中国医疗行业研究报告

Asia China Health Care Health Care 25 August 2010 China Healthcare Sustainable growth ahead； a buy/sellsiders perspectiveJack Hu, Ph.D Research Analyst (+852) 2203 6208 Eugene Yeoh Research Analyst (+852) 2203 6248 Raymond Yang Research Associate (+852) 2203 6139 We are initiating on Chinas healthcare sector with a positive view The primary growth drivers for the sector include favorable government policies to increase healthcare spending and expand reimbursement coverage； robust end-user demand for medical care, including generic and innovative therapeutics, devices, diagnostic tests, and accessible healthcare services； and increasing private reimbursement and middle class affordability. Importantly, we anticipate improving operating leverage for the years to come as a result of consolidation and accompanying economies of scale. Deutsche Bank AG/Hong Kong 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) 007/05/2010 Coverage Change Related recent research DateWeigao - Path to accelerated growth Jack Hu 25 Aug 2010Mindray - Delivering long-term stable growth Jack Hu 25 Aug 2010CMED - Re-emergence of a bellwether Jack Hu 25 Aug 2010Top picks Shandong Weigao (1066.HK),HKD37.80 BuyCompanies featured Mindray Medical (MR.N),USD26.72 Buy2009A 2010E 2011EP/E (x) 21.6 18.2 16.0EV/EBITDA (x) 16.0 12.4 10.0Price/book (x) 5.8 3.8 3.2Shandong Weigao (1066.HK),HKD37.80 Buy2009A 2010E 2011EP/E (x) 29.5 44.8 31.6EV/EBITDA (x) 27.8 42.0 29.7Price/book (x) 8.4 9.9 7.9China Medical Technologies (CMED.OQ),USD10.56 Buy2010A 2011E 2012EP/E (x) 15.8 6.8 5.2EV/EBITDA (x) 12.8 8.4 6.6Price/book (x) 1.4 0.9 0.8Company Global Markets Research We forecast a 15-20% 2010-20 CAGR for top-line growth We divide the growth period into two phases, with 2010-15 defined as the near and mid term, and 2015 and beyond as the long term, based on distinct top-line growth drivers. In the near and mid term, we believe the primary growth drivers include government funding and a continuous increase in end-user demand on the volume level. In the long term, the aging baby boomer population and the increasing income of the aged are likely to drive growth. We expect volume and value markets to dominate at different stages. We expect the depth and scope of operating leverage to expand We identified operating leverage in bellwethers in the distribution and medical device sectors after examining all 230 listed companies. While industry consolidation and operating efficiency improvements are the underlying drivers for the distribution sector, strategic product offerings and cost savings based on economies of scale should drive the medical device sector. Despite the prevailing pessimism regarding operating margins in the pharmaceutical industry, we remain sanguine about individual companies with unique product portfolios achieving or maintaining such leverage. Additionally, we anticipate that operating efficiency improvement is likely to continue, and more companies and subsectors should be on track to achieve such leverage in the years to come. We benchmark the China healthcare industry in this report We analyzed financial statements from all 230 publicly listed companies, the first such comprehensive review offering operational references. Interestingly, our analysis indicated an industry CAGR of 18% for 2006-09, lower than consensus of 20-23%. Given that all our data are from publicly traded companies whose growth includes acquisitions, this suggests an even larger discrepancy and lower organic growth rate. However, because of increased venture investment and corporate spending on R&D (2006-09 R&D CAGR 37%), we expect the next wave of new products launch to drive accelerated industry growth under favorite macro policy and increasing affordability. We favor the medical device subsector With this industry report, we concurrently publish reports on three companies, Shandong Weigao (1066.HK), Mindray Medical (MR.N) and China Medical Technologies (CMED.OQ), with Buy ratings. We initiate coverage on CMED and assume coverage of Shandong Weigao and Mindray Medical. Multiples-based valuation preferred； risks relate mainly to policy/regulations We use a multiples-based valuation approach given the sustainable growth in the sector. Industry risks relate primarily to government policies and regulatory changes in China, particularly regarding healthcare reforms. 2 325 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 3 Table of Contents Executive summary . 