USD 38.00 USD 23.61 - 36.26 EURm 3,131 USDm 4,044

P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x)

Company Profile
Mindray Medical International develops, manufactures, and markets medical devices. The company offers patient monitoring devices, diagnostic laboratory instruments, and ultrasound imaging systems.

Income Statement (USDm)
Sales revenue Gross profit EBITDA Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit 634 360 189 28 0 161 2 0 0 26 188 29 0 -12 147 0 147 704 406 201 30 0 171 9 0 0 9 189 18 0 0 171 0 171 881 492 221 34 0 187 19 0 0 3 209 23 0 0 186 0 186 1,074 599 265 41 0 224 29 0 0 3 256 39 1 0 216 0 216 1,275 715 304 39 0 265 24 0 0 4 293 44 1 0 248 0 248 1,495 838 354 48 0 306 26 0 0 3 336 50 1 0 284 0 284

Price Performance
40 36 32 28 24 20 Sep 10Dec 10 Mar 11Jun 11Sep 11Dec 11 Mar 12Jun 12
Mindray Medical HANG SENG INDEX (Rebased)

Cash Flow (USDm)
Cash flow from operations Net Capex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital 172 -56 116 0 -22 12 2 108 0 148 -66 82 150 -23 -169 -107 -67 0 192 -90 102 -9 -35 85 -157 -13 0 241 -91 150 0 -46 52 15 170 0 216 -108 108 0 -48 0 0 60 0 326 -127 199 0 -55 0 0 144 0

Margin Trends
30 28 26 24 22 20
09 10 11 12E 13E
EBIT Margin

Balance Sheet (USDm)
14E
EBITDA Margin

Growth & Profitability
30 25 20 15 10 5 0 09 10 11 12E 13E 14E
ROE (RHS)

30 25 20 15 10 5 0

Cash and other liquid assets Tangible fixed assets Goodwill/intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net debt

306 182 205 66 207 966 169 157 326 641 0 641 -137

138 223 228 296 266 1,151 0 184 184 967 0 967 -138

124 244 268 479 343 1,459 86 222 308 1,142 9 1,151 -39

294 315 255 479 376 1,720 138 267 405 1,306 10 1,316 -157

354 398 243 479 460 1,934 138 297 434 1,489 10 1,499 -217

498 491 229 479 508 2,204 138 355 493 1,700 11 1,711 -361

Sales growth (LHS)

Key Company Metrics
Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates 15.8 11.4 29.8 25.4 14.1 25.9 8.9 2.0 -21.4 nm 11.1 11.5 28.5 24.3 12.9 21.3 9.4 2.2 -14.2 nm 25.1 8.2 25.1 21.2 18.0 17.7 10.2 2.7 -3.4 nm 22.0 14.9 24.6 20.9 20.9 17.7 8.5 2.2 -11.9 nm 18.7 12.3 23.8 20.8 18.8 17.8 8.5 2.8 -14.5 nm 17.3 12.6 23.7 20.5 19.0 17.8 8.5 2.7 -21.1 nm

Solvency
0 -5 -10 -15 -20 -25 09 10 11 12E 13E 14E

Net debt/equity (LHS)

Net interest cover (RHS)

Jack Hu, Ph.D
+852 2203 6208 jack.hu@db.com

Page 4

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Model updated:01 August 2012

Fiscal year end 31-Dec

2009
0.45 0.45 0.15 2.7 1,200 3,660 5,384 6.8 6.8 1.55 nm 4.9 1.2 4.8 6.9

2010
0.78 0.78 0.31 4.1 1,246 13,476 14,980 13.8 13.8 3.89 nm 2.9 2.3 9.0 12.0

2011
0.08 0.08 0.21 4.0 1,302 12,467 15,219 121.2 121.2 1.12 nm 2.2 2.4 19.6 47.4

2012E
0.13 0.13 0.08 4.0 1,509 6,101 9,045 28.8 28.8 0.93 nm 2.1 1.2 8.4 17.1

2013E
0.24 0.24 0.10 3.9 1,627 6,101 9,506 15.6 15.6 0.96 nm 2.7 1.1 7.1 12.8

2014E
0.28 0.28 0.12 4.1 1,627 6,101 9,779 13.4 13.4 0.92 nm 3.1 1.0 6.6 11.8

Running the numbers Asia Hong Kong Health Care

Financial Summary
DB EPS (HKD) Reported EPS (HKD) DPS (HKD) BVPS (HKD) Weighted average shares (m) Average market cap (HKDm) Enterprise value (HKDm)

The United Laboratories
Reuters: 3933.HK Bloomberg: 3933 HK

Valuation Metrics

Buy
Price (25 Sep 12) Target Price 52 Week range Market Cap (m) HKD 3.75 HKD 4.10 HKD 2.78 - 6.46 HKDm 6,101 USDm 787

P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x)

Company Profile
The United Laboratories International Holdings is a pharmaceutical company involved in the manufacturing, marketing and sales of intermediate products, bulk medicine and antibiotic finished products, non-antibiotic finished products and capsule casings.

Income Statement (HKDm)
Sales revenue Gross profit EBITDA Depreciation Amortisation EBIT Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit 4,643 2,147 1,117 333 5 778 -85 0 0 0 693 152 0 0 541 0 541 6,503 2,982 1,668 414 5 1,249 -86 0 0 0 1,163 189 0 0 974 0 974 6,405 2,282 778 453 4 321 -143 0 0 5 183 79 0 0 104 0 104 7,551 2,781 1,080 546 4 530 -224 0 0 0 306 92 0 0 214 0 214 9,017 3,384 1,334 589 5 741 -223 0 0 0 517 93 0 0 424 0 424 10,227 3,798 1,474 638 5 831 -228 0 0 0 603 109 0 0 495 0 495

Price Performance
20 16 12 8 4 0 Sep 10Dec 10 Mar 11Jun 11Sep 11Dec 11 Mar 12Jun 12
The United Laboratories HANG SENG INDEX (Rebased)

Cash Flow (HKDm)
Cash flow from operations Net Capex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital 742 -856 -114 0 -180 425 -101 30 -286 668 -1,080 -412 1,191 -388 63 -184 272 -833 508 -1,237 -728 931 -273 894 -338 485 -194 356 -1,140 -785 719 -127 600 0 408 -583 448 -730 -282 0 -178 0 0 -460 -590 763 -828 -65 0 -208 40 0 -233 -392

Margin Trends
28 24 20 16 12 8 4
09 10 11 12E 13E
EBIT Margin

Balance Sheet (HKDm)
14E
EBITDA Margin

Growth & Profitability
50 40 30 20 10 0 -10 09 10 11 12E 13E 14E
ROE (RHS)

25 20 15 10 5 0

Cash and other liquid assets Tangible fixed assets Goodwill/intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net debt

481 3,988 137 0 2,854 7,460 2,205 2,062 4,267 3,193 0 3,193 1,724

846 4,651 115 0 3,996 9,608 2,350 2,148 4,498 5,110 0 5,110 1,504

1,538 5,639 117 0 4,571 11,865 4,290 2,398 6,688 5,177 0 5,177 2,752

1,946 6,226 120 0 5,384 13,676 4,890 2,700 7,590 6,086 0 6,086 2,945

1,485 6,358 124 0 6,370 14,338 4,890 3,116 8,006 6,332 0 6,332 3,405

1,253 6,539 129 0 7,157 15,077 4,930 3,528 8,459 6,619 0 6,619 3,678

Sales growth (LHS)

Key Company Metrics
Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates 23.6 25.9 24.1 16.8 33.2 18.0 18.5 2.5 54.0 9.2 40.1 73.3 25.7 19.2 39.8 23.5 16.7 2.6 29.4 14.5 -1.5 -89.9 12.2 5.0 258.6 2.0 19.4 2.7 53.2 2.2 17.9 64.5 14.3 7.0 54.4 3.8 15.1 2.1 48.4 2.4 19.4 85.2 14.8 8.2 38.8 6.8 8.1 1.2 53.8 3.3 13.4 16.6 14.4 8.1 38.8 7.6 8.1 1.3 55.6 3.6

Solvency
60 50 40 30 20 10 0 09 10 11 12E 13E 14E 20 15 10 5 0

Net debt/equity (LHS)

Net interest cover (RHS)

Jack Hu, Ph.D
+852 2203 6208 jack.hu@db.com

Deutsche Bank AG/Hong Kong

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26 September 2012 Health Care China Healthcare

Solid fundamentals; increasing conviction
Remaining sanguine on the sector due to strong fundamentals
While growth moderation continues for numerous sectors in China, healthcare has differentiated itself by exhibiting accelerated growth YTD-July vs. 2011, which we attribute to strong demand growth and rapidly growing reimbursement. However, similar to many other sectors, the healthcare sector is also experiencing structural derating on margins, particularly operating margin, largely due to an unsustainable pricing environment and rising costs. We anticipate the sector continuing to perform in 2H12 and 2013, based on strong demand growth, a seemingly improving reimbursement environment, insurance coverage expansion and a temporary lack of additional policy headwinds. We have greater conviction in light of new data points in July, which include: 1) hospital drug sales increased 24% in July, vs. 17% for full-year 2011; 2) the number of inpatient and outpatient visits to medical institutions rose 18% and 12% YoY, respectively, for YTD-July 2012, vs. 4% and 12% YoY, respectively, for YTD-July 2011, and 8% and 7% YoY, respectively, for full-year 2011; 3) both gross margins and operating margins were stable in 2Q12 after rebounding in 1Q12, based on Deutsche Bank’s proprietary analysis of 50 healthcare companies with the largest market cap. We see these data points as clear indicators that sector recovery is on track. Best sector catalyst: demand growth continues to accelerate July data showed that 1) hospital drug sales rose 24% in July, vs. 21% in 2Q12 and 24% in 1Q12, and vs.17% for full-year 2011, 2) inpatient and outpatient volume growth rates were 18% and 11% for July 2012, respectively, vs. 15% and 13% for June 2012, and vs. 8% and 7.4% YoY for full-year 2011. We highlight the high degree of correlation between these data points. Figure 1: Monthly outpatient volume for all medical institutions in China (as of July 2012)
mn 1200 1000 800 600
431 562 540 554 558 548

Figure 2: Monthly inpatient volume for all medical institutions in China (as of July 2012)
mn 20% 30 25 20 15 0% -5% -10% -15% 10 5 0 11 10 24
Inpatients (LH S) YoY (RH S)

O utpatients (LH S)
1,047

YoY (RH S)

