Bright prospects for heart disease productsrdfile.gw.com.cn/3F/4F/3F4FB01DF43C0B7F7D0C8DD863071564.pdf · A rich pipeline of product candidates for cardiovascular diseases. Qinming

Please read carefully the important disclosures at the end of this report

Equity Research

September 9, 2013

Lepu Medical Bright prospects for heart disease products

Investment focus Upgrade to BUY

Action We upgrade Lepu Medical Technology from ACCUMULATE toBUY. Lepu has the broadest portfolio of interventional cardiologyproducts in China, and has entered the cardiovascular drug marketwith the acquisition of New Shuaike. We believe its current share price has a comfortable safety margin as its fundamentals are likely toimprove substantially on the stabilization of heart stent prices.

Reasoning The heart stent market has shown signs of bottoming out, anddemand in rural areas is likely to rise significantly. Lepu’s principal business declined in 2012 due to falling heart stent prices. This year,heart stent prices have stabilized. As PCI procedures graduallybecome covered by critical illness insurance programs under the newrural cooperative medical care system, the heart stent market growth islikely to pick up, helped by strong pent-up demand.

A rich pipeline of product candidates for cardiovascular diseases.Qinming Pharmaceuticals (a subsidiary of Lepu) is the only Chinesecompany to gain approval for cardiac pacemakers, and its upgradeddual-chamber pacemakers are likely to be approved in 2014. Lepu isalso likely to launch renal artery radiofrequency ablation catheters (anew procedure to treat hypertension), which should become a new growth driver.

Acquisition of New Shuaike to help Lepu build an integratedplatform and accelerate its earnings growth. Lepu successfully penetrated the clopidogrel hydrogen sulfate tablet market with theacquisition of New Shuaike. In China, this market has maintained a CAGR of 30% over the past few years and is likely to reach Rmb10bnin 2015. We believe the consolidation of New Shuaike’s financial statements will enhance Lepu’s earnings growth.

Earnings forecast and valuation We expect EPS to grow 4% YoY to Rmb0.52 for 2013 and 21% YoYto Rmb0.63 for 2014. The stock is trading at 26x/22x 2013/14e P/E,offering a comfortable safety margin.

Risks A sharp decline in stent prices; delays in new product development.

Ticker 300003.SZ

Last close Rmb13.80 52wk price range Rmb14.28~7.65 Market cap (bn) Rmb11 Daily value (mn) Rmb119.64 Shares outstanding (mn) 812 Free float (%) 29 Daily volume (mn sh) 9.65 Business sector Health Care

(Rmb mn) 2011A 2012A 2013E 2014E

Revenue 920 1,016 1,298 1,529

(+/-) 19.4% 10.4% 27.8% 17.8%

Net profit 473 403 424 509

(+/-) 15.2% -14.8% 5.2% 20.0%

EPS 0.58 0.50 0.52 0.63

BPS 2.88 3.22 3.66 4.19

DPS 0.18 0.18 0.08 0.09

CPS 0.36 0.33 0.26 0.46

P/E 23.7 27.8 26.4 22.0

P/B 4.8 4.3 3.8 3.3

EV/EBITDA 18.9 21.2 19.4 15.9

Dividend yield 1.3% 1.3% 0.6% 0.7%

ROAA 20.3% 15.5% 14.4% 15.1%

ROAE 21.5% 16.3% 15.2% 16.0%

Source: Bloomberg, company data, CICC Research

Jing QIANG

[email protected] SFC CE Ref: AWU229

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CICC Research: September 9, 2013

Please read carefully the important disclosures at the end of this report 2

Contents

Heart stent market has shown signs of bottoming out; strong demand growth from rural residents is likely .................................................................................................................................................... 3

Heart stent prices have limited further downside risks in the short term ................................................................. 3

Growth in number of PCI procedures has moderated over the past few years; grassroots market will likely become new growth driver ............................................................................................................. 4