4 Investable universe. 6 Growth drivers. 34 Healthcare reform one year later. 51 Stock picking: valuation of the universe . 57 Pharmaceuticals . 59 Medical devices . 78 Distribution . 85 Appendix A: listed companies by market cap. 92 Shandong Weigao . 98 Mindray Medical. 100 China Medical Technologies. 102 425 August 2010 Health Care China Healthcare Page 4 Deutsche Bank AG/Hong Kong Executive summary Outlook Government spending and demand growth for volume should remain the primary drivers of healthcare industry growth in the near and mid term. In the first half of 2010, government spending on healthcare slowed significantly due to fiscal constraints at the local government level. As near-term pressure on local-government fiscal revenue lingers, we anticipate either a delay in or underachievement of the 2009-11 healthcare reform plan. However, we remain confident in government funding beyond 2011 as the widely anticipated incoming Prime Minister, Mr. Keqiang Li, has made healthcare one of his top priorities and is likely to continue to allocate further resources to the sector. Additionally, with increasing coverage from both the public and private sector, volume growth is likely to take center stage in 2010-15, for which we forecast industry growth of 16-20%. Our conviction in long-term sustainable growth is driven primarily by the increasing income of Chinas baby boomers. We define Chinese baby boomers as those who were born between 1955 and 1970. It is this generation that captured the monetary benefits of Chinas economic reforms started in the 1980s. Macro data indicate that China will morph into an aging society, and that 90% of Chinese healthcare expenditure in 2008 was spent on the 170m people who were 60 or above. However, the current aging population, who were born between 1940 and 1955, are unlikely to be able to afford modern medicine and medical services. In our opinion, the most likely fundamental driver for growth sustainability resides in the Chinese baby boomers assets and income. Our analysis indicates that approximately 50m of these baby boomers live in households with an estimated annual income of USD45,000 or above, and another 110m baby boomer households have an income of USD7,500-45,000, suggesting sufficient income to be able to afford healthcare. Combined, this 160m-strong soon-to-be-aging group represents 41% of the 380m Chinese baby boomers. Therefore, we anticipate volume growth in 2010-15 to be sustained beyond 2015. We project 13-17% growth for the industry during 2015-20 while the value market emerges. The future of Chinas healthcare equity investment also resides in the emergence of operating leverage. Going from a highly fragmented market to a consolidated one, economies of scale are likely to drive operating margin improvement, as history has proven repeatedly. While it is hard to identify subsectors or companies that could consistently improve operating margins, we believe the exceptions include bellwethers in the distribution and medical device sectors. During the current era of M&A, we anticipate the emergence of bellwethers with sustainable operating leverage across different subsectors, which in turn should create another significant driver of bottom-line growth. We strongly favor the first three to five launches of high-quality mimics of western innovations that address large market opportunities because of favorable domestic policy on these drugs/devices/tests, relative pricing power due to first domestic mover status, a discount price (vs. an MNCs pricing) that should enable these mimics to take the majority of the market share, subsequent large market expansion based on price/demand elasticity, physicians willingness to prescribe, and a relatively longer product life cycle. For any company holding one of the first three to five launches, the most important decisive feature to maximize ROI resides in the companys marketing prowess. We believe this represents the most exciting investment opportunity in the Chinese healthcare sector within the next 5-10 years. 