45% 40% 35% 30% 17 11 11 12 11 12 12 11 11 12 12 12 12 12 12 12 12 12 12 10 12 13 15 14 14 14 14 25% 20% 15% 10% 5% 0% -5%

940

15% 10% 5%

400 200 0

385

445 432 434 438 441 447 446 434 457

454

432

495 485 497 495 495 497 483 488 507

481

513

11

Jan-10 Feb -10 M ar-10 Ap r-10 M ay-10 Jun-10 Jul-10 Aug -10 Sep -10 O ct-10 N o v-10 Dec-10 Jan-11 Feb -11 M ar-11 Ap r-11 M ay-11 Jun-11 Jul-11 Aug -11 Sep -11 O ct-11 N o v-11 Dec-11 Jan-12 Feb -12 M ar-12 Ap r-12 M ay-12 Jun-12 Jul-12

Source: MOH; December data was derived from annual data and monthly data from Jan-Nov

Source: MOH; December data was derived from annual data and monthly data from Jan-Nov

Page 6

Jan-10 Feb -10 M ar-10 Ap r-10 M ay-10 Jun-10 Jul-10 Aug -10 Sep -10 O ct-10 N o v-10 Dec-10 Jan-11 Feb -11 M ar-11 Ap r-11 M ay-11 Jun-11 Jul-11 Aug -11 Sep -11 O ct-11 N o v-11 Dec-11 Jan-12 Feb -12 M ar-12 Ap r-12 M ay-12 Jun-12 Jul-12

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Margin stabilizing; however, not indicative in near term Our data analysis suggests stable margins in 2Q12, after a significant rebound in 1Q12. We attribute this to sufficient new product launches and relatively effective risk mitigation strategies for price controls, as well as deceleration of raw material cost inflation and near-term cost savings. Additionally, we think the widespread practice of increasing ex-manufacturing prices is likely to inflate GM and decrease OPM, making GM/OPM analysis less meaningful for the next few quarters. Figure 3: Margin analysis by quarter
Gross margin 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12
16.1% 13.1% 13.6% 9.1% 12.4%12.0% 10.6% 7.6% 18.1% 16.2% 15.3% 14.2%13.6% 13.9%13.4% 13.7%13.4% 12.2% 14.3% 13.4% 12.3% 11.0%11.2%10.6%11.0%10.8% 9.8% 7.7% 7.8% 8.6% 8.4% 34.9%34.8%34.2% 31.2% 35.3% 33.8%33.2% 33.3%32.9% 31.7% 31.4%31.7% 30.2% 30.0% 29.1%29.3% 28.8% 27.8%

Figure 4: Margin analysis by quarter ex-distributors
N et margin

O perating margin

Gross margin 40.0% 35.0% 30.0% 25.0% 20.0%
11.7% 10.8%

O perating margin

N et margin

39.3%39.7%39.2% 35.6%

39.4%38.8% 37.6% 37.5% 36.7%37.2% 35.7% 35.4%35.3%34.8% 34.7%35.0% 33.8% 32.7%

22.6% 18.9% 15.4% 16.3% 15.7%16.0% 19.1%18.5%

15.0% 10.0% 5.0% 0.0%

11.5%11.1%

16.3%15.8% 14.3%15.0% 14.2% 13.3% 13.0% 18.0% 12.0% 11.1% 16.0% 15.0% 9.4% 14.6%14.4% 13.3%13.3% 13.1%13.5%12.7%12.4%13.3% 12.6% 10.4%10.2% 9.6% 9.2% 8.3%

6.7%

1Q 08

3Q 08

1Q 09

3Q 09

1Q 10

3Q 10

1Q 11

3Q 11

1Q 12

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Valuation appears relatively attractive
We continue to believe risk:reward favors being long on the China healthcare sector at present because of accelerated demand growth YTD 2012 and relatively inexpensive valuations even after the recent rally. Currently, HK-listed healthcare companies are trading at 15x NTM PE, on 18% NTM EPS growth expectations, which is much lower than the previous peak of 28x, on 4% growth. While we are mindful that historical comparisons may not be meaningful if the growth outlook fails to materialize, we think sell-side consensus has largely reached a reasonable level to be met or beaten. We remind investors that names with upward earnings revision potential include Shanghai Pharma and United Lab, and those with downward revision potential include Biosensors.

Deutsche Bank AG/Hong Kong

Page 7

26 September 2012 Health Care China Healthcare

Figure 5: Average forward P/Es & NTM EPS YoY of HKlisted companies from January 2010 to present
PE x
35 30 25 20 15 10 5 HK PE HK EPS YOY 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Figure 6: Average forward P/Es & NTM EPS YoY of Chinalisted companies from January 2010 to present
PE x
40 35 30 25 20 15 10 5 China PE China EPS YOY 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10%

Sep-10

Sep-11

Sep-10

Sep-12

Sep-11

Mar-10

Mar-11

Mar-10

Mar-12

Mar-11

May-10

May-11

May-10

May-12

May-11

Mar-12

Nov-10

Nov-11

Nov-10

Nov-11

Source: Reuters, Deutsche Bank

Source: Reuters, Deutsche Bank

Events to watch
We anticipate that

Drug performance to diverge: bigger blockbusters to emerge We anticipate that differentiated drugs, including innovative drugs and first to market generics that address large market opportunities, will significantly outgrow the sector in the near to medium term, while non-differentiated drugs or drugs with too much competition will gradually disappear, which may lead to consolidation. While industry consensus is that a “blockbuster” drug is defined as one achieving RMB1bn sales, we have a high conviction that we will see more drugs reaching the RMB2-3bn threshold in the near future. We think this will bode well for companies such as Sino Biopharm. Focus on net profit growth; top-line growth and GM inflated We expect the increase of ex-manufacturing prices to continue across the sector for the next few quarters, artificially inflating top-line growth and gross margin, and reducing operating margin. As such, we would focus on net profit growth going forward. More importantly, we ponder why almost all manufacturers have rushed to increase exmanufacturing prices. Recall that in February, the NDRC issued its Guidelines on Pricing Management for Pharmaceutical Distribution, a policy that addresses drug mark-up at both the distribution and the retail level. The policy will have a negative impact on manufacturers using an external sales force, as the price cap could be generally smaller than the current difference between the ex-manufacturing price and the hospital purchase price. Subsequently, industry participants dismissed the likelihood of it being implemented. However, the widespread practice of increasing ex-manufacturing prices in 1H12 clearly tells another story. This leads us to conclude that it is highly likely that this policy will be implemented sooner or later.

differentiated drugs, including innovative drugs and first to market generics that address large market opportunities, will significantly outpace sector growth in the near to medium term

Page 8

Deutsche Bank AG/Hong Kong

May-12

Sep-12

Jul-10

Jul-11

Jul-10

Jul-12

Jul-11

Jan-10

Jan-11

Jan-10

Jan-12

Jan-11

Jan-12

Jul-12

26 September 2012 Health Care China Healthcare

Policy impact diverging: benefits from coverage expansion, and headwinds from pricing/volume control We anticipate that coverage expansion, particularly the coverage of serious diseases, is likely to benefit selective participants. For example, the expansion to include cardiovascular diseases in the Rural Insurance Program and the Urban Resident Program is likely to add a second leg of growth for stent makers including Microport (0853.HK), and Plavix marketers such as Sanofi (SNY.N), as the current coverage includes only 180m of the population under the Urban Employee Program. While we believe gradual implementation of increasing coverage is more likely to provide a second wave of growth momentum in the years to come, the impact remains very difficult to quantify, as the government will rely on commercial insurance to take the lead. However, we also expect more stringent pricing control for non-differentiated drugs, which is likely to further lower margins for generic makers without a sufficient blockbuster in the product mix, such as Shanghai Pharma (2607.HK). We also anticipate that zero mark-up policies on hospital drug sales is likely to exert pressure to prescribe expensive drugs, which may lead to volume growth moderation. 2012 RDL tender back on track The province of Hainan has started its 2012 RDL drug tender – after a long quiet period with no tenders in the past five months – signifying RDL tendering is back on track. We anticipate mild price erosion in the low to high teens for drugs with multiple competitors. Should price erosion exceed this range, sector growth would decelerate in 2013. 2013 NRDL revisions and 2012 EDL expansion We anticipate 2013 NRDL revisions to be one of the most important catalysts for the sector, and that companies with drugs as new additions into the NRDL are likely to outperform in the 2014/2015 tender season. We believe the process kicked off in early September. We also expect new additions to the 2012 EDL to face immediate price cuts, while volume benefits may materialize in the long term. We would advise caution on names such as Shineway, which has drugs that are potential new additions to EDL.

While we believe gradual implementation of increasing coverage is more likely to provide a second wave of growth momentum in the years to come, the impact remains very difficult to quantify, as government will rely on commercial insurance to take the lead

We anticipate 2013 NRDL revision as one of the most important catalysts for the sector, and that companies with drugs as new additions into NRDL are likely to outperform in the 2014/2015 tender season

Top picks: Mindray, United Lab and Sino Biopharma
We think accelerated demand growth is a positive for all major participants on the value chain, including bellwethers such as Shanghai Pharma (2607.HK). Our top picks include Mindray (MR.N), United Laboratories (3933.HK) and Sino Biopharma (1177.HK).

Mindray (MR.N) is trading at 17x DB 2013E EPS of USD2.03, with 2013-2015E EPS CAGR of 12%, and 13% growth for 2013E. We like Mindray because 1) its robust growth in China is likely to continue for at least two years; as the infrastructure build-up cycle completes, equipment purchases should ensue; 2) it is aggressively taking market share internationally, amid global austerity talk; 3) there is scope for operating margin stabilization; and 4) we see potential for upward earnings revisions. As regards United Lab, the stock is currently trading at 15.5x DB 2013E EPS of HKD 0.24, with an expected 15% CAGR 2013-2015 for EPS and 34% EPS growth for 2013.

Deutsche Bank AG/Hong Kong

Page 9

26 September 2012 Health Care China Healthcare

We have new data points that the antibiotic class grew 8.3% in July, vs. 0% growth in 2Q12 and -1% in 1Q12. We have conviction that YoY growth will reach as high as 15% in 2H12, as the base would be lower going into 2H11 due to antibiotic usage restrictions. This strongly suggests that the sector growth recovery is well on track, which could serve as a significant, ongoing catalyst for the stock. Additionally, we like this name due to: 1) robust demand recovery for antibiotics, which is likely to lift or stabilize API prices including 6-APA and 7-ACA; and 2) ongoing capacity expansion, which is likely to reduce costs by RMB20 to the RMB100-110 range vs. the current level of RMB130 per kg; this should significantly improve margins upon completion in 2H13. For Sino Biopharma, the stock currently trades at 16x DBe 2013E EPS of HKD0.182, with 15.3% expected EPS CAGR 2013-2015, and 18% growth for 2013. We remain surprised to observe accelerated growth for its flagship products, such as Kaishi and Kaifen YTD, as well as strong growth for Ganmei and Runzhong. Therefore, we expect a strong 2H12 and 2013 for Sino Biopharma. We expect these blockbusters to continue to exceed Street expectations. We are currently restricted on two names. As such, we are unable to include them in the discussion and the accompanying charts.