Rural demand for PCI procedures to rise rapidly after regulations on hospitals/physicians qualified to perform them are loosened ......................................................................................................................... 5

Heart stent business expected to bottom out in 2H13 ............................................................................................. 5

Bioresorbable stents – A leader in new market trend .............................................................................................. 6

A rich pipeline of product candidates for cardiovascular diseases ............................................................ 7 Cardiac pacemakers to replicate stents’ success in import substitution ................................................................. 8

Occlude devices to see rapid growth after congenital cardiovascular disease becomes covered by the critical illness insurance program ............................................................................................................ 10

Renal artery radiofrequency ablation catheters likely launched next year ............................................................ 11

New Shuaike acquisition helps Lepu become an integrated producer of cardiovascular devices & drugs ................................................................................................................................................. 12

Acquisition gains exposure to key cardiovascular product market ........................................................................ 12

Consolidation of New Shuaike’s financial statements likely to significantly boost earnings growth ...................... 12

Figures

Figure 1: Decline in foreign brands’ heart stent prices has been moderating ..................................................... 3 Figure 2: Prices of domestic heart stents have already stabilized ...................................................................... 4 Figure 3: Growth in number of PCI procedures has slowed (Unit: 10,000) ........................................................ 4 Figure 4: Details of the “Implementation Measures of Hubei NCMS Critical Illness Insurance (Pilot)” ............... 5 Figure 5: Revenue and gross margin of heart stent operations (Rmb mn) ......................................................... 6 Figure 6: Lepu’s subsidiaries .............................................................................................................................. 7 Figure 7: A full range of product offerings for cardiovascular diseases............................................................... 8 Figure 8: Licensed producers of cardiac pacemakers in China .......................................................................... 8 Figure 9: China’s cardiac pacemaker market landscape in 2011 ....................................................................... 9 Figure 10: Prices for different brands of cardiac pacemaker .............................................................................. 9 Figure 11: China’s cardiac pacemaker market growth (Rmb bn) ...................................................................... 10 Figure 12: Fast-growing revenue from occlude devices (Rmb mn) .................................................................. 10 Figure 13: New Shuaike’s revenue and profit growth (Rmb mn) ...................................................................... 12 Figure 14: Rapid growth of Clopidogrel’s market size (Rmb bn) ...................................................................... 12 Figure 15: New Shuaike boosts Lepu’s earnings ............................................................................................. 13 Figure 16: Growth forecasts, by product .......................................................................................................... 13 Figure 17: Revised earnings forecasts ............................................................................................................. 14 Figure 18: Key financials and valuations .......................................................................................................... 14 Figure 19: Historical P/E & P/B ........................................................................................................................ 15 Figure 20: Comparable valuations ................................................................................................................... 15



Year Brand (DES) Avg. tender price (Rmb) Change

2004 Medtronic 20k －

2005 Medtronic 17k -15.0%

2006 Medtronic 17k 0.0%



Heart stent market has shown signs of bottoming out; strong demand growth from rural residents is likely

While some market participants wonder whether stent prices may decline further, we believe stent prices have limited further downside risks in the short term. Heart stent prices have been falling notably since 2012, when local governments started to administer their centralized procurement through open tenders, which dragged down the gross margin of Lepu’s heart stents.

On the other hand, the critical illness insurance program has been gradually introduced into the new rural cooperative medical care system, which means PCI procedures may also be covered as the program does not specify the types of critical illness it covers. In this case, we believe demand for PCI procedures is likely to rise strongly in rural regions, as in the past this demand was dampened by high average procedure rates of Rmb20,000 (including stents).

We believe the heart stent market is likely to expand strongly along with improvements in the rural medical care system. Heart stent prices have limited further downside risks, and demand from rural residents is likely to rise rapidly.

Heart stent prices have limited further downside risks in the short term

In the past, China’s heart stent market was dominated by foreign brands, with Johnson & Johnson and Medtronic the first two global companies to enter the Chinese market. As Chinese brands gradually entered the market, the prices of heart stents produced by foreign brands declined, but this decline has moderated over the past few years (Figure 1).