525 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 5 Our favored sector is medical devices, due to the sectors better growth prospects and its bellwethers ability to maintain or improve both gross margins and operating margin. Other major factors include less stringent regulation, relative pricing power and higher R&D spending vs. other subsectors. With this report, we concurrently publish reports on three companies in the medical device sector, Shandong Weigao (1066.HK), Mindray Medical (MR.N) and China Medical Technologies (CMED.OQ), with Buy ratings. We initiate on the latter and assume coverage on the former two. They are the largest Chinese medical consumable company, the largest medical equipment company, and the largest IVD (in Vitro Diagnostic) company, respectively. Valuation We derive our 12-month target prices using a multiples-based approach. We prefer to use a P/E valuation given the companies sustainable growth profiles. Though this is our preferred methodology, we may alternatively use a EV/EBITDA valuation methodology. We also cross check our valuation with a discounted cash flow model. Risks The largest risk is government policy fluctuation. While government policy decision-making has been more transparent and predictable since the new reforms started, we cant exclude the possibility of subsector-specific disruption. We take a great degree of comfort from the fact that the incoming Prime Minister, Mr. Keqiang Li, is spearheading the current reform, which should ensure a smooth policy transition in 2013 when Mr. Li takes over. Other risks include lower-than-expected government spending, insufficient IP protection, an increasingly competitive landscape, and price erosion. 625 August 2010 Health Care China Healthcare Page 6 Deutsche Bank AG/Hong Kong Investable universe Key findings: capital markets We analyze 230 publicly traded Chinese healthcare companies in this report, the first comprehensive review of the investable equity universe for the investment community. No shortage of capital in the east: USD7bn Chinese IPO vs. USD12bn US IPO Total equity capital raised through HC-related IPOs is USD7bn in China vs. USD12bn in the US, from 2005 to YTD 2010 China/HK represented 82% of the healthcare IPO market in YTD 2010 USD3bn was raised for US HC companies vs. USD6bn for Chinese HC companies, from 2009 to YTD2010 USD215m was raised for US HC companies vs. USD415m for Chinese HC companies in 2008 Valuation: high-growth companies fetch the same multiples across capital markets in the US, HK and China. Average forward P/E multiples for China/HK/US listed companies are 30x, 14x and 13x, respectively, consensus conveniently concluded willingness to pay in above order We disagree with street consensus, and have a strong conviction that high-growth companies with a great degree of sustainability have fetched, and will continue to enjoy, the same high multiple ranges across US/HK/China listings Lions share of market capitalization is in A shares The 230 Chinese HC companies have an aggregate market cap of USD199bn There are over 1,168 HC companies listed in the US, with an aggregate market cap of USD1,467bn 151, or 66%, of the 230 Chinese HC companies are listed in China, also representing about 81% of the aggregate market cap 29 US listed stocks represent 4% of the total market cap 50 HK-listed stocks represent 15% of the total market cap Of the investable (defined as greater than USD500m) Chinese HC companies, 13 are listed in the US and HK, while 98 are listed in China USD500m-1bn: 55 companies USD1bn-3bn: 41 companies Greater than USD3bn: 15 companies Large concentration of aggregate market cap of Chinese HC companies is in pharma Pharma (including chem., TCM and biologics) represents 79% of total market cap TCM makes up 29% of the aggregate market cap Medical equipment represents 9% of the aggregate market cap 725 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 7 Key findings: operational review We benchmark Chinese healthcare companies operations, an analysis based on published data points for investors reference. Outlook: We forecast industry growth to accelerate with a CAGR of 15-20% for 2010-2020. We estimate pharmaceutical sector CAGR 15-18% for 2010-2015 We project medical device sector CAGR 18-20% for 2010-2015 We anticipate distribution sector CAGR 13-16% for 2010-2015 2007-09 CAGRs for revenue and net income (NI) were 18.3% and 46.3% for the whole healthcare universe, respectively. For pharmaceuticals, 2007-09 CAGRs for revenue and net income were 16.6% and 51.5%, respectively For medical devices, 2007-09 CAGRs for revenue and net income were 28.0% and 19.5%, respectively In 2009, for 181 pharmaceutical companies, sales averaged RMB1.5bn. Average gross margin was 35.7% Average SG&A