Page 10

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Sector valuation
Valuation looks relatively attractive
We highlight that P/E trading multiples are at a three-year nadir, while sector growth looks likely to recover. We track 50 names with the largest market caps, with 30 listed in the domestic A market, 10 listed in HK and 10 listed in the US. The average P/E trading multiple for H list healthcare names is 11.6x 2013E consensus EPS, with an expected 19.7% EPS growth. With sell-side consensus reaching what we consider a reasonable level, we think there is a reasonable chance of upward earnings revisions for selective names. Figure 7: Average forward P/Es of top 50 from January 2010 to present

China PE

US PE MOH 2011 working priorities: more stringent pricing controls incoming

HK PE

PE x

40 Drug pricing concern started 35

1H11 results largely missed/barely met expectations Reimbursement funding issue emerged

30

25

20

15

10

Dec-10

Dec-11

Aug-10

Aug-11

Nov-10

Nov-11

Aug-12

Oct-10

Oct-11

Apr-10

Apr-11

Apr-12

Jan-11

Jan-12

Sep-11

Sep-10

Feb-10

Feb-11

Feb-12

May-10

May-11

May-12

Source: Reuters

Deutsche Bank AG/Hong Kong

Mar-10

Mar-11

Mar-12

Sep-12
Page 11

Jan-10

Jun-12

Jun-11

Jun-10

Jul-10

Jul-11

Jul-12

26 September 2012 Health Care China Healthcare

Figure 8: Average forward EPS growth of top 50 from January 2010 to present

China EPS YOY 40%

US EPS YOY

HK EPS YOY

30%

20%

10%

0%

Apr-10

Apr-11

Feb-10

Sep-10

Feb-11

Sep-11

Feb-12

Apr-12

Mar-10

Mar-11

Mar-12

Dec-10

Aug-10

Aug-11

Dec-11

Nov-10

Nov-11

May-10

May-11

-10%

-20%

Source: Deutsche Bank

We summarize the financials in the following three figures. Figure 9 includes all the companies we cover, with Deutsche Bank estimates. Figure 10 and Figure 11 include HK- and US-listed healthcare companies, with consensus numbers listed.

Page 12

Deutsche Bank AG/Hong Kong

May-12

Aug-12

Sep-12

Jun-10

Jun-11

Jun-12

Jul-10

Jul-11

Oct-10

Oct-11

Jan-10

Jan-11

Jan-12

Jul-12

26 September 2012 Health Care China Healthcare

Figure 9: Financials for the Deutsche Bank coverage universe (excluding restricted names)
24-Sep Ticker Nam e Price (LC) 52-w eek High Low Mkt TN00105 cap (US$m ) 2011 1,989 797 1,919 1,178 6,430 1,738 4,072 1,001 15.2 10.9 33.4 9.3 14.4 28.0 23.8 13.5 21.4 2011 PE 2012E 12.8 22.4 20.1 10.1 14.9 14.4 20.7 11.1 18.0 2013E 10.6 15.3 16.1 8.8 12.8 13.8 17.6 9.6 14.7 CNY HKD HKD CNY N/A USD USD USD 2012 Crncy EPS (reporting currency) 2011E 0.16 0.35 0.09 0.96 N/A 0.04 1.45 1.06 2012E 0.19 0.17 0.15 0.89 N/A 0.07 1.67 1.29 2013E 0.23 0.25 0.19 1.03 N/A 0.07 1.96 1.49 Sales (reporting currency) 2011E 2,198 6,622 5,689 2,184 N/A 155 865 404 2012E 3,232 7,126 7,801 2,127 N/A 289 1,065 497 2013E 4,042 8,225 9,600 2,415 N/A 372 1,257 570 EPS Grow th % 2011 60.0 (45.3) (10.0) (0.7) 27.1 56.5 6.0 1.3 3.4 2012E 18.7 (51.4) 66.7 (7.3) (3.4) 94.4 15.1 22.3 17.1 2013E 20.0 46.5 24.3 14.8 16.2 4.3 17.4 14.9 16.7

0460.HK 3933.HK 1177.HK 2877.HK 2607.HK BIOS.SI MR.N WX.N

Sihuan Pharmaceutical Holdings Group Ltd The United Laboratories International Holdings Ltd Sino Biopharmaceutical Ltd China Shinew ay Pharmaceutical Group Ltd Shanghai Pharmaceuticals Holding Co Ltd Biosensors International Group Ltd Mindray Medical International Ltd Wuxi Pharmatech (Cayman) Inc Covered listed average

2.98 3.80 3.01 11.04 13.78 1.24 34.60 14.32

3.47 6.09 3.18 13.28 17.90 1.70 36.36 15.60

2.48 2.66 1.84 7.43 7.70 1.09 22.90 10.65

Source: Deutsche Bank; Reuters

Figure 10: Financials for Hong Kong-listed companies
24-Sep Ticker Nam e Price (LC) 13.78 3.80 11.04 3.01 2.33 5.86 3.35 3.75 1.53 0.38 0.16 0.89 2.98 5.00 3.96 1.70 14.82 2.32 14.08 0.77 52-w eek High Low Mkt TN00105 cap (US$m ) 2011 6,430 797 1,178 1,919 734 461 335 688 476 83 91 260 1,989 335 1,234 175 2,593 336 1,068 107 14.4 10.9 9.3 33.4 24.7 N/A 16.0 13.5 8.5 5.1 4.2 7.3 15.2 29.4 1.6 5.0 30.9 4.3 26.4 2.7 14.5 2011 PE 2012E 13.8 22.4 10.1 20.1 19.8 5.8 12.0 12.9 6.1 5.1 5.4 7.4 12.8 20.0 13.6 4.2 28.2 3.4 20.9 4.5 13.1 2013E 11.9 15.3 8.8 16.1 18.9 5.3 10.1 12.7 6.1 4.4 5.4 7.5 10.6 15.2 11.0 3.2 22.9 3.0 16.7 3.9 11.6 CNY HKD CNY HKD HKD CNY CNY CNY HKD CNY HKD HKD CNY HKD USD CNY CNY CNY CNY CNY 2012 Crncy EPS (reporting currency) Sales (reporting currency) 2011 0.78 0.35 0.96 0.09 0.09 N/A 0.17 0.23 0.18 0.06 0.04 0.12 0.16 0.17 0.31 0.28 0.39 0.44 0.43 0.23 2012E 0.81 0.17 0.89 0.15 0.12 0.82 0.23 0.24 0.25 0.06 0.03 0.12 0.19 0.25 0.04 0.33 0.43 0.56 0.55 0.14 2013E 0.94 0.25 1.03 0.19 0.12 0.90 0.27 0.24 0.25 0.07 0.03 0.12 0.23 0.33 0.05 0.44 0.53 0.62 0.69 0.16 2011 52,824 6,622 2,184 5,689 2,196 N/A 371 862 1,140 525 381 340 2,198 357 220 1,243 5,206 1,826 1,684 2,999 2012E 67,437 7,126 2,127 7,801 2,542 2,101 503 921 1,805 550 430 411 3,232 609 285 1,378 6,314 2,064 6,200 2,200 2013E 80,132 8,225 2,415 9,600 2,882 2,500 586 1,087 2,330 575 477 528 4,042 758 374 1,540 7,432 2,330 2,843 2,448 EPS Grow th % 2011 N/A (45.3) (0.7) (10.0) (21.3) N/A 9.7 35.3 58.3 (48.7) (23.0) 2,330 60.0 23.2 51.6 23.9 14.0 36.4 30.7 N/A 9.4 2012E 3.8 (51.4) (7.3) 66.7 24.3 N/A 33.2 4.6 39.5 (22.1) (1.2) 18.7 47.1 (88.0) 20.0 9.5 27.9 26.3 (39.1) (6.2) 2013E 16.1 46.5 14.8 24.3 5.1 10.2 19.2 1.5 16.7 (0.8) 20.0 32.0 24.0 31.8 23.4 11.8 25.4 14.3 19.5

2607.HK 3933.HK 2877.HK 1177.HK 2005.HK 8058.HK 0325.HK 0853.HK 0587.HK 1889.HK 0233.HK 0801.HK 0460.HK 0950.HK 0867.HK 2348.HK 0874.HK 2010.HK 1666.HK 1011.HK

Shanghai Pharmaceuticals Holding Co Ltd The United Laboratories International Holdings Ltd China Shinew ay Pharmaceutical Group Ltd Sino Biopharmaceutical Ltd Lijun International Pharmaceutical (Holding) Co Ltd Shandong Luoxin Pharmacy Stock Co Ltd Trauson Holdings Co Ltd MicroPort Scientific Corp Hua Han Bio-Pharmaceutical Holdings Ltd Wuyi International Pharmaceutical Co Ltd Mingyuan Medicare Development Co Ltd Golden Meditech Holdings Ltd Sihuan Pharmaceutical Holdings Group Ltd Lee's Pharmaceutical Holdings Ltd China Medical System Holdings Ltd Daw nrays Pharmaceutical (Holdings) Ltd Guangzhou Pharmaceutical Co Ltd Real Nutriceutical Group Ltd Tong Ren Tang Technologies Co Ltd China NT Pharma Group Co Ltd

17.90 6.09 13.28 3.18 2.03 7.20 3.80 4.88 1.82 0.62 0.39 1.15 3.47 5.55 6.13 2.51 19.66 3.44 15.08 1.85

7.70 2.66 7.43 1.84 0.55 4.47 1.67 3.03 1.08 0.35 0.12 0.75 2.48 2.30 3.06 1.57 4.11 1.67 6.50 0.72

Hong Kong-listed average Source: Reuters

Figure 11: Financials for US-listed companies
24-Sep Ticker Nam e Price (LC) 34.60 14.32 7.64 25.12 1.82 8.28 13.41 2.44 10.40 2.67 0.35 9.57 3.73 4.78 52-w eek High Low Mkt TN00105 cap (US$m ) 2011 4,072 1,001 143 590 178 426 295 145 173 195 5 259 181 95 23.8 13.5 8.0 33.1 40.8 19.7 18.1 244.0 65.0 13.8 0.2 8.6 8.0 23.9 37.2
Source: Reuters