Figure 1: Decline in foreign brands’ heart stent prices has been moderating

Note: DES stands for Drug-eluting stent. Source: Local government tender websites, CICC Research

Lepu’s heart stent prices have already stabilized in 2013, after a sharp decline in 2012. As the price of this round of tenders may be effective for 2~3 years, we believe heart stent prices face limited further downside risks in the short term.



Time Brand (DES) Avg. tender price (Rmb) Change (most recent)

2006 Lepu Partner 1.20 －

2009 Lepu Partner 1.10 -8.3%

Lepu Partner 0.95 (Anhui) -13.6%

Lepu Nano 1.25 (Anhui) －

Lepu Partner 0.91 (Hunan) -4.2%

Lepu Nano 1.16 (Hunan) -7.2%

Lepu Partner 0.92 (Guangxi) +1.1%

Lepu Nano 1.18 (Guangxi) +1.7%

Lepu Partner 0.90 (Shaanxi) -2.2%

Lepu Nano 1.08 (Shaanxi) -8.5%Jul.2013

Jun.2012

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Mar.2013

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Figure 2: Prices of domestic heart stents have already stabilized

Note: Partner refers to eluting stents, and Nano refers to polymer-free eluting heart stent.

Source: Local government tender websites, CICC Research

Growth in number of PCI procedures has moderated over the past few

years; grassroots market will likely become new growth driver

The number of PCI procedures increased rapidly in China after they became covered by the urban health insurance program in 2005. However, this pace has slowed gradually over the past few years. We believe the rural market will likely become new growth driver after PCI procedures become covered by the new rural cooperative medical care system’s critical illness insurance program.

Figure 3: Growth in number of PCI procedures has slowed (Unit: 10,000)

Source: Yearly Statistics and Outlook of Coronary Stent Market, CICC Research

Local governments have sought out commercial insurance companies to establish a new rural cooperative medical care system under which critical illnesses such as PCI procedures will be covered, since the existing rural health insurance system does not cover rural patients for critical illnesses.



Contents

Policy Implementation Measures of Hubei NCMS Critical Illness Insurance (Pilot)

Inpatient deductible Rmb8,000 (PCI costs: Rmb25k)

Expenses: Rmb 8k~30k; reimbursement ratio: 50%

Expenses: Rmb 30k~50k; reimbursement ratio: 60%

Expenses: ≥Rmb 50k; reimbursement ratio: 70%

Reimbursement

Covers high medical expenses due to critical illnesses (excluding inpatient deductible); no restrictions on disease type.

Coverage

We will illustrate the critical illness insurance program based on the Implementation Measures for Critical Illness Insurance of Hubei New Rural Cooperative Medical Care System (Pilot). Considering the deductible amount for the critical illness insurance program is Rmb8,000, we believe most PCI procedure rates (Rmb25,000 with domestic heart stent) may be covered. More importantly, the type of critical illness is not specified, which means PCI procedures have a large chance of being included. We believe the stent market growth will likely pick up thanks to strong PCI procedure demand from rural residents.

Figure 4: Details of the “Implementation Measures of Hubei NCMS Critical Illness Insurance (Pilot)”

Source: Health Department of Hubei Province, CICC Research

Rural demand for PCI procedures to rise rapidly after regulations on

hospitals/physicians qualified to perform them are loosened

In the past, PCI procedures could only be performed in approved Class III hospitals, which dampened demand as it stopped many hospitals from performing them. PCI procedures are currently allowed to be performed in: 1) all Class III hospitals; 2) other qualified hospitals; and, 3) other hospitals, if necessary. This show that qualified hospitals and physicians are no longer the constraints preventing the number of PCI procedures from rising. After receiving training at provincial training centers, many physicians are qualified to perform PCI procedures.