as a percentage of sales was 21.7%, with a 2006-09 CAGR of 16.5%, in line with the revenue CAGR Average R&D as a percentage of sales was 0.5%, with a 2006-09 CAGR of 42.1%, higher than the revenue CAGR Average operating income margin was 12.6% Average net income margin was 10.2% In 2009, for 18 medical device companies, sales averaged RMB831m. Average gross margin was 51.4% Average SG&A as a percentage of sales was 22.9%, with a 2006-09 CAGR of 35.0%, higher than its revenue CAGR of 28.0% Average R&D as a percentage of sales was 3.8%, with a 2006-09 CAGR of 28.4%, marginally higher than its revenue CAGR of 28.0% Average operating income margin was 25.0% Average net income margin was 21.5% We identified operating leverage among the distribution and medical device sectors, primarily driven by industry consolidation and economies of scale. We define operating leverage as operating income growth higher or similar to revenue growth. We believe bellwethers in both sectors should maintain or improve operating leverage, and that depth and scope will expand to more companies However, we do not envisage operating leverage in the pharmaceutical sector 825 August 2010 Health Care China Healthcare Page 8 Deutsche Bank AG/Hong Kong Listed Chinese healthcare companies We identified 230 publicly traded Chinese healthcare companies trading in the US, HK and China. These stocks can be further classified into the following subsectors: Medical device companies Pharmaceutical companies Chemical drug companies Biotech companies Traditional Chinese medicine (TCM) companies Distribution companies Healthcare services companies Figure 1: Medical devices peer comparison as of 23 August 2010 Company Ticker Price 52 wk Mkt Cap P/E EPS (USD) Sales (USD) EPS Growth rate (%) LCcy High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011Mindray Medical MR.N 26.84 40.35 25.52 2,875 20.1 16.3 1.05 1.33 1.65 634 713 831 3.1 26.9 23.6 China Medical Technologies Inc CMED.OQ 10.52 18.98 9.40 339 8.5 6.7 1.02 1.24 1.58 106 117 134 654.3 21.1 27.5 Winner Medical Group WWIN.OQ 5.70 9.00 2.52 138 9.7 7.9 0.41 0.59 0.72 98 122 150 81.1 43.6 23.1 Huiheng Medical Inc HHGM.OB 1.29 3.00 0.53 18 N/M N/M 0.22 N/A N/A 11 N/A N/A (9.2) N/M N/M US-listed average 12.8 10.3 0.68 1.05 1.31 212 317 372 182.3 30.5 24.7 Shandong Weigao Group 1066.HK 38.00 39.80 19.74 5,260 42.9 33.3 0.09 0.11 0.15 275 365 480 21.7 32.1 28.9 Mingyuan Medicare Development Co 0233.HK 0.89 1.62 0.68 390 17.0 13.6 0.00 0.01 0.01 51 60 72 (50.9) 118.7 24.8 Trauson Holdings Co Ltd 0325.HK 3.60 3.96 3.21 358 26.4 21.1 0.02 0.02 0.02 31 37 47 - (12.5) 25.1 Golden Meditech Holdings Ltd 0801.HK 1.32 2.25 1.17 272 9.6 7.6 0.01 0.02 0.02 41 49 62 122.5 175.9 26.1 China Renji Medical Group Ltd 0648.HK 0.04 0.09 0.04 77 3.4 2.7 (0.00) 0.00 0.00 23 39 44 N/M N/M 23.1 Biosino Bio Tech. and Science Inc 8247.HK 3.67 4.25 2.10 47 N/M N/M 0.04 N/A N/A 31 N/A N/A 10.7 N/M N/M HK-listed average 19.8 15.7 0.03 0.03 0.04 75 110 141 20.8 78.6 25.6 Lepu Medical Tech. Co 300003.SZ 27.58 34.16 14.50 3,298 52.9 37.4 0.06 0.08 0.11 83 112 147 50.0 27.9 41.3 Jiangsu Yuyue Medical Equipment Co 002223.SZ 42.00 45.00 12.88 1,529 75.2 55.5 0.06 0.08 0.11 79 121 158 52.2 34.2 35.5 Wuhan Humanwell Hi-tech Industry 600079.SS 17.19 19.20 8.55 1,194 40.3 31.3 0.08 0.06 0.08 195 252 331 152.3 (16.3) 28.8 Shandong Pharmaceutical Glass Co 600529.SS 17.53 19.48 11.31 664 22.0 18.6 0.09 0.12 0.14 182 217 242 10.9 31.1 18.4 Guangdong Shirongzhaoye Co Ltd 002016.SZ 9.29 15.20 6.53 631 29.1 23.2 0.02 0.05 0.06 84 N/A N/A (9.6) 91.7 25.5 Beijing Wandong Medical Equipment 600055.SS 16.82 19.69 7.56 536 94.0 84.6 0.05 0.03 0.03 100 113 133 119.0 (48.3) 11.1 Shinva Medical Instrument Co Ltd 600587.SS 17.56 21.00 12.60 348 40.1 28.9 0.05 0.06 0.09 130 169 219 39.4 36.6 38.6 Weida Medical Applied Technology 000603.SZ 16.00 16.87 8.11 331 N/M N/M (0.00) N/A N/A 1 N/A N/A N/M N/M N/M Guangzhou Improve Med Instruments 300030.SZ 29.44 40.00 24.02 321 54.2 38.0 0.07 0.08 0.11 21 27 39 16.7 14.3 42.5 Jilin Leading Tech. Development Co 000669.SZ 21.80 21.95 7.52 297 N/M N/M (0.00) N/A N/A 5 N/A N/A N/M N/M N/M China-listed average 51.0 39.7 0.05 0.07 0.09 88 144 181 53.9 21.4 30.2 Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates 925 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 9 Figure 2: Pharmaceutical (chemical drugs) peer comparison as of 23 August 2010 Company Ticker Price 52 wk Mkt Cap