2011 PE 2012E 20.7 11.1 10.4 27.5 34.6 27.2 17.3 N/A 24.2 9.5 0.3 7.1 8.8 25.2 17.2

2012 Crncy 2013E 17.6 9.6 8.4 22.7 30.4 19.6 14.0 N/A 8.3 15.7 0.3 6.0 8.0 25.2 14.3 USD USD USD CNY CNY CNY CNY USD USD CNY N/A USD CNY CNY EPS (reporting currency) 2011 1.45 1.06 0.96 0.76 0.04 0.42 0.74 0.01 0.16 0.19 1.56 1.11 0.46 0.20 2012E 1.67 1.29 0.73 0.91 0.05 0.30 0.78 (0.24) 0.43 0.28 1.38 1.35 0.43 0.19 2013E 1.96 1.49 0.91 1.11 0.06 0.42 0.96 (0.14) 1.26 0.17 1.28 1.60 0.47 0.19 Sales (reporting currency) 2011 865 404 113 50 385 330 83 56 113 50 124 158 74 44 2012E 1,065 497 133 64 403 335 104 44 140 59 121 190 99 43 2013E 1,257 570 156 79 394 365 126 52 308 75 121 228 156 45 EPS Grow th % 2011 6.0 1.3 3.7 38.0 26.3 3.0 26.5 (70.9) (68.3) 93.3 (14.3) (38.8) 19.8 (41.2) (7.9) 2012E 15.1 22.3 (23.3) 20.7 17.9 (27.4) 4.9 N/A 168.8 44.9 (11.5) 21.6 (8.3) (5.0) 4.9 2013E 17.4 14.9 24.5 21.2 13.9 38.2 23.4 (42.6) 193.0 (39.3) (6.9) 18.5 9.4 22.8

MR.N WX.N SHP.N KH.N NPD.N SCR.N SSRX.OQ SVA.OQ CHDX.OQ CO.N CSKI.PK CBPO.OQ CCM.N NKBP.OQ

Mindray Medical International Ltd Wuxi Pharmatech (Cayman) Inc ShangPharma Corp China Kanghui Holdings China Nepstar Chain Drugstore Ltd Simcere Pharmaceutical Group 3SBio Inc Sinovac Biotech Ltd Chindex International Inc China Cord Blood Corp China Sky One Medical Inc China Biologic Products Inc Concord Medical Services Holdings China Nuokang Bio Pharmaceutical In

36.36 15.60 10.42 27.47 3.87 10.36 15.33 2.88 13.45 3.38 2.51 11.96 4.29 5.08

22.90 10.65 5.81 12.92 1.50 7.12 9.26 1.64 7.39 1.85 0.25 5.97 2.54 2.25

Deutsche Bank AG/Hong Kong

Page 13

26 September 2012 Health Care China Healthcare

Growth recovery continues
Hospital drug sales growth remains robust in July
Hospital drug sales rose 24% in July, vs. 21% in 2Q12 and 24% in 1Q12, and vs.17% for full-year 2011. Recall in 1Q12, hospital drug sales increased 24% YoY, vs. 19% for 1Q11 and 17% for full-year 2011. Excluding anti-infectives, the sector saw 28% YoY growth in 2Q12, vs. 20% YoY growth for the same period in 2011. The strong data suggest growth acceleration continues. We continue to anticipate a strong 2H12. Anti-infective recovery looks to be well on track, with 8% growth in July. The class had 0% YoY growth in 2Q12, after an 11% YoY decline for 4Q11 and -1% YoY in 1Q12. We remind investors that hospital sales for antibiotics started to experience negative growth in July 2011, after the government implemented a restriction policy. We continue to anticipate that growth is likely to reach the mid-teens as bases will be lower going into 2H12. We anticipate that growth recovery in the drug sector is a positive for most drug companies, especially for: 1) bellwethers such as Shanghai Pharma and other large distributors’ top lines; 2) companies with a unique product portfolio, including CV, oncology and neural drugs, such as Sino Biopharma; and 3) antibiotic bellwethers such as United Lab.

Accelerated growth for patient visits continues
In July 2012, inpatient and outpatient volume growth was 18% and 11% YoY, respectively, vs. 4% and 12% in July 2011, respectively. On a YTD (January-July 2012) basis, inpatient and outpatient volume growth was 18% and 12%, respectively, vs. 4% and 12% YoY, respectively, for YTD-July 2011, and vs. 8% and 7% YoY, respectively, for full-year 2011. We believe the number of patient visits is the most direct demand indicator for the healthcare sector; these data points confirm the growth acceleration in drug sales. We ascribe growth acceleration to increasing reimbursement and the accessibility/availability of more healthcare facilities after years of infrastructure buildup. From 2011, outpatient growth has significantly accelerated. On a monthly basis, inpatient and outpatient admissions largely exhibited positive YoY growth from 2011 across medical institutions, including hospitals, community health centers, clinics and specialty centers, in China. There is also a trend for consolidation of patient flow to large hospitals.
We believe the number of patient visits is the most direct demand indicator for the healthcare sector

Page 14

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Figure 12: Monthly outpatient volume for all medical institutions in China (as of July 2012)
mn 1200 1000 800 600
431 562 540 554 558 548

Figure 13: Monthly inpatient volume for all medical institutions in China (as of July 2012)
mn 20% 30 25 20 15 0% -5% -10% -15% 10 5 0 11 10 24
Inpatients (LH S) YoY (RH S)

O utpatients (LH S)
1,047

YoY (RH S)

45% 40% 35% 30% 17 11 11 12 11 12 12 11 11 12 12 12 12 12 12 12 12 12 12 10 12 13 15 14 14 14 14 25% 20% 15% 10% 5% 0% -5%

940

15% 10% 5%

400 200 0

385

445 432 434 438 441 447 446 434 457

454 432

495 485 497 495 495 497 483

488 507

481

513

11

Jan-10 Feb -10 M ar-10 Ap r-10 M ay-10 Jun-10 Jul-10 Aug -10 Sep -10 O ct-10 N o v-10 Dec-10 Jan-11 Feb -11 M ar-11 Ap r-11 M ay-11 Jun-11 Jul-11 Aug -11 Sep -11 O ct-11 N o v-11 Dec-11 Jan-12 Feb -12 M ar-12 Ap r-12 M ay-12 Jun-12 Jul-12

Source: MOH; December data was derived from annual data and monthly data from Jan-Nov

Source: MOH; December data was derived from annual data and monthly data from Jan-Nov

We believe that patient volume and value per visit growth rates are the most significant and direct indicators of healthcare sector demand growth, as reimbursement growth remains an indirect measurement. As the Ministry of Health (MOH) recently started releasing monthly volume data, we track this data point to gauge macro sector growth trends. As a reminder, the multiples of volume and value per visit represent all healthcare costs involved in hospital visits, including drug and diagnostic costs (lab costs plus imaging) and healthcare service fees.

Deutsche Bank AG/Hong Kong

Jan-10 Feb -10 M ar-10 Ap r-10 M ay-10 Jun-10 Jul-10 Aug -10 Sep -10 O ct-10 N o v-10 Dec-10 Jan-11 Feb -11 M ar-11 Ap r-11 M ay-11 Jun-11 Jul-11 Aug -11 Sep -11 O ct-11 N o v-11 Dec-11 Jan-12 Feb -12 M ar-12 Ap r-12 M ay-12 Jun-12 Jul-12

Page 15

26 September 2012 Health Care China Healthcare

Analysis of sector data
Key takeaways: 2Q growth slowing
Revenue growth. 2Q12 revenues grew 18% YoY, much lower than the 27% growth in 1Q12 and 30% YoY growth in 2Q11. Excluding distributors, top-line growth was 15% YoY in 2Q12, compared to 28% growth in 2Q11. We attribute this primarily to antibiotics slowing and a tough comp in 2Q11. Net profit growth. 2Q12 net profit grew -8% YoY, lower than the -1% growth in 1Q12 and the 28% YoY growth in 2Q11. Excluding distributors, net profit growth was -11% YoY in 2Q12, compared to 30% growth in 2Q11. We attribute the slowdown largely to antibiotic makers’ profit loss since 3Q11, as well as a tough comp in 2Q11. Both operating margin and net margin are stable. OPM was 10.8% in 2Q12 vs. 11.7% in 1Q12 and 7.7% in 4Q11. NM was 8.4% in 2Q12 compared to 8.6% in 1Q12 and 6.7 in 4Q11. GM aggregated as 29.3% in 2Q12, compared to 29.1% in 1Q12 and 30.2% in 4Q11. However, we believe these numbers are no longer indicative because of the widespread practice of increasing ex-manufacturing prices. We compiled the financials of the top 30 China-listed, top 10 HK-listed and top 10 USlisted Chinese healthcare companies by market cap, and conducted an analysis of the results of the aggregate set on a quarterly basis.

Top-line weaker than expected in 2Q12
The 2Q12 aggregate revenues of the top 30 China-listed, top 10 US-listed and top 10 HK-listed healthcare companies registered 18% YoY growth, which is lower than the 2025% top-line growth rate many industry sources have forecast for the healthcare sector in general. We advise readers to treat these numbers with caution as we are using the top 50 as a sample subset of the entire China healthcare universe, including both public and private companies. The 18% YoY growth rate in 2Q12 is much lower than the 27% YoY growth in 1Q12, in line with the 18% YoY growth in 4Q11, and lower than 30% YoY growth in 2Q11. We attribute this to the strong 2Q11 base. On a sequential basis, 2Q12 saw 1% QoQ growth, compared with 12% QoQ growth in 1Q11. In 2Q12, government spending on healthcare increased 8% YoY to RMB311bn, compared with 68% YoY growth in 1Q12. On a YTD (January to Aug 2012) basis, government spending on healthcare increased 23% YoY to RMB422bn, vs. 58% YoY in YTD Aug 2011. Excluding distributors from the revenue analysis, top-line growth rose 15% YoY in 2Q12, compared to 24% in 1Q12 and 10% in 4Q11.