The number of PCI procedures is set to rise rapidly in rural areas after regulations on the hospitals/physicians qualified to perform them are loosened. In order to take full advantage of this opportunity, Lepu has started to help county-level hospitals expand this business through financing guarantees and academic workshops. Lepu can offer one-stop solutions, offering equipment paid for with installments over three years, and invites senior experts to train local physicians. In addition, Lepu also reached “3 + X” agreements with local hospitals, under which local hospitals commit to using Lepu’s medical consumables for the first three years, plus another X years as agreed between Lepu and the hospital. We believe county-level markets are likely to become a new growth driver.

Heart stent business expected to bottom out in 2H13

Revenue and gross margin of heart stents dropped YoY in 1H13 due to price declines in 2012. We believe its heart stent business faces limited further downside risk in 2H13 as ex-plant prices of stent have already stabilized. In addition, Lepu’s earnings growth is likely to pick up steadily in 2H13 after the consolidation of the financial statements of New Shuaike and Qinming Pharmaceuticals.



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Revenue (stent) Growth (YoY) Gross margin

Figure 5: Revenue and gross margin of heart stent operations (Rmb mn)

Source: Company data, CICC Research

Bioresorbable stents – A leader in new market trend

Polymers carried by drug-eluting stents have the risk of leading to late stent thrombosis. Although the incidence of stent thrombosis is only as low as 3%, it has a high mortality rate. While many stent producers have developed bioresorbable stents and polymer-free stents, we believe the bioresorbable stents, which can be fully degraded in vessels, will become a trend as it not only eliminates the risk of stent thrombosis, but also helps blood vessels return to their optimum conditions.

Abbott launched the world first bioresorbable vascular scaffold (BVS) system ABSORB, made of degradable polymer materials and absorbable magnesium ions. Despite being priced at five times that of traditional drug-eluting stents, BVS has a rapidly expanding market share.

Lepu has started developing products with both materials, and are now at the stage of animal testing. We expect clinical trials to start in 2014. Lepu is leading the domestic R&D of fully dissolvable stents and is likely to become a leader in this new market trend.



QinmingPacing system

Lepu Medical

Tiandi XieheEndovascular & Peripheral

Shanghai Shape

Occluder

Star MedicalCardiac valves

Lepu TechIVD

LepuEquipmentAngiography

ShuaikeCardiovascular

drugs

98.54% 100% 100% 100% 100% 100% 60%

2012 sales: Rmb75.83mn;

NP: Rmb43.80mn


NP: Rmb9.56mn


NP: Rmb6.23mn

2012 sales Rmb9.63mn;

NP: -Rmb1.60mn


NP: Rmb1.66mn


NP: Rmb13.39mn


NP: Rmb13.16mn

A rich pipeline of product candidates for cardiovascular diseases

Thanks to its continuous efforts to expand product offerings for cardiovascular diseases, Lepu has built a comprehensive treatment platform comprising of coronary stents, occlude devices, cardiac valves, cardiac pacemakers, angiography and antithrombotic agents. Cardiac pacemakers and cardiac valves will likely replicate the success of stents in import substitution and become new growth drivers.

Figure 6: Lepu’s subsidiaries

Source: Company announcement, CICC Research

As shown in Figure 7, Lepu has a broad portfolio of interventional cardiology products. Due to the high technological barriers to entry, foreign brands still hold monopolies over the cardiac pacemaker and prosthetic heart valve markets, although China has already achieved a relatively high self-sufficiency rate in stent systems. The company currently offers the fullest range of cardiovascular devices in China and also has industry-leading expertise in R&D. Given a higher incidence rate of cardiovascular diseases and a faster pace of import substitution, Lepu’s extensive product portfolio should provide strong support for its long-term growth.