P/E EPS (USD) Sales (USD) EPS Growth rate (%) (LCcy) High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011Simcere Pharmaceutical Group SCR.N 8.95 10.03 6.77 492 26.1 18.5 0.09 0.34 0.48 272 313 364 (77.2) 265.3 41.3 Tiens Biotech Group (USA) Inc TBV.A 3.03 4.32 1.90 131 6.1 5.8 0.48 0.50 0.52 62 74 90 7.9 4.0 5.0 China Pharma Holdings Inc CPHI.A 1.74 5.64 1.65 126 N/M N/M 0.33 N/A N/A 62 N/A N/A (13.8) N/M N/M Biostar Pharmaceuticals Inc BSPM.OQ 2.80 5.51 1.69 76 N/M N/M 0.33 N/A N/A 53 N/A N/A 47.7 N/M N/M AIDA Pharmaceuticals Inc AIDA.PK 0.22 0.56 0.12 6 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M US-listed average 16.1 12.1 0.31 0.42 0.50 112 194 227 (8.8) 134.6 23.2 The United Laboratories Int 3933.HK 13.64 13.92 2.80 2,193 17.4 15.0 0.06 0.10 0.12 599 780 884 25.5 67.9 16.1 Sino Biopharmaceutical Ltd 1177.HK 2.78 4.04 0.97 1,710 25.8 19.9 0.01 0.01 0.02 418 530 629 24.1 21.2 29.6 China Pharmaceutical Group 1093.HK 4.24 6.26 3.83 837 8.7 10.0 0.08 0.06 0.05 907 953 1,015 (4.5) (21.9) (13.7)Shandong Luoxin Pharmacy Co 8058.HK 10.54 12.98 3.50 826 19.7 N/M 0.07 0.07 N/A 133 188 N/A 47.2 5.5 N/M Lijun International Pharma 2005.HK 2.48 3.30 0.80 676 20.7 16.5 0.01 0.02 0.02 224 259 292 102.3 17.4 25.0 Global Biochem Technology 0809.HK 1.35 2.29 0.88 468 7.2 6.7 0.00 0.02 0.03 1,011 1,228 1,295 (98.3) N/M 7.7 HuaHan Bio-Pharmaceutical Hld 0587.HK 2.54 3.68 0.91 434 15.6 8.7 0.02 0.02 0.04 132 185 275 3.6 15.4 79.8 Dawnrays Pharmaceutical (Hld) 2348.HK 2.21 2.57 0.88 224 10.2 8.3 0.02 0.03 0.03 159 N/A N/A 16.8 22.7 23.4 Shandong Xinhua Pharma 0719.HK 3.21 4.27 2.27 189 N/M N/M 0.04 N/A N/A 336 N/A N/A 221.5 N/M N/M Broad Intelligence Int Pharma 1149.HK 1.28 1.42 0.51 165 18.3 9.1 (0.07) 0.01 0.02 16 381 708 N/M N/M 100.0 Wuyi International Pharma 1889.HK 0.72 1.18 0.69 158 5.4 4.7 0.01 0.02 0.02 94 105 118 (35.8) 48.9 14.5 Jiwa Bio-Pharm Holdings Ltd 2327.HK 0.51 0.78 0.20 106 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M China Grand Pharma & Healthcare 0512.HK 0.67 1.00 0.40 93 N/M N/M 0.00 N/A N/A 70 N/A N/A N/M N/M N/M Tianjin TEDA Biomedical Engineering 8189.HK 0.38 0.60 0.34 69 N/M N/M 0.00 N/A N/A 63 N/A N/A N/M N/M N/M Jilin Province Huinan Changlong Bio- 8049.HK 0.81 0.96 0.30 58 N/M N/M 0.01 N/A N/A 22 N/A N/A 37.0 N/M N/M Asia Resources Holdings Ltd 0899.HK 0.12 0.33 0.09 31 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Wai Yuen Tong Medicine Hld 0897.HK 0.04 0.13 0.03 30 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Ruyan Group (Holdings) Ltd 0329.HK 0.08 0.28 0.03 18 N/M N/M (0.03) N/A N/A 13 N/A N/A N/M N/M N/M HK-listed average 14.9 11.0 0.02 0.04 0.04 280 512 652 30.9 22.2 31.4 Shanghai Pharmaceuticals Hold 601607.SS 18.50 20.29 12.90 5,429 28.4 21.3 0.08 0.10 0.13 2,866 5,725 7,184 106.5 27.2 33.0 Jiangsu Hengrui Medicine Co 600276.SS 41.39 50.96 30.08 4,541 39.0 30.9 0.13 0.16 0.20 444 556 693 44.8 20.9 26.2 Sichuan Kelun Pharmaceutical 002422.SZ 108.14 115.20 82.17 3,822 N/M N/M 0.35 N/A N/A 471 N/A N/A 40.0 N/M N/M Harbin Pharmaceutical Group 600664.SS 18.66 23.50 14.80 3,413 20.7 18.1 0.11 0.13 0.15 1,564 1,740 1,927 6.8 16.0 14.0 Shenzhen Salubris Pharma 002294.SZ 73.88 100.95 31.00 2,470 48.7 34.0 0.17 0.22 0.32 124 181 253 71.7 28.0 43.4 Zhejiang NHU Co Ltd 002001.SZ 33.54 41.73 22.93 2,391 11.5 11.6 0.34 0.43 0.42 425 504 540 (25.9) 25.9 (1.5)Zhejiang Medicine Co Ltd 600216.SS 34.88 42.40 23.71 2,312 10.9 9.9 0.42 0.47 0.52 613 710 795 25.4 13.7 9.9 Beijing Double-Crane Pharma 600062.SS 26.21 30.25 19.65 2,207 25.5 20.9 0.12 0.15 0.18 738 821 910 15.0 28.3 22.0 Zhejiang Hisun Pharmaceutical 600267.SS 30.86 35.46 14.33 2,199 41.6 32.4 0.10 0.11 0.14 586 690 853 39.9 15.0 28.5 North China Pharmaceutical Co 600812.SS 10.58 14.50 7.58 1,603 22.0 13.0 0.00 0.07 0.12 715 944 1,227 (92.6) 1,729.5 69.3 Guangxi Wuzhou Zhongheng Gr 600252.SS 36.74 40.35 14.03 1,477 50.9 35.7 0.07 0.11 0.15 104 144 175 224.2 61.8 42.8 Hubei Biocause Pharmaceutical 000627.SZ 6.00 7.07 2.66 1,196 73.6 35.3 0.01 0.01 0.03 141 188 N/A 190.8 117.4 108.3 Tianjin Lisheng Pharmaceutical 002393.SZ 43.08 65.00 37.75 1,158 43.5 36.3 0.17 0.15 0.18 85 97 117 21.4 (14.1) 19.9 Harbin Pharm. Grp Sanjing Pharma 600829.SS 18.56 23.25 14.96 1,057 19.1 17.7 0.11 0.14 0.15 386 464 502 1.7 31.8 7.4 Chongqing Huapont Pharm. Co 002004.SZ 54.01 60.40 20.22 1,050 55.4 39.9 0.16 0.14 0.20 80 117 151 41.6 (8.1) 38.9 Zhejiang Huahai Pharmaceutical 600521.SS 15.74 22.00 