Page 16

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Figure 14: Revenue analysis by quarter
R Bm M 70,000 60,000 50,000 40,000 30,000 20,000 10,000 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12 10% 30% Revenues Revenue gro wth 50%

Figure 15: Revenue analysis by quarter (ex. distributors)
R m MB 70,000 60,000 50,000 40,000 30,000 20,000 10,000
0%

Revenues

Revenue growth 50%

40%

40%

30%

20%

20%

10%

1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12
Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

0%

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Figure 16: Gross profit analysis by quarter
R Bm M 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12 20% 10% 0% -10% Gro ss pro fit Gross profit growth 60% 50% 40% 30%

Figure 17: Gross profit by quarter (ex-distributors)
R m MB 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12 20% 10% 0% -10% Gross profit Gross profit growth 60% 50% 40% 30%

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Figure 18: Revenue analysis by half year
R m MB 250,000 Revenues Revenue growth 40% 35% 200,000 30% 25% 20% 100,000 15% 10% 5% 1H 08 2H 08 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 0%

Figure 19: Revenue analysis by half year (ex-distributors)
R m MB 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 1H 08 2H 08 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 Revenues Revenue growth 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

150,000

50,000

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Deutsche Bank AG/Hong Kong

Page 17

26 September 2012 Health Care China Healthcare

Figure 20: Gross profit by half year
R m MB 60,000 50,000 40,000 30,000 20,000 10,000 1H 08 2H 08 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 Gross profit Gross pro fit growth 40% 35% 30% 25% 20% 15% 10% 5% 0%

Figure 21: Gross profit by half year (ex-distributors)
R m MB 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 1H 08 2H 08 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 Gross profit Gross pro fit growth 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: Company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semiannually; in aggregate, 40 of top 50 companies

Source: Company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semiannually; in aggregate, 40 of top 50 companies

Profit in 2Q12
The decline of aggregated net profit for the 50 companies was -8% YoY, compared with -1% and -25% YoY growth in 1Q12 and 4Q11, respectively. At the same time, operating profit was -5% YoY in 2Q12, vs. 9% and -25% YoY growth in 1Q12 and 4Q11, respectively. On a sequential basis, net profit and operating profit recorded -6% and -1% QoQ growth in 2Q12, respectively, compared with 69% and 42% QoQ growth in 1Q12, respectively. This served as a strong basis for comparison. Based on 2Q12 results and briefings, many companies benefit from a lower level of raw material cost inflation and expense control, which could be the major reasons for the improved performance. Excluding distributors, 2Q12 net profit was -11% YoY, compared with 4% and -27% YoY growth in 1Q12 and 4Q11, respectively. Operating profit was 13% YoY growth in 2Q12, vs. 18% in 1Q12 and -28% in 4Q11. Figure 22: Operating profit by quarter
R m MB 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12 O perating profit O perating profit growth 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40%

Figure 23: Operating profit by quarter (ex-distributors)
R m MB 10,000 O perating profit O perating profit growth 180% 160% 8,000 140% 120% 6,000 100% 80% 60% 40% 20% 2,000 0% -20% 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12 -40%

4,000

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Page 18

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Figure 24: Net profit by quarter
R Bm M 8,000 N et profit N et profit growth 160% 140% 6,000 120% 100% 80% 4,000 60% 40% 2,000 20% 0% -20% 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12 -40%

Figure 25: Net profit by quarter (ex-distributors)
R m MB 8,000 N et profit N et profit growth 160% 140% 6,000 120% 100% 80% 4,000 60% 40% 2,000 20% 0% -20% 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12 -40%

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Figure 26: Operating profit by half year
R m MB 20,000 Operating profit Operating profit growth 120% 100% 15,000 80% 60% 10,000 40% 5,000 20% 0% 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 -20%

Figure 27: Operating profit by half year (ex-distributors)
R m MB 15,000 Operating profit Operating profit growth 120% 100% 80% 10,000 60% 40% 5,000 20% 0% -20% 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 -40%

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Figure 28: Net profit by half year
R Bm M 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 20% 0% -20% -40% Net profit Net profit growth 100% 80% 60% 40%

Figure 29: Net profit by half year (ex-distributors)
R Bm M 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 -10% -30% 50% 30% 10% Net profit Net profit growth 90% 70%

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Deutsche Bank AG/Hong Kong

Page 19

26 September 2012 Health Care China Healthcare

Margins are stable
Operating margin was 10.8% in 2Q12 Operating margin was 10.8% in 2Q12 vs. 11.7% in 1Q12. We attribute this to sufficient new product launches and relatively effective risk mitigation strategies for price controls, as well as a deceleration of raw material cost inflation and near-term cost savings. 3Q09 marked the peak in operating margins, at 18.1% for the 50 companies in the aggregate. Operating margins witnessed a rebound after sequentially declining quarter after quarter; however, they did so at a slower pace. Operating margin sank to 12.2% in 4Q10, but showed modest improvements thereafter. In 3Q11, operating margin hit its second-lowest level since 4Q08 (when it hit 9.1%). Excluding distributors, the operating margin trend is equally apparent, peaking at 22.6% in 3Q09 before sinking to 9.4% in 4Q11, and finishing at 13.0% in 2Q12. See Figure 31 for margin analysis excluding distributors. Figure 30: Margin analysis by quarter
Gross margin 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11 3Q 11 1Q 12
Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50
16.1% 13.1% 13.6% 9.1% 12.4%12.0% 10.6% 7.6% 18.1% 16.2% 15.3% 14.2%13.6% 13.9%13.4% 13.7%13.4% 12.2% 14.3% 13.4% 12.3% 11.0%11.2%10.6%11.0%10.8% 9.8% 7.7% 7.8% 8.6% 8.4% 34.9%34.8%34.2% 31.2% 33.3%32.9% 31.7% 35.3% 33.8%33.2% 31.4%31.7% 30.2% 30.0% 29.1%29.3% 28.8% 27.8%

Softening of inflationary pressure on raw material prices and labor costs

Figure 31: Margin analysis by quarter ex-distributors
N et margin

O perating margin

Gross margin 40.0% 35.0% 30.0% 25.0% 20.0%
11.7% 10.8%

O perating margin

N et margin

39.3%39.7%39.2% 35.6%

39.4%38.8% 37.6% 37.5% 36.7%37.2% 35.7% 35.4%35.3%34.8% 34.7%35.0% 33.8% 32.7%

22.6% 18.9% 15.4% 16.3% 15.7%16.0% 19.1%18.5%

15.0% 10.0% 5.0% 0.0%

11.5%11.1%

16.3%15.8% 14.3%15.0% 14.2% 13.3% 13.0% 18.0% 12.0% 11.1% 16.0% 15.0% 9.4% 14.6%14.4% 13.5% 13.3%13.3% 13.1% 12.7%12.4%13.3% 12.6% 9.2% 9.6% 10.4%10.2% 8.3%

6.7%

1Q 08

3Q 08

1Q 09

3Q 09

1Q 10

3Q 10

1Q 11

3Q 11

1Q 12

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50

Figure 32: Margin analysis by half year
Gross margin 30.0% 25.0% 20.0% 15.0% 10.0% 9.6% 5.0% 0.0% 1H 08 2H 08 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 7.4% 12.5% 9.0% 8.9% 10.5% 9.2% 13.4% 11.3% 27.5% 27.7% 26.3% O perating margin 27.5% 26.9% N et margin

Figure 33: Margin analysis by half year (ex-distributors)
Gross margin 40.0% 37.3% 38.1% 36.1% O perating margin 37.9% 37.8% 35.0% 34.2% 33.6% 34.2% N et margin

25.5%

24.5%

22.7%

22.4%

35.0% 30.0% 25.0% 20.3% 13.3% 14.0% 11.2% 15.6% 16.4% 12.8% 17.6% 15.2%

12.0%

10.4%

11.0% 7.2% 8.7%

20.0% 15.0% 10.0% 5.6% 6.2% 5.0% 0.0%

17.9%

14.7% 10.7%

13.1%

14.0%

8.4%

8.4%

13.0%

13.0% 9.0% 10.0%

1H 08

2H 08

1H 09

2H 09

1H 10

2H 10

1H 11

2H 11

1H 12

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Source: Reuters, company data, includes 34 of 42 that report quarterly in the top 50 and 6 of 8 that report semi-annually; in aggregate, 40 of top 50 companies

Page 20

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Earnings quality remains a key issue
Analysis of working capital; outlook challenging Our comprehensive analysis of 50 Chinese healthcare names with the largest market caps indicated a budding trend of increasing difficulties in managing account receivables (AR) and cash conversion cycles (CCC) across different subsectors. With multiple interest rate hikes and more to come, we expect AR and working capital management to be more challenging in 2012. As such, we believe that operating cash flow will become one of the top three most important stock drivers for the sector in the coming quarters. Increasing AR/inventory days and cash conversion cycle AR days increased to 68 in 2Q12, from 59/64 in 2Q10/2Q11, respectively, while cash conversion days increased to 142 in 2Q12, from 123/132 in 2Q10/2Q11, respectively. Additionally, our analysis suggests inventory increases primarily drove CCC growth, while AR/AP contributed much less. In our opinion, AR is largely determined by the sales model, the subsectors the business is involved in, and the competitive landscape. Of the top 50 listed companies, we identified medical tech as having the highest average cash conversion days, at 185, while pharmaceutical manufacturers and distribution companies had 139 days and 48 days, respectively. Distributors are the best at balance sheet management Distributors appear to be the best at managing their working capital (see Figure 38). Manufacturers, whether of drugs or devices/equipment/supplies, represent the largest population in healthcare. Hence, their CCC mirrors inventory days, while AP and AR days almost offset each other. Figure 34: AR/AP/inventory days of top 50 Chinese healthcare companies
200
A R days AP days Inv days

150 115 100 60 50 68 54 64 54 62 54 60 112 110 103

127

126

128 115

123

123

130

131

126

132

64 67

59 62

61 58

57 55

63

64

69

66 62

67

68

56

55

56

55

58

1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12
Source: Reuters; company data; companies that report semi-annually are not included in this quarterly analysis

Deutsche Bank AG/Hong Kong

Page 21

26 September 2012 Health Care China Healthcare

Figure 35: Cash conversion days of top 50 Chinese healthcare companies
200
C ash conversion cycledays

150 131 117 130 132 143 135 138 142

100

123 107 103 101 97

123

50

1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12
Source: Reuters; company data; companies that report semi-annually are not included in this quarterly analysis

Analysis by subsector
Pharmaceutical manufacturing The average CCC for the pharmaceutical manufacturers subsector was 114 days (102 to 126 range) in 1Q09-4Q09. Since then, CCC has increased as a result of higher inventory days; the average CCC from 1Q10 to 2Q12 was 136 days. In 2Q12, AR days for pharmaceutical manufacturers was 59, nearly in line with 60 days in 1Q12 and lower than the 61 days in 2Q11. Figure 36: AR/AP/Inventory/CCC days of pharmaceutical manufacturers
AR days AP days Inv days CCC