Company Marketed in China

St. Jude Early '80s

Biotronic Late '80s

Medtronic Early '90s

Boston Scientific Early '00s

Shaanxi Qinming 2009

Figure 7: A full range of product offerings for cardiovascular diseases

Source: CICC Research

Cardiac pacemakers to replicate stents’ success in import substitution

Cardiac pacemakers are a major interventional cardiovascular device. Due to high technological barriers to entry, China’s cardiac pacemaker market is dominated by foreign brands, with domestic players holding <5% market share. Currently, Qinming Pharmaceuticals is the only Chinese company to gain approval for cardiac pacemakers. As technological barriers are gradually overcome, cardiac pacemakers will likely replicate the success of stents in import substitution and domestic brands can leverage on their cost advantages to achieve rapid expansion of market share. As China’s leading cardiac pacemaker manufacturer, Qinming Pharmaceuticals is poised to gain a preemptive edge over its peers.

Figure 8: Licensed producers of cardiac pacemakers in China


The cardiac pacemaker market has a similar size to that of heart stents and is currently dominated by foreign brands due to high technological barriers. China’s only licensed Chinese cardiac pacemaker producer, Qinming Pharmaceuticals, has a market share of just 2% and should benefit from the significant potential for import substitution as its technology matures and the device is included in rural medical insurance coverage.



Brand Type Tender price (Rmb)

REGENCY SR (Single chamber) 19k

Axios S (Single chamber) 13k

Philos DR (Dual chamber) 37k

Sigma SS303 (Single chamber) 17k

Kappa KD701 (Dual chamber) 35k

Shaanxi Qinming Qinming 2312M (Single chamber) 11k

IDENTITY ADX XL DC (Dual chamber)

33k

Medtronic

Biotronic

St. Jude

Figure 9: China’s cardiac pacemaker market landscape in 2011

Source: Interventional Cardiovascular Devices Conference, CICC Research

A key factor that constrains the demand for cardiac pacemaker is its high prices, which range between >Rmb10,000 (single-chamber) and >Rmb20,000 (dual-chamber).

Figure 10: Prices for different brands of cardiac pacemaker

Source: www.ezhaobiao.com, CICC Research

In developed nations, the cardiac pacemaker market is similar in size to that of the stent. However, China’s cardiac pacemaker market is just Rmb800mn, vs. Rmb4bn for cardiac stents. We believe this is mainly due to China’s lack of surgeons qualified to perform such intricate surgery as well as the steep price of the devices.

Given the improving expertise of practicing surgeons in China (some county-level hospitals already have the capability to implant cardiac pacemakers) and the increasingly higher medicare reimbursements, we believe cardiac pacemakers enjoy the greatest growth potential among all kinds of cardiovascular devices offered in China.

55%26%

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Medtronic St. Jude Biotronic Boston Scientific Others



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Figure 11: China’s cardiac pacemaker market growth (Rmb bn)

Source: Interventional Cardiovascular Devices Conference, CICC Research

Currently the dual-chamber cardiac pacemaker developed by Qinming Pharmaceuticals has entered the clinical testing phase and will likely be approved by 2014. As China’s only licensed domestic cardiac pacemaker producer, the company will likely achieve import substitution after the dual-chamber product gets approved. High entry barriers and the huge market potential should also provide a strong support for its growth.

Occlude devices to see rapid growth after congenital cardiovascular

disease becomes covered by the critical illness insurance program

Each year, ~150,000 new cases of congenital cardiovascular defects are diagnosed in children. Based on an average cost of Rmb20,000 per surgery (including Rmb10,000 for occlude devices), the theoretical size of China’s occlude device market is estimated at ~Rmb1.5bn. However, due to the expensive surgery costs, a considerable amount of treatment demand has been suppressed. After the congenital cardiovascular disease was included in 2010’s critical illness insurance program with a reimbursement rate of ~90%, the treatment rate of grassroots patients has been increasing rapidly.

Shanghai Shape Memory Alloy, a wholly-owned subsidiary of Lepu, is one of China’s leading occlude device manufacturers, with a market share of >25%. It will likely maintain stable growth driven by the increasing grassroots demand.