7.98 1,040 34.8 25.2 0.05 0.07 0.09 136 179 239 2.5 28.8 38.1 Livzon Pharmaceutical Group 000513.SZ 37.48 50.00 24.84 1,014 22.4 18.9 0.24 0.25 0.29 379 435 512 1,100.0 2.5 18.7 Guangzhou Baiyunshan Pharma 000522.SZ 13.30 16.65 6.91 919 29.1 36.1 0.03 0.07 0.05 409 693 626 42.0 103.3 (19.6)Northeast Pharmaceutical Grp 000597.SZ 17.30 29.12 13.49 850 9.2 8.3 0.22 0.28 0.31 746 792 955 (12.0) 27.7 10.8 Livzon Pharmaceutical Group I 200513.SZ 22.31 24.66 13.50 848 11.8 9.8 0.26 0.24 0.29 380 405 480 696.8 (5.5) 19.7 Hainan Honz Pharmaceutical Co 300086.SZ 57.18 62.29 46.81 842 N/M N/M 0.19 N/A N/A 32 N/A N/A 90.0 N/M N/M Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates. 1025 August 2010 Health Care China Healthcare Page 10 Deutsche Bank AG/Hong Kong Figure 2: Pharmaceutical (chemical drugs) peer comparison as of 23 August 2010 Contd Company Ticker Price 52 wk Mkt Cap P/E EPS (USD) Sales (USD) EPS Growth rate (%) (LCcy) High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011PKU Int. Healthcare Grp SW Pharma 000788.SZ 13.39 15.13 5.53 821 48.1 36.5 0.03 0.04 0.05 129 158 191 121.6 44.9 31.7 Jiangsu Nhwa Pharmaceutical 002262.SZ 21.65 25.07 8.98 746 63.3 44.0 0.04 0.05 0.07 163 196 231 13.4 38.5 43.8 Zhejiang Xianju Pharmaceutical 002332.SZ 14.72 20.26 12.36 740 49.3 N/M 0.06 0.04 N/A 187 223 N/A 39.0 (22.5) N/M Shandong Lukang Pharma 600789.SS 8.51 9.68 4.77 729 26.7 19.0 0.02 0.05 0.07 291 375 411 8.2 203.7 40.4 Tianjin Tianyao Pharmaceuticals 600488.SS 8.39 11.14 5.97 671 27.7 12.4 0.02 0.04 0.10 130 176 216 56.6 115.6 122.9 Shanghai Modern Pharma 600420.SS 15.70 18.98 9.82 665 35.6 27.5 0.05 0.06 0.08 171 196 220 49.8 40.3 29.5 Tianjin Chase Sun Pharma 300026.SZ 42.99 145.50 35.50 637 24.0 20.0 0.15 0.26 0.32 32 40 47 15.4 75.7 20.0 Hainan Haiyao Co Ltd 000566.SZ 19.70 24.70 13.01 613 36.0 31.5 0.05 0.08 0.09 76 135 200 64.4 70.2 14.3 Henan Topfond Pharmaceutical 600253.SS 9.12 11.97 4.57 564 34.4 28.0 0.01 0.04 0.05 328 418 525 N/M 380.2 23.1 Shandong Xinhua Pharma 000756.SZ 7.55 10.42 5.88 508 26.5 38.3 0.04 0.04 0.03 340 381 429 177.7 10.4 (31.0)Zhejiang Hisoar Pharmaceutical 002099.SZ 21.33 23.80 7.09 504 35.8 25.2 0.03 0.09 0.12 131 153 181 33.6 163.1 42.3 Qianjiang Yongan Pharma 002365.SZ 36.39 46.00 29.30 501 34.4 26.7 0.14 0.16 0.20 45 66 85 (33.3) 11.4 28.8 Merro Pharmaceutical Co Ltd 600297.SS 8.80 11.58 6.11 454 9.4 32.5 0.01 0.14 0.04 181 124 147 (1.9) 1,045.0 (71.0)Zhejiang Hangzhou Xinfu Pharma 002019.SZ 14.00 25.50 10.51 454 34.3 21.2 0.03 0.06 0.10 59 80 95 (37.4) 132.3 62.2 Shanghai Dingli Tech Dev (Grp) 600614.SS 6.47 9.30 5.41 426 N/M N/M 0.02 N/A N/A 102 N/A N/A 100.0 N/M N/M Hubei Guangji Pharmaceutical 000952.SZ 10.82 17.75 8.49 401 37.6 28.0 0.03 0.04 0.06 66 88 104 (54.0) 62.7 34.4 Chongqing Lummy Pharma 300006.SZ 28.41 49.40 16.50 383 49.9 43.5 0.08 0.08 0.10 49 63 77 14.3 4.7 14.8 Zhejiang Yatai Pharmaceutical 002370.SZ 20.70 28.50 16.66 366 43.6 34.3 0.08 0.07 0.09 63 75 92 16.1 (12.2) 27.1 Southwest Pharmaceutical Co 600666.SS 11.32 15.18 7.23 322 N/M N/M 0.03 N/A N/A 105 N/A N/A 6.1 N/M N/M Beijing Beilu Pharmaceutical Co 300016.SZ 20.40 34.40 16.25 306 35.4 29.2 0.06 0.08 0.10 32 40 45 20.0 41.6 21.2 Anhui Fengyuan Pharma 000153.SZ 8.04 10.55 5.28 308 40.1 26.8 0.03 0.03 0.04 N/A N/A N/A 189.3 0.7 50.0 Zhongzhu Holding Co Ltd 600568.SS 12.13 22.03 8.70 297 N/M N/M 0.14 N/A N/A 296 N/A N/A N/M N/M N/M S&P Pharmaceutical Co Ltd 600869.SS 16.89 21.49 10.83 298 17.2 14.1 (0.02) 0.15 0.18 31 1,585 1,850 N/M N/M 22.1 Apeloa Co Ltd 000739.SZ 7.80 12.22 6.25 295 N/M N/M 0.03 N/A N/A 200 N/A N/A 29.9 N/M N/M Shanghai Dingli Tech Dev (Grp) 900907.SS 0.42 0.65 0.34 238 N/M N/M 0.02 N/A N/A 106 N/A N/A 51.4 N/M N/M Jilin Pharmaceutical Co Ltd 000545.SZ 9.95 14.60 7.75 232 N/M N/M (0.01) N/A N/A 14 N/A N/A N/M N/M N/M Jiangsu Lianhuan Pharma 600513.SS 16.61 16.19 7.07 286 N/M N/M 0.02 N/A N/A 38 N/A N/A 23.0 N/M N/M Ginwa Enterprise (Group) Inc 600080.SS 5.01 7.10 3.75 225 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Sichuan Dikang Sci & Tech Pharma Ind 600466.SS 8.66 13.49 7.02 224 N/M N/M 0.02 N/A N/A 46 N/A N/A 43.7 N/M N/M Topsun Science And Tech 600771.SS 6.21 9.52 4.68 223 N/M N/M (0.08) N/A N/A 38 N/A N/A N/M N/M N/M Zhejiang Jingxin Pharma 002020.SZ 13.80 17.25 7.31 206 115.6 73.0 0.01 0.02 0.03 76 80 86 N/M 140.0 58.3 Shanghai Wingsung Inv Mgmt 900904.SS 0.74 0.90 0.59 110 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Guilinjiqi