300

200 132 100 129 133 134 127 132 137 141 131 138

124

121

111 58 49 4Q 09

120

67 61

62 54 2Q 09

63 53 3Q 09

59 56 1Q 10

55 54 2Q 10

53 56 3Q 10

50 53 4Q 10

52 58

54 61

55 66

62 61

52 60

58 59

1Q 09 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12
Source: Reuters; company data; companies that report semi-annually are not included in this quarterly analysis

Medical device/equipment/supplies manufacturing The cash conversion cycle for medical device/equipment/supplies manufacturers averaged 125 days (92 to 150 range) in the 1Q09-4Q09 period. Since then, CCC has increased as a result of higher inventory days; the average CCC from 1Q10 to 2Q12 was 152 days. In 2Q12, CCC was 185 days, compared with 148 days in 1Q12 and 146 days in 2Q11.
Page 22 Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Figure 37: AR/AP/Inventory/CCC days of device/supplies/equipment manufacturers
AR days AP days Inv days CCC

300

200 170 142 100 109 100 117 77 96 145 153 158 168 142 89 94 147 143 94 90 159 137 103 95 104 97 136 109 97 164 122 101

80 89

87 107

89 95

84 93

86 95

90 102

1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12

Source: Reuters; company data; companies that report semi-annually are not included in this quarterly analysis

Deutsche Bank AG/Hong Kong

Page 23

26 September 2012 Health Care China Healthcare

Pharmaceutical distribution The average cash conversion cycle for distributors was 41 days (37 to 45 range) in 1Q09-4Q09. Since then, CCC has increased due to fast-growing AR and inventory days; the average CCC from 1Q10 to 2Q12 was 45 days. In 2Q12, CCC was recorded at 48 days, compared with 48 in 1Q12 and 45 in 2Q11. Figure 38: AR/AP/Inventory/CCC days analysis of distributors
AR days AP days Inv days CCC

100

48 45 43

53 51 47

50 46 44

53 44 47

59 52 57 46 45 47 49 44 48 47 48 42 48 50 45 47 45 48 48 49 41 50 45 43 49 47 50

53 47 54

1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12

Source: Reuters; company data; companies that report semi-annually are not included in this quarterly analysis

Figure 39: Shanghai Pharmaceuticals (601607.SS)
AR days AP days Inv days CCC

300

200

100 43 35 23 15 1Q09 50 40 24 14 2Q09 48 40 22 14 3Q09 61 50 39 28 4Q09

64 56 43 35 1Q10

67 61 42 36 2Q10

74 68 48 42 3Q10

78 68 54 43 4Q10

64 56 44 36 1Q11

65 63 44 41 2Q11

74 73 51 50 3Q 11

78 72 57 51 4Q11

70 65 51 46 1Q12

73 72 49 48 2Q12

Source: Reuters; company data

Page 24

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Medical devices/supplies/equipment manufacturers The cash conversion cycles for the medical devices/equipment/supplies manufacturers subsector are generally higher than for other subsectors. In 2Q12 results, Wegao, Lepu and Tauson recorded increasing CCC, while others’ CCC was generally decreasing in the last quarter. Figure 40: Mindray Medical (MR.N)
AR days AP days Inv days CCC

Figure 41: Lepu Medical Technology (300003.SZ)
AR days AP days Inv days CCC

300

300

294 281

249 248

273 264

294 263 234 226 229 238 248 233

300 271 261 215 253 207

289

200 128 100 93 69 52 1Q 10 52 2Q 10 59 58 40 3Q 10 4Q10 69 117 102 83 59 52 1Q 11

200

227 205

226 221

168

100 100 88 60 49 1Q 09

109 85 82 54 52 2Q 09 52 3Q09 99 63 91 74 53 36 4Q 09

113 96

115 95 73

108 95 64 51 2Q 11

122 101 72 51 3Q 11

107 79

123 101 92 66 49 1Q12 79 87 64 50

114 100 61 82 91 66 62 65 58 59 61 52 2Q 10 70 66 58 39 3Q 10 4Q10 1Q11 2Q11 3Q 11 72 81 52 4Q09 76 85

108

108

89 61 62

39 4Q 11

2Q 12

1Q09

2Q 09

3Q 09

1Q10

4Q 11

1Q12

2Q12

Source: Reuters; company data

Source: Reuters; company data

Figure 42: Kanghui Holdings (KH.N)
AR days AP days Inv days CCC

Figure 43: Trauson (325.HK)
AR days AP days Inv days CCC

600 500 400 354 300 200 100 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 81 3Q10 315 134 395 275 233 112

300 265

296 251 249 224 253 234 211 184 135 95 81 189 167 131 173

535 451 432 395 390 418 414 375 353 435 412 381 361

488 452 448 406
200 225

100

128 87 108 46 101 33

100

84 80 4Q10

94 90 1Q11

92

102

90 69 4Q11

121

120

70 2Q11

79 3Q11

81 1Q12

74 2Q12

2H 09 1H 10

47 2H 10 1H 11 2H 11 1H 12

Source: Reuters; company data

Source: Reuters; company data

Figure 44: China Medical System (0867.HK)
AR days AP days Inv days CCC

Figure 45: 3sbio Inc (SSRX.OQ)
AR days AP days Inv days CCC

300

300 270 244 219 190 175
143 110 39 72 73 111 74 112 60 100 61 101

200 159 95 102 85 78 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 98 108 98 108 89 109 129 120 63 103

200 183 146 127 100 86 38 22 51 1Q09 2Q09 3Q09 4Q09 95 66 77 41 51 77

192 150

184 140

192 146 163 122 168 123

202 162

208 166

210 179 179 146

100

32 61

25 67

24 67

76 29

25 65

68 24

33 73

35 77

37 69

27 61

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

Source: Deutsche Bank; company data

Source: Deutsche Bank; company data

Deutsche Bank AG/Hong Kong

Page 25

26 September 2012 Health Care China Healthcare

Pharmaceutical manufacturers The cash conversion cycles for the following pharmaceutical manufacturers are generally higher than those of distributors and lower than those of medical device/equipment/supplies manufacturers. Sihuan Hengrui and Tongrentang recorded increasing CCC for 2Q12, and others recorded declining CCC. Figure 46: Sihuan Pharmaceutical (460.HK)
A R days A P days Inv days CCC

Figure 47: China Shineway (2877.HK)
AR days AP days Inv days CCC

300

300

200 127 100

200 127
118 68 57 33 22 2H 10 105 55 43 32 20 1H 11 60 40 42 21 2H 11 36 23 1H 12

183 157 126 90 20 32 49 1H 10 2H 10 (28) (73) 1H 11 97 113 61 83 71 2H 11 156 144 76 64 1H 12 144 132

100 49 -

79 73 15 2H 09 (28) 84

71 68 12 1H 09 2H 09 1H 10

42 1H 09

-

(100)

Source: Reuters; company data

Source: Reuters; company data

Figure 48: The United Laboratories (3933.HK)
AR days AP days Inv days CCC

Figure 49: Sino-Biopharmaceutical (1177.HK)
AR days AP days Inv days CCC

300

300

200 143 100 103 97 57 1H 09 150 104 93 47 2H 09 147 104 98 55 1H 10 2H 10 1H 11 2H 11 1H 12 (100) 1H 09 2H 09 1H 10 2H 10 1H 11 2H 11 1H 12 134 110 102 78 136 125 119 107 132 125 126 119 200 119 110 115 106 100 120 93 89 61 57 98 75 53 112 92 75 55 154 127 87 60 60 68 115 123 129 122 72 66 108 101 58 51

Source: Reuters; company data

Source: Reuters; company data

Figure 50: Guangzhou Pharmaceutical (874.HK)
AR days A P days Inv days CCC

Figure 51: Simcere Pharmaceutical (SCR.N)
AR days AP days Inv days CCC

300

300 282 229 192 141
84 75 44 35 66 60 32 26 1H 11

276 217 225 158 151

200

222 200 136 130

224 188 124 114 94 54 3Q09 4Q09 1Q10 2Q10 50 3Q10 48 4Q10 56 1Q11 129 173 175

233 165

199

130 122 90

162 111 142 106

133

141 113 133

100 83 55 -

76 62 68

76 45 37

67 60 40 33 1H 10

77 73 36 32 2H 11 59 55 33 29 1H 12

100

117

133 113 115

123

128

75 103 95

131 72

1H 09

2H 09

2H 10

-

37 1Q09

41 2Q09

46 2Q11

50 3Q11

64

61

52 2Q12

4Q11

1Q12

Source: Reuters; company data

Source: Reuters; company data

Page 26

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Figure 52: Shenzhen Hepalink Pharma (02399.SZ)
AR days AP days Inv days CCC

Figure 53: Kangmei Pharmaceutical (600518.SS)
AR days A P days Inv days CCC

300 231 198 200 211 181 199 209 150 245 222 195 186 149

300 226 200 133 100 124 145 138 186 182 229 235 234 230 227

225 222 178 175 110 104 107 128 129 99 34 29 4Q 11 28 22 1Q12 100 35 97 36 26 2Q11 138 134 105 111

132

100 39 103 47

83 112

126 60 107 44 95 42

26 18 1Q 09

30 23 2Q 09

37 32 3Q 09

36 39 4Q 09

37 36 1Q 10

34 31 2Q 10

35 32 3Q10

36 33 4Q 10

32 26 1Q 11

39 29 3Q 11

20 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 0 2Q 10

17 0 3Q10

24 1 4Q 10

2 1Q 11

0 2Q11

0 3Q 11

0 4Q 11

2 1Q12

5 2Q 12

24 2Q 12

Source: Reuters; company data

Source: Reuters; company data

Figure 54: Jiangsu Hengrui Medicine (600276.SS)
AR days AP days Inv days CCC

Figure 55: Yunnan Baiyao Group (000538.SZ)
AR days AP days Inv days CCC

300

300

200 152 116 100 119 138 116 114 134 112 110 103 102 127 101 101 100 121 119 94 115 91 106 92 111 86 108 87 109 111 89 116 90 87 85 82 101 100 77 77 72 111 67 64 104 104 103 99 98 96 95 95 88 87 83 81 80 120

200 137 102 100 56 60 14 1Q 09 89 102 119 102 106 91 55 50 16 2Q09 65 57 21 3Q 09 70 64 15 4Q 09 63 52 13 1Q10 65 57 16 2Q 10 65 19 3Q 10 64 50 12 4Q10 102 85 77 139

169

170 128

169

155

102 91

105 84

109 80 59 11 4Q 11 80

102 77 24 2Q12

23 1Q 11

25 2Q 11

19 3Q11

20 1Q 12

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Source: Reuters; company data