Figure 12: Fast-growing revenue from occlude devices (Rmb mn)

Source: Company announcement, CICC Research



Renal artery radiofrequency ablation catheters likely launched next year

Renal denervation (RDN) is a minimally invasive, endovascular catheter based procedure using radiofrequency ablation aimed at treating resistant hypertension. By applying radiofrequency pulses to the renal arteries, the nerves in the vascular wall (adventitia layer) can be denervated. This causes a reduction of renal sympathetic afferent and efferent activity and blood pressure can be decreased.

RDN is relatively new approach of treating hypertension. In spite of its relatively small global market size of US$100mn, this product is likely to see a CAGR of 40% over the coming few years. At present, Europe represents 80% of the global market size, followed by the Asia-Pacific market. This product is pending US FDA approval, and is likely to get it in 2015.

Lepu has started clinical testing for its renal artery radiofrequency ablation catheter, and clinical efficacy of 20 patients is satisfactory. We expect Lepu to submit production application documents after the completion of clinical trials of 100 cases in 2014. RDN helps enhance its presence in the cardiovascular product market. We believe RDN has huge room for growth and will become a new growth driver thanks to its robust demand.



New Shuaike acquisition helps Lepu become an integrated producer of cardiovascular devices & drugs

Acquisition gains exposure to key cardiovascular product market

On June 22, 2013, Lepu announced it had acquired a 60% equity stake in Henan New Shuaike for Rmb390mn, and intended to buy the remaining 40% at 15x P/E (based on previous years’ earnings) over the next three years. New Shuaike mainly produces clopidogrel hydrogen sulphate and compound glycyrrhizin. In 2012, New Shuaike posted revenue of Rmb78.034mn (+29.5% YoY) and net profit of Rmb13.16mn (+69.2% YoY). This acquisition can significantly enhance Lepu’s earnings after the consolidation of their financial statements.

New Shuaike is the third drug-maker in China to be granted approval to make Clopidogrel hydrogen sulphate, after Sanofi (the producer of the patent drug) and Shenzhen Salubris (the manufacturer of the first generic product). Clopidogrel hydrogen sulphate (or Plavix as it is marketed by Sanofi), is a mainstream antiplatelet drug that is widely applied before and after PCI procedures to reduce platelet aggregation and prevent thrombus.

In 2012, clopidogrel hydrogen sulphate’s market size reached Rmb4.98bn in China, with a CAGR of 29.7% over the past five years. We expect this product to see explosive sales growth going forwards, since it was included in March 2013’s Essential Drug List. New Shuaike conservatively estimates that sales growth could stay at 30% in the future (without considering the possible wider applications) and its market size could reach Rmb10bn in 2015.

Figure 13: New Shuaike’s revenue and profit growth (Rmb mn)

Figure 14: Rapid growth of Clopidogrel’s market size (Rmb bn)

Source: Company Announcement, CICC Research Source: Company Announcement, CICC Research

Consolidation of New Shuaike’s financial statements likely to significantly

boost earnings growth

New Shuaike produces two types of tablets (75mg & 25mg). Harbin Gloria Pharmaceuticals serves as the general sales agency for 75mg-tablets, while sales of 25mg-tablets are directly marketed by New Shuaike. The company has won bids in Yunnan and Anhui. At present, this product has high gross margin thanks to its strong pricing power, due to the fact it only has a few rivals (Sanofi and Salubris, as well as a new Chia Tai Tianqing product that is unlikely to be approved before 2014). After winning bids in 2013, New Shuaike’s clopidogrel products are likely to see strong sales growth in grassroots markets, likely to significantly boost earnings growth.