Pharmaceutical Co Ltd 000750.SZ N/A 4.39 4.39 N/A N/M N/M 0.01 N/A N/A 23 N/A N/A N/M N/M N/M China-listed average 35.6 27.4 0.09 0.12 0.15 294 514 632 79.5 123.0 28.6 Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates 1125 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 11 Figure 3: Biotech peer comparison as of 23 August 2010 Company Ticker Price 52 wk Mkt Cap P/E EPS (USD) Sales (USD) EPS Growth rate (%) Lccy High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011China Nuokang Bio Pharma Inc NKBP.OQ 11.90 14.38 4.17 280 7.3 6.1 0.07 1.62 1.94 119 146 185 (87.4) 2,213.0 19.8 China Biologic Products Inc CBPO.OQ 12.81 15.30 9.38 276 19.7 16.6 0.08 0.65 0.77 46 60 76 104.6 666.1 18.5 3SBio SSRX.OQ 4.10 12.50 3.72 222 26.5 14.3 0.46 0.16 0.29 84 60 93 146.1 (66.6) 85.5 Sinovac Biotech Ltd SVA.OQ 5.12 9.30 4.50 101 9.1 12.5 0.08 0.56 0.41 41 51 69 20.2 644.5 (26.8)US-listed average 15.7 12.4 0.17 0.75 0.85 73 79 106 45.9 864.2 24.2 CK Life Sciences Intl (Holdings) 0775.HK 0.46 0.60 0.38 569 N/M N/M 0.00 N/A N/A 345 N/A N/A N/M N/M N/M Lees Pharmaceutical Holdings 0950.HK 2.68 4.18 0.82 155 16.4 12.3 0.01 0.02 0.03 22 31 42 58.3 52.8 33.3 Shanghai Fudan-Zhangjiang Bio-Pharma 8231.HK 1.60 2.23 0.60 146 N/M N/M (0.00) N/A N/A 9 N/A N/A N/M N/M N/M Shenzhen Neptunus Interlong Bio-Tech 8329.HK 1.03 1.93 0.96 125 N/M N/M (0.01) N/A N/A 1 N/A N/A 40.9 N/M N/M Bloomage BioTechnology Corp 0963.HK 2.45 3.40 1.26 98 N/M N/M 0.02 N/A N/A 17 N/A N/A 15.2 N/M N/M Uni Bio Science Group Ltd 0690.HK 0.43 0.90 0.38 71 N/M N/M 0.11 N/A N/A 296 N/A N/A N/M N/M N/M Vital Pharmaceutical Holdings 1164.HK 0.28 0.39 0.15 56 N/M N/M 0.01 N/A N/A 47 N/A N/A (37.5) N/M N/M Essex Bio-Technology Ltd 8151.HK 0.65 0.70 0.20 47 N/M N/M 0.00 N/A N/A 15 N/A N/A (22.4) N/M N/M HK-listed average N/M N/M 0.02 N/M N/M 94 N/M N/M N/M N/M N/MShenzhen Hepalink Pharma Co L 002399.SZ 125.01 188.88 105.00 7,366 38.5 27.3 0.33 0.48 0.68 325 551 756 26.9 44.8 41.2 Hualan Biological Engineering 002007.SZ 48.35 52.80 17.80 4,103 35.3 27.8 0.16 0.20 0.26 179 237 295 219.1 24.9 26.9 Shanghai Fosun Pharma (Group) 600196.SS 13.14 17.41 9.53 3,593 24.9 20.5 0.20 0.08 0.09 567 702 796 259.0 (61.2) 21.3 Anhui Anke Biotechnology (Grp) 300009.SZ 23.59 9.44 29.08 1,825 41.6 54.3 0.05 0.08 0.06 28 37 45 - 67.0 (23.3)Beijing Tiantan Bio Products 600161.SS 22.73 34.70 16.96 1,634 45.4 40.2 0.06 0.07 0.08 161 184 200 12.3 13.9 13.0 China Animal Husbandry Ind Co 600195.SS 27.20 29.50 17.28 1,562 31.2 25.6 0.10 0.13 0.16 308 344 372 28.1 33.4 21.8 Beijing SL Pharmaceutical Co 002038.SZ 39.18 55.18 31.03 1,451 30.2 22.8 0.15 0.19 0.25 57 73 93 15.4 31.2 32.4 Shenzhen Neptunus Bioengineering 000078.SZ 13.46 22.35 7.08 1,293 90.3 N/M 0.01 0.02 N/A 397 N/A N/A 128.2 283.1 N/M Shanghai Kehua Bio-Engineering 002022.SZ 15.80 22.53 12.52 1,145 28.9 22.8 0.06 0.08 0.10 91 114 143 32.4 32.0 26.9 Shanghai RAAS Blood Products 002252.SZ 48.31 51.47 24.88 1,138 41.2 33.0 0.12 0.17 0.22 57 76 94 30.4 38.3 24.8 Jiangsu Sihuan Bioengineering 000518.SZ 6.13 6.59 3.08 929 N/M N/M 0.00 N/A N/A 28 N/A N/A N/M N/M N/M Tonghua Dongbao Pharma 600867.SS 10.81 13.73 8.30 915 34.3 34.3 0.02 0.05 0.05 84 112 144 42.9 121.0 -Changchun High & New Tech Ind 000661.SZ 45.60 53.28 18.73 882 51.9 42.7 0.09 0.13 0.16 150 171 197 151.2 43.0 21.6 Da An Gene Co Ltd of Sun Yat-Sen 002030.SZ 14.64 16.73 9.45 623 65.4 57.0 0.02 0.03 0.04 47 51 60 36.0 34.3 14.7 Xinjiang Tecon Animal Husbandry 002100.SZ 19.01 20.95 9.97 596 33.8 27.4 0.09 0.08 0.10 303 381 461 80.5 (8.1) 23.4 Jiangsu Wuzhong Industrial Co 600200.SS 6.18 7.43 3.51 568 N/M N/M 0.01 N/A N/A 338 N/A N/A 109.3 N/M N/M Chengzhi Co Ltd 000990.SZ 12.50 18.90 9.30 547 66.1 22.1 0.02 0.03 0.08 415 559 783 12.6 15.1 200.0 Zhejiang Shenghua Biok Biology 600226.SS 9.15 10.35 6.07 546 28.7 22.8 0.05 0.05 0.06 222 276 319 (8.7) (13.2) 25.5 Inner Mongolia Jinyu Group Co 600201.SS 11.76 12.87 7.16 486 47.2 39.3 0.04 0.04 0.04 100 103 108 (13.4) (9.4) 20.1 Zhongyuan Union 600645.SS 9.15 13.39 5.67 438 89.8 84.2 0.00 0.02 0.02 45 N/A N/A (91.0) 847.6 6.7 Shanghai Jiaoda Onlly Co 600530.SS 9.31 11.67 7.45 428 N/M N/M 0.02 N/A N/A 46 N/A N/A N/M N/M N/M Zhejiang Qianjiang Biochemical 600796.SS 7.98 9.50 4.91 322 26.7 21.8 0.02 0.04 0.05 52 270 332 N/M 116.0 22.7 Zhejiang Intl Group Co Ltd 000411.SZ 8.82 10.76 5.55 269 40.6 32.5 0.02 0.03 0.04 744 N/A N/A 66.9 42.7 25.0 Wuhan National Pharma Tech 600421.SS 6.30 