Source: Reuters; company data

Figure 56: Sichuan Kelun Pharma (002422.SZ)
AR days AP days Inv days CCC

Figure 57: Harbin Pharmaceutical Group (600664.SS)
AR days AP days Inv days CCC

300

300

200 151 124 90 134 113 73 127 106 67 144 122 107 67 122 84 152 141 77 67

162 140 142 75 112 75

161 139 129 102 118 87

200

100

100
71 66

87 65 77 60 49 83 64 59

93 80 62 48

86 80 56 50 68 66 44 42 1Q10

89 78 54 43

84 75 53 43 3Q 10

100 102 59 61 62 62 36

76 69 58 51

80 75 70 65

95 107 92 80

75 83 59 51

75 73 57 54

62 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10

53 2Q 10

47 3Q10

52 4Q 10

62

54 3Q 11

48 4Q 11 1Q12 2Q 12

1Q 11

2Q11

1Q 09 2Q 09 3Q 09 4Q 09 2Q 10 4Q 10 1Q11 2Q 11 3Q 11 4Q 11 1Q12 2Q 12

Source: Reuters; company data

Source: Reuters; company data

Figure 58: Beijing Tongrentang (600085.SS)
AR days AP days Inv days CCC

Figure 59: North China Pharmaceutical (600812.SS)
AR days AP days Inv days CCC

400 325 300 273 200 268 334

353

363

381 341 327 283 345

300

280

293

254 262 200 273 248 140 138 103 103 64 30 2Q11 25 3Q11 12 4Q11 14 1Q12 22 2Q12 172 205 155 215

200 131 108 102 79 90 86 73 69 68 51 42 58 74 61 50 62 72 70 57 60 49 45 36 32 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 36 35 25 24 4Q10 35 32 26 29 1Q11 36 30 27 33 2Q11 40 31 27 36 3Q11 4Q11 72 53 51 70 56 36 44 65 61 38 72 49

192 176 126 103

100

118 97 92 71

100 90 38 1Q09 102 36 2Q09

115

108 79 37 4Q09

115

113

101 54 15 4Q10

122 67 16 1Q11

42 3Q09

26 1Q10

36 2Q10

34 3Q10

-

1Q12

2Q12

Source: Reuters; company data

Source: Reuters; company data

Deutsche Bank AG/Hong Kong

Page 27

26 September 2012 Health Care China Healthcare

Services Subsectors Wuxi PharmaTech and Shang Pharma experienced a fairly flat trend in the cash conversion cycle over the review period, while Concord Medical registered lower CCC in 2Q12. Figure 60: Concord Medical Services (CCM.N)
AR days AP days Inv days CCC

Figure 61: Chindex International (CHDX.OQ)
AR days AP days Inv days CCC

300

300

200 134 115 96 38 1Q10 129 129

183 168 151 150

195 173 170 191

204 201
200

162 160
100 55 38 56 49 27 34 2Q09 54 56 20 27 3Q09 61 55 19 19 4Q09 55 31 51 30 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 94 105 99 88 93 116 99 108 67

121 100 53 17 36 1Q09 2Q09 3Q09 4Q09 80 41 -

82 33 2Q10

96 33 3Q10

93 36 4Q10 - 15 1Q11 1 2Q11 2 3Q11 3 4Q11 3 1Q12 1 2Q12

76

57 50 44

63 40

54

66

73

66

-

38 1Q09

Source: Reuters; company data

Source: Reuters; company data

Figure 62: WuXi PharmaTech (WX.N)
AR days AP days Inv days CCC

Figure 63: ShangPharma Corp (SHP.N)
AR days AP days Inv days CC C

300

300

200

200

100 58 48 29 18 1Q 09 16 2Q 09 58 47 27 23 3Q 09 60 55 27 56 42 43 29 4Q 09 59 57 25 23 1Q 10

66 61 25 21 2Q 10

62 58 25 21 3Q 10

58 58 26 26 4Q 10

61

64 67 26 35 2Q 11

73

64 81 28 44 3Q 11

61 88 55 28 4Q 11

59 85 55 29 1Q 12

57 79 48 27 2Q 12

100

63 67 10 14 1Q09 2Q09 3Q09 4Q09 1Q10 2Q 10 3Q10 4Q10 1Q11

59 61 9 12 2Q11

65 65 10 10 3Q11

69 68 11 11 4Q11

64 78 12 27 1Q12

58 80 11 33 2Q12

23 29 1Q 11

-

Source: Reuters; company data

Source: Reuters; company data

Page 28

Deutsche Bank AG/Hong Kong

Deutsche Bank AG/Hong Kong Page 29

China Healthcare

Health Care

26 September 2012

Figure 64: Financials for top 50 companies
24-Sep Ticker Nam e Price (LC) 20.09 11.91 30.39 61.58 16.28 48.89 36.90 5.89 26.46 15.17 23.73 13.71 9.82 15.03 15.34 52.25 18.48 17.26 10.03 22.55 8.61 3.78 26.18 21.59 6.17 36.16 34.91 23.23 52-w eek High Low Mkt cap (US$m ) 2011 2,527 6,430 5,947 6,660 5,665 3,666 3,742 1,787 2,336 3,276 3,538 3,082 1,220 2,058 2,039 4,270 2,094 3,557 1,733 2,040 1,349 925 1,783 1,777 1,004 2,148 2,339 2,593 13.6 15.3 40.9 35.3 14.4 24.5 27.6 11.4 33.6 10.0 27.7 40.5 16.2 6.1 25.7 40.4 10.3 51.0 20.8 23.3 15.2 7.1 26.7 7.7 9.7 25.4 37.7 58.2 23.9 34.60 14.32 8.28 1.82 25.12 9.57 3.73 10.40 2.67 36.36 15.60 10.36 3.87 27.47 11.96 4.29 13.45 3.38 22.90 10.65 7.12 1.50 12.92 5.97 2.54 7.39 1.85 4,072 1,001 426 178 590 259 181 173 195 22.0 11.5 19.7 40.8 33.1 8.6 8.0 65.0 13.8 24.7 2.98 11.91 3.80 3.01 11.04 14.82 3.75 0.83 3.96 3.35 3.47 15.49 6.09 3.18 13.28 19.66 4.88 2.23 6.13 3.80 2.48 10.01 2.66 1.84 7.43 4.11 3.03 0.70 3.06 1.67 1,989 6,430 797 1,919 1,178 2,593 688 349 1,234 335 15.8 9.8 47.5 23.2 10.3 31.1 13.6 6.2 1.6 16.1 20.6 PE 2012E 2013E 25.2 14.8 34.6 27.8 14.9 20.0 22.7 13.5 31.1 16.4 23.5 33.6 14.7 15.5 25.5 37.2 10.1 41.9 15.5 21.3 22.4 5.6 22.1 8.4 6.0 29.1 31.2 55.5 22.6 19.1 10.3 27.1 34.6 27.4 7.1 8.8 24.2 9.5 18.7 12.8 9.3 29.2 20.1 11.3 28.4 13.5 2.9 12.8 12.3 17.4 23.7 12.7 28.0 22.2 12.8 15.6 17.5 12.3 26.1 13.5 19.4 37.4 13.5 13.1 20.8 29.2 9.2 33.7 16.9 17.8 15.8 5.4 17.6 7.2 N/A 22.6 24.7 46.7 19.5 17.0 9.2 19.6 30.4 22.8 6.0 8.0 8.3 15.7 15.2 11.1 8.1 15.8 16.7 10.3 23.0 12.8 1.8 10.9 10.3 13.8 CNY CNY HKD HKD CNY CNY CNY HKD USD CNY 0.16 0.71 0.08 0.13 0.91 0.39 0.23 0.13 0.31 0.17 0.19 0.75 0.13 0.15 0.80 0.43 0.23 0.28 0.04 0.22 0.22 0.83 0.24 0.18 0.88 0.53 0.24 0.47 0.05 0.27 2,242 55,548 6,405 5,782 1,985 5,206 862 9,903 220 371 3,334 68,362 7,551 7,801 2,044 6,314 940 11,006 286 498 4,378 80,191 9,017 9,671 2,295 7,432 1,110 18,734 376 589 USD USD CNY CNY CNY USD CNY USD CNY 1.57 1.24 0.42 0.04 0.76 1.11 0.46 0.16 0.19 1.81 1.30 0.30 0.05 0.92 1.35 0.43 0.43 0.28 2.03 1.56 0.42 0.06 1.10 1.60 0.47 1.26 0.17 881 407 330 385 50 158 74 113 50 1,074 493 335 403 64 190 99 140 59 1,275 578 365 394 79 228 156 308 75 CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY Crncy EPS (reporting currency) Sales (reporting currency) 2011 1.49 0.78 0.75 1.75 0.51 2.01 1.35 0.52 0.79 1.53 0.86 0.34 0.61 2.49 0.60 1.30 1.80 0.34 0.49 0.97 0.57 0.53 0.98 2.80 0.64 1.43 0.93 0.40 2012E 0.80 0.81 0.88 2.23 0.65 2.46 1.63 0.44 0.85 0.93 1.02 0.41 0.67 0.98 0.61 1.41 1.83 0.41 0.65 1.06 0.39 0.68 1.19 2.59 1.04 1.25 1.12 0.42 2013E 0.85 0.94 1.09 2.79 0.87 3.15 2.12 0.48 1.02 1.13 1.23 0.37 0.73 1.15 0.74 1.80 2.01 0.51 0.60 1.28 0.55 0.71 1.49 3.03 N/A 1.61 1.42 0.50 2011 3,664 52,824 4,506 11,506 5,247 5,120 2,979 13,774 1,019 5,625 5,181 28,353 941 1,201 5,264 6,013 3,852 4,775 2,302 5,846 12,221 5,142 1,599 5,143 6,667 628 10,908 5,268 2012E 1,992 67,437 5,558 13,222 6,115 6,155 2,917 18,200 1,063 7,279 6,700 35,448 1,073 1,323 6,092 7,962 4,215 7,314 2,476 7,392 11,712 6,641 1,801 5,133 7,813 863 14,318 6,499 2013E 2,441 80,132 6,741 15,434 13,709 7,684 3,706 20,020 1,322 8,038 8,114 30,470 1,180 1,455 7,163 9,443 4,804 8,794 1,945 8,500 13,905 6,289 2,097 5,581 N/A 1,153 17,628 7,659 EPS Grow th % 2011 (6.0) 11.7 16.0 31.6 27.1 44.5 43.1 (24.3) (42.3) 66.3 (2.3) 30.8 21.5 93.4 31.5 51.8 7.0 29.8 27.6 (3.5) 14.6 14.9 21.8 (1.2) 68.4 87.9 17.7 5.5 21.3 8.3 13.6 3.0 26.3 38.0 (38.8) 19.8 (68.3) 93.3 (6.0) 23.1 11.7 (89.7) 44.4 (8.1) 14.0 35.3 25.8 51.6 9.7 6.4 2012E (46.3) 3.8 18.3 27.2 (3.4) 22.5 21.2 (15.8) 8.2 (39.4) 18.1 20.6 9.8 (60.7) 0.8 8.5 1.6 21.8 34.0 9.6 (32.2) 28.1 21.0 (7.5) 62.5 (12.6) 20.7 4.7 (0.3) 15.0 12.0 (27.4) 17.9 20.7 21.6 (8.3) 168.8 44.9 16.7 23.4 4.6 62.5 15.4 (8.7) 9.5 0.2 111.6 (87.2) 31.2 (22.1) 2013E 6.2 16.1 23.8 25.4 16.2 28.0 30.1 10.0 19.4 21.8 21.1 (10.2) 9.0 17.7 22.3 27.6 9.8 24.2 (8.5) 19.9 41.4 3.7 25.5 17.0 N/A 28.8 26.5 19.0 16.4 12.2 12.2 38.2 13.9 20.4 18.5 9.4 193.0 (39.3) 24.6 15.8 15.3 84.6 20.0 10.0 23.4 6.0 64.2 17.5 18.8 20.8