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Revenue (Rmb mn) 132 195 259 337

Growth (YoY) － 47.76% 32.95% 29.78%

Net profit (Rmb mn) 39 65 92 124

Growth (YoY) － 68.73% 41.27% 35.26%

Net profit margin 29.18% 33.32% 35.40% 36.90%

Attributed EPS (Rmb) 0.03 0.05 0.07 0.09

(Rmb mn) 2012A 2013e 2014e 2015e

Coronary stents 699.0 692.0 782.0 899.3

Growth (YoY) 5% -1% 13% 15%

Gross Margin 91% 89% 89% 88%

Occluder 78.0 89.7 103.2 118.6

Growth (YoY) 18% 15% 15% 15%

Gross Margin 91% 91% 91% 91%

Cardiac valves 27.0 30.0 40.0 50.0

Growth (YoY) 10% 11% 33% 25%

Gross Margin 90% 90% 90% 90%

Agent products 139.6 250.0 300.0 360.0

Growth (YoY) 51% 79% 20% 20%

Gross Margin 26% 33% 31% 30%

Others 98.6 103.5 108.7 125.0

Growth (YoY) 1% 5% 5% 15%

Gross Margin 63% 60% 60% 60%

Shuaike 77.0 132.0 194.0 252.3

Growth (YoY) 30% 71% 47% 30%

Gross Margin 65% 68% 70% 71%

Total revenue 1,016.0 1,297.2 1,527.9 1,805.2

Growth (YoY) 10% 28% 18% 18%

Gross Margin 79% 74% 73% 72%

Figure 15: New Shuaike boosts Lepu’s earnings

Source: Feasibility Study Report, CICC Research

Figure 16: Growth forecasts, by product

Note: Only 60% of earnings from New Shuaike were consolidated in 2012. Source: CICC Research



Figure 17: Revised earnings forecasts


Figure 18: Key financials and valuations

Source: Wind, CICC Research

2011A 2012A 2013E 2014E

P&L (Rmb mn)

Revenue 920 1,016 1,298 1,529

19.4% 10.4% 27.8% 17.8%

Gross profit 749 791 950 1,101

Selling expense -149 -226 -299 -336

G&A -90 -124 -161 -176

Financial expense 27 28 20 19

Profit from operations 533 463 511 608

Profit before tax 538 473 505 603

14.5% -12.0% 6.8% 19.3%

Income tax -70 -77 -81 -93

Minority Interest - -0.05 -0.06 -0.07

Net profit 473 403 424 509

Balance Sheet (Rmb mn)

Cash and cash equivalen 1,116 1,109 817 1,021

Trade receivables 319 450 575 677

Inventories 119 151 229 282

Current assets 1,672 1,866 1,838 2,235

Fixed assets,net 481 513 553 605

Short term loans - - - -

Current liabilities 91 120 153 187

Long term liabilities 10 12 12 12

Minority interests - 6 6 6

Shareholders’ equity 2,342 2,612 2,973 3,406

Total assets 2,443 2,750 3,144 3,611

2011A 2012A 2013E 2014E

Cash Flow (Rmb mn)

473 403 424 509

-255 -172 -230 -159

Operating cash flow 291 265 211 376

Investment cash flow -168 -139 -459 -116

Financing cash flow -221 -134 -43 -57

Net change in cash -98 -7 -291 204

Financial ratios

Gross margin 81.4% 77.9% 73.2% 72.0%

EBIT margin 55.5% 43.4% 37.8% 38.5%

Net margin 51.4% 39.7% 32.7% 33.3%

ROE 20.2% 15.4% 14.3% 15.0%

ROA 20.3% 15.5% 14.4% 15.1%

Liability/Asset 4.1% 4.8% 5.2% 5.5%

Grow of sales 19.4% 10.4% 27.8% 17.8%

Grow of operating profit 13.6% -13.1% 10.4% 19.0%

Grow of net income 15.2% -14.8% 5.2% 20.0%

Current ratio 18.3 15.5 12.0 11.9

Quick ratio 17.0 14.3 10.5 10.4

Receivable turnover days 126.5 161.7 161.7 161.7

Inventory turnover days 269.3 260.1 250.0 250.0

EPS 0.58 0.50 0.52 0.63

P/E 20.5 24.0 22.8 19.0

P/B 4.1 3.7 3.3 2.8

Dividend yield 1.5% 1.5% -0.7% -0.8%

2011A 2012A 2013E 2014E

Revenue Before 920 1,016 1,080 1,229

(Rmb mn) After 920 1,016 1,298 1,529

(+/-%) 0% 0% 20% 24%

COGS Before 171 224 257 297

(Rmb mn) After 171 224 348 428

(+/-%) 0% 0% 35% 44%

Net profit Before 473 403 409 472

(Rmb mn) After 473 403 424 509

(+/-%) 0% 0% 4% 8%

Shares Before 812 812 812 812

(Rmb) After 812 812 812 812

(+/-%) 0% 0% 0% 0%

EPS Before 0.58 0.50 0.50 0.58

(Rmb) After 0.58 0.50 0.52 0.63

(+/-%) 0% 0% 4% 8%



Figure 19: Historical P/E & P/B

P/E P/B


Figure 20: Comparable valuations


Close Price Market Cap EV/EBITDA P/S Div.Yield PEG

13-9-08 RMB mn LTM 2012A 2013E 2014E LTM 2012A 2013E 2014E 2012A LTM 2012A LTM 2012A LTM 2012A 2012A

Median-Generic Drug 5,263 39x 40x 32x 25x 29x 7.8x 0.6% 11% 10% 3.7x 3.9x 1.82

Median-Modern TCM 4,830 37x 40x 32x 24x 35x 5.6x 1.2% 10% 8% 3.7x 3.8x 1.64

Median-Biotech 6,980 42x 49x 34x 25x 40x 10.7x 1.0% 11% 10% 5.4x 5.8x 1.62

Median-API 3,617 43x 40x 27x 20x 32x 3.8x 0.9% 6% 7% 2.5x 2.6x 1.58

Median-Brand TCM 8,871 48x 40x 36x 26x 34x 6.4x 0.7% 13% 13% 5.0x 5.1x 1.73

Median-Medical Service 5,518 62x 65x 53x 39x 40x 6.9x 0.9% 11% 11% 8.0x 8.3x 2.47

Yuyue Medical 21.95 11,669 0.50 0.46 0.53 0.64 44x 48x 41x 34x 41x 8.4x 0.5% 19% 19% 8.4x 8.9x 3.73

Lepu Medtech 13.80 11,206 0.44 0.50 0.52 0.63 32x 28x 27x 22x 24x 10.1x 1.3% 13% 15% 4.1x 4.3x 4.91

Shinva Medical 55.18 10,406 1.06 0.87 1.40 1.97 52x 64x 39x 28x 44x 2.9x 0.2% 12% 10% 6.2x 6.4x 1.11

Kehua Bio-Engineering 16.05 7,901 0.55 0.49 0.61 0.75 29x 33x 26x 21x 27x 7.3x 2.5% 24% 22% 6.8x 7.3x 2.48

Toff lon 30.14 6,269 1.24 1.12 1.50 1.86 24x 27x 20x 16x 27x 6.4x 2.0% 11% 10% 2.7x 2.8x 0.95

Median-Medical Device 4,439 50x 53x 41x 31x 45x 9.2x 0.9% 12% 10% 5.9x 5.9x 1.92

Median-Conglomerates 10,725 25x 25x 19x 16x 19x 1.7x 0.9% 9% 11% 2.4x 2.5x 1.32

Median-Healthcare Distribution 4,532 26x 35x 21x 18x 29x 0.6x 0.4% 7% 7% 3.6x 3.8x 1.10

Industry Median 5,330 41x 41x 33x 25x 33x 5.0x 0.9% 9% 9% 3.7x 3.9x 1.70

Subsector &Company

EPS P/E ROE P/B

6

8

10

12

14

16

18

2012-09 2012-12 2013-03 2013-06 2013-09

Lepu 15X 20X 24X 29X

6

8

10

12

14

16

18

2012-09 2012-12 2013-03 2013-06 2013-09

Lepu 2.1X 2.9X 3.6X 4.4X


16

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