002399.SZ 601607.SS 600276.SS 000538.SZ 600518.SS 002422.SZ 000423.SZ 600664.SS 002007.SZ 600739.SS 000999.SZ 600998.SS 300003.SZ 000623.SZ 600267.SS 600535.SS 002001.SZ 600085.SS 600252.SS 600062.SS 600869.SS 600380.SS 002294.SZ 600216.SS 600812.SS 002038.SZ 000963.SZ 600332.SS

Shenzhen Hepalink Pharmaceutical Co Ltd Shanghai Pharmaceuticals Holding Co Ltd Jiangsu Hengrui Medicine Co Ltd Yunnan Baiyao Group Co Ltd Kangmei Pharmaceutical Co Ltd Sichuan Kelun Pharmaceutical Co Ltd Shan Dong Dong-E E-Jiao Co Ltd Harbin Pharmaceutical Group Co Ltd Hualan Biological Engineering Inc Liaoning Cheng Da Co Ltd China Resources Sanjiu Medical & Pharmaceutical Co Ltd Jointow n Pharmaceutical Group Co Ltd Lepu Medical Technology (Beijing) Co Ltd Jilin Aodong Pharmaceutical Group Co Ltd Zhejiang Hisun Pharmaceutical Co Ltd Tasly Pharmaceutical Group Co Ltd Zhejiang Nhu Co Ltd Beijing Tongrentang Co Ltd Guangxi Wuzhou Zhongheng Group Co Ltd China Resources Double-Crane Pharmaceutical Co Ltd S&P Pharmaceutical Co Ltd Joincare Pharmaceutical Group Industry Co Ltd Shenzhen Salubris Pharmaceuticals Co Ltd Zhejiang Medicine Co Ltd North China Pharmaceutical Co Ltd Beijing SL Pharmaceutical Co Ltd Huadong Medicine Co Ltd Guangzhou Pharmaceutical Co Ltd China-listed average

35.98 15.49 32.26 64.56 16.70 59.78 50.58 10.15 28.10 19.49 24.00 14.50 18.42 22.66 23.88 53.60 24.75 19.28 15.75 22.94 13.58 6.63 29.65 27.78 10.86 38.10 36.29 33.76

18.78 10.01 22.18 45.58 10.49 35.05 34.51 5.58 20.21 11.44 14.27 8.36 9.10 14.20 13.65 33.30 17.25 12.88 7.62 12.28 7.27 3.47 18.82 18.10 5.00 25.01 21.78 10.80

MR.N WX.N SCR.N NPD.N KH.N CBPO.OQ CCM.N CHDX.OQ CO.N

Mindray Medical International Ltd Wuxi Pharmatech (Cayman) Inc Simcere Pharmaceutical Group China Nepstar Chain Drugstore Ltd China Kanghui Holdings China Biologic Products Inc Concord Medical Services Holdings Ltd Chindex International Inc China Cord Blood Corp US-listed average

0460.HK 2607.HK 3933.HK 1177.HK 2877.HK 0874.HK 0853.HK 0809.HK 0867.HK 0325.HK

Sihuan Pharmaceutical Holdings Group Ltd Shanghai Pharmaceuticals Holding Co Ltd The United Laboratories International Holdings Ltd Sino Biopharmaceutical Ltd China Shinew ay Pharmaceutical Group Ltd Guangzhou Pharmaceutical Co Ltd MicroPort Scientific Corp Global Bio Chem Technology Group Co Ltd China Medical System Holdings Ltd Trauson Holdings Co Ltd Hong Kong-listed average

Source: Deutsche Bank; Reuters; All numbers are consensus except Sihuan Pharma, United Laboratories, Sino Biopharmaceutical, China Shineway and Mindray Medical

26 September 2012 Health Care China Healthcare

Valuation and Risks
Mindray Our target price is based on 19x 2013E EPS of US$2.03, above the US listed peers’ average. This premium reflects MR’s better EPS growth profile vs. the peers. The 19x target P/E is slightly below the mid-cycle valuation of 20x. We forecast 2013-15 EPS CAGR of 12% and 13% growth for 2013. In our forecasts, we do not factor in a onetime tax benefit (anticipated US$7.5-8m) in 2012 based on management’s indication that the company may get a tax benefit related to the National Key Software Enterprise status for its Shenzhen subsidiary. In 1Q11, the company reported US$7.6m in tax benefits. Downside risks include a global slowdown in basic medical equipment demand and its sales force restructuring taking longer than expected or generating lower-thanexpected returns. Other risks: 1) RMB appreciating faster than expected; 2) new product launches being slower than expected; 3) EU and US hospital spending continuing to decline and 4) ongoing market share erosion for mature products due to increasing competition from local players and multinationals with sizable financial resources to be price competitive. The United Laboratories We derive our target price by applying 21x P/E multiple to NTM (next 12 month) EPS of HK$0.19. This is higher than the HK-listed peers' average, given TUL's improving API business and higher-than-sector average forecast growth in its antibiotics business. We forecast 2013-15 EPS CAGR at 15%. With good upside potential to our target price, we believe this remains the best near-term opportunity in our coverage universe, as Street expectations remain low, and recovery of anti-infective growth arrived earlier than expected. Risks include lower-than-expected operating cash flow, more stringent antibiotics usage restriction, continued raw material price increases, as well as stagnant or deteriorating API prices. Sino Biopharmaceutical Our 12-month target price is based on applying a 1.2 target PEG, translating into an 18x P/E to 2013E EPS. Both PEG and P/E are at a premium to the average PEG and P/E of the company's Hong Kong- and China-listed peers. In our view, the premium is justified by the company's strong earnings growth profile, innovative R&D, investment track record, blockbuster product portfolio and market leadership in hepatitis B and cardiocerebral vascular treatments in China. We believe the biggest risks are government policy, to which pharmaceuticals are exposed via pricing control, and the holding company structure of the company. Other risks include increasing competition, further financing and integration issues.

Page 30

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Appendix 1
Important Disclosures Additional information available upon request
Disclosure checklist Company The United Laboratories Sino Biopharmaceutical Mindray Medical Ticker 3933.HK 1177.HK MR.N Recent price* 3.76 (HKD) 25 Sep 12 2.89 (HKD) 25 Sep 12 35.09 (USD) 24 Sep 12 Disclosure NA NA NA

*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Jack Hu Historical recommendations and target price: The United Laboratories (3933.HK)
(as of 9/25/2012)
18.00

Previous Recommendations
2 1

16.00 14.00 12.00

Security Price

3
10.00 8.00 6.00

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations
4 5 7 6

4.00 2.00 0.00 Sep 10

Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002

Dec 10

Mar 11

Jun 11

Sep 11

Date

Dec 11

Mar 12

Jun 12

1. 2. 3. 4.

29/10/2010: 18/11/2010: 11/07/2011: 04/09/2011:

No Recommendation, Target Price Change HKD0.00 Upgrade to Buy, Target Price Change HKD18.50 Downgrade to Hold, Target Price Change HKD9.10 Hold, Target Price Change HKD6.80

5. 6. 7.

02/04/2012: 21/05/2012: 27/08/2012:

Hold, Target Price Change HKD3.80 Upgrade to Buy, Target Price Change HKD3.90 Buy, Target Price Change HKD4.10

Deutsche Bank AG/Hong Kong

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26 September 2012 Health Care China Healthcare

Historical recommendations and target price: Sino Biopharmaceutical (1177.HK)
(as of 9/25/2012)
3.50

Previous Recommendations
4 1 2 3 5

3.00

2.50

Security Price

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002

2.00

1.50

1.00

0.50

0.00 Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Date

Dec 11

Mar 12

Jun 12

1. 2. 3.

16/02/2012: 04/04/2012: 17/05/2012:

Upgrade to Hold, Target Price Change HKD2.20 Hold, Target Price Change HKD2.30 Upgrade to Buy, Target Price Change HKD2.70

4. 5.

09/07/2012: 28/08/2012:

Buy, Target Price Change HKD3.15 Buy, Target Price Change HKD3.30

Historical recommendations and target price: Mindray Medical (MR.N)
(as of 9/24/2012)
40.00

Previous Recommendations
3

35.00

30.00

1

2

Security Price

25.00

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations

20.00

15.00

10.00

Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002

5.00

0.00 Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

Date

Dec 11

Mar 12

Jun 12

1. 2.

14/03/2011: 03/11/2011:

Buy, Target Price Change USD31.00 Buy, Target Price Change USD33.00

3.

09/08/2012:

Buy, Target Price Change USD38.00

Page 32

Deutsche Bank AG/Hong Kong

26 September 2012 Health Care China Healthcare

Equity rating key Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

Equity rating dispersion and banking relationships
450 400 350 300 250 200 150 100 50 0

56 % 38 %

11 %
Buy
Companies Covered

15 %
Hold

5% 11 %
Sell

Cos. w/ Banking Relationship

Asia-Pacific Universe

Deutsche Bank AG/Hong Kong

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26 September 2012 Health Care China Healthcare

Regulatory Disclosures 1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the name of the entity. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Page 34

Deutsche Bank AG/Hong Kong

Deutsche Bank AG/Hong Kong Asia-Pacific locations
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Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) 2203 8888

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GRCM2012PROD026993