10.18 5.18 181 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Sihuan Pharmaceutical Co Ltd 000605.SZ 11.38 15.20 9.20 156 N/M N/M 0.00 N/A N/A 5 N/A N/A N/M N/M N/M Shandong Jintai Group Co Ltd 600385.SS 5.73 8.88 3.79 125 N/M N/M (0.00) N/A N/A 1 N/A N/A N/M N/M N/M Shenzhen CAU Technology Co 000004.SZ 10.49 12.60 6.28 130 N/M N/M 0.00 N/A N/A 9 N/A N/A N/M N/M N/MGuangxi Beisheng Pharma 600556.SS N/A 4.13 3.75 N/A N/M N/M 0.33 N/A N/A 3 N/A N/A N/M N/M N/M Sanjiu Yigong Biopharma &Chem 000403.SZ N/A 5.25 4.91 N/A N/M N/M 0.02 N/A N/A 68 N/A N/A N/M N/M N/M China-listed average 44.6 34.6 0.07 0.10 0.13 173 250 306 56.9 84.8 28.7 Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates 1225 August 2010 Health Care China Healthcare Page 12 Deutsche Bank AG/Hong Kong Figure 4: TCM peer comparison as of 23 August 2010 Company Ticker Price 52 wk Mkt CapP/E EPS (USD) Sales (USD) EPS Growth rate (%) Lccy High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011BMP Sunstone Corp BJGP.OQ 6.08 6.72 3.38 256 30.4 24.3 0.03 0.20 0.25 147 170 193 N/M 674.9 25.0 American Oriental Bioengineering Inc AOB.N 2.27 5.68 2.14 178 6.5 5.5 0.53 0.35 0.42 296 331 370 (30.2) (33.9) 18.6 China Sky One Medical Inc CSKI.OQ 10.25 25.45 8.82 172 3.9 4.0 1.86 2.66 2.56 130 161 187 (0.6) 42.8 (3.6)Aoxing Pharmaceutical Comp Inc AXN.A 2.65 4.16 1.52 123 132.5 (33.1) (0.05) 0.02 (0.08) 9 9 16 N/M N/M N/M Tongjitang Chinese Medicines Co TCM.N 3.55 5.10 3.03 94 (50.7) 71.0 (0.00) (0.07) 0.05 70 84 100 N/M N/M N/M Sunwin Int Neutraceuticals Inc SUWN.OB 0.37 0.73 0.18 59 N/M N/M N/A N/A N/A 22 14 N/A N/M N/M N/M Tianyin Pharmaceutical Co Inc TPI.A 2.98 5.25 2.49 79 N/M N/M 0.33 N/A N/A 43 N/A N/A 6.7 N/M N/M China Shenghuo Pharma Hld KUN.A 0.46 1.10 0.41 9 N/M N/M (0.33) N/A N/A 36 N/A N/A N/M N/M N/M US-listed average 24.5 14.3 0.34 0.63 0.64 94 128 173 (8.0) 227.9 13.3 China Shineway Pharma Group Ltd. 2877.HK 20.55 28.25 7.01 2,186 18.6 15.0 0.14 0.14 0.18 239 319 404 92.4 4.8 23.9 Guangzhou Pharmaceutical Co Ltd 0874.HK 6.72 9.44 3.53 701 17.1 14.6 0.04 0.05 0.06 557 654 723 81.3 26.9 17.1 Tong Ren Tang Technologies Co Ltd 1666.HK 13.40 15.30 9.10 400 13.6 12.0 0.13 0.15 0.17 191 215 248 8.3 15.4 13.3 Winteam Pharmaceutical Group Ltd 0570.HK 1.06 1.29 0.70 222 N/M N/M 0.00 N/A N/A 86 N/A N/A 7.3 N/M N/M Longrun Tea Group Co Ltd 2898.HK 0.49 1.27 0.47 90 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Pak Fah Yeow International Ltd 0239.HK 2.26 2.45 1.27 75 N/M N/M 0.02 N/A N/A 14 N/A N/A N/M N/M N/M Hao Wen Holdings Ltd 8019.HK 0.12 0.31 0.08 16 N/M N/M (0.01) N/A N/A 12 N/A N/A 63.3 N/M N/M Northeast Tiger Pharmaceutical Co 8197.HK 0.16 0.29 0.10 15 N/M N/M 0.00 N/A N/A 5 N/A N/A (93.7) N/M N/M HK-listed average 16.4 13.9 0.05 0.11 0.14 158 396 458 26.5 15.7 18.1 Yunnan Baiyao Group Co 000538.SZ 56.39 59.16 29.91 5,766 45.5 35.4 0.13 0.18 0.23 1,051 1,373 1,644 11.0 41.9 28.6 Shandong Dong-E E-Jiao Co Ltd 000423.SZ 40.00 42.60 17.20 3,853 45.9 35.7 0.09 0.13 0.17 305 386 483 39.9 40.7 28.7 Kangmei Pharmaceutical Co Ltd 600518.SS 15.19 16.16 8.16 3,790 37.1 27.4 0.05 0.06 0.08 348 474 647 60.0 32.3 35.4 China Resources Sanjiu 000999.SZ 23.99 30.35 16.20 3,458 27.2 22.6 0.11 0.13 0.16 711 669 814 40.7 18.8 20.5 Jilin Aodong Medicine Industry Grp 000623.SZ 29.83 59.40 24.60 2,519 12.6 10.5 0.36 0.35 0.42 150 165 182 62.1 (1.9) 20.2 Tianjin Tasly Pharmaceutical Co Ltd 600535.SS 33.12 36.36 16.16 2,380 39.0 31.7 0.10 0.13 0.15 585 703 835 24.7 29.5 23.0 Beijing Tongrentang Co Ltd 600085.SS 25.21 29.98 15.70 1,934 37.2 31.9 0.09 0.10 0.12 476 530 593 19.2 7.5 16.7 Joincare Pharma Group Industry Co 600380.SS 9.59 11.75 5.23 1,861 27.8 15.7 0.06 0.05 0.09 540 631 759 N/M (13.5) 77.2 Guilin Sanjin Pharmaceutical Co Ltd 002275.SZ 26.42 31.99 20.06 1,766 30.5 24.6 0.11 0.13 0.16 163 200 220 7.4 20.7 24.1 Inner Mongolia Yili Energy Co Ltd 600277.SS 12.19 13.87 7.49 1,619 35.2 N/M 0.02 0.05 N/A 824 N/A N/A N/M 193.8 N/M Jiangzhong Pharmaceutical Co Ltd 600750.SS 34.82 38.50 13.45 1,517 39.9 31.9 0.11 0.13 0.16 277 343 433 39.1 17.3 25.3 Tianjin Zhongxin Pharmaceutical Grp 600329.SS 13.72 17.19 9.14 1,494 30.0 22.6 0.05 0.07 0.09 422 533 677 63.0 46.8 32.6 Guangzhou Pharmaceutical Co Ltd 600332.SS 11.23 15.10 6.98 1,341 34.1 25.3 0.04 0.05 0.07 569 670 789 (8.7) 37.1 34.8 Tibet Cheezheng Tibetan Medicine 002287.SZ 21.08 28.45 17.56 1,260 48.2 46.1 0.06 0.06 0.07 71 85 103 1.6 17.1 4.4 Renhe Pharmacy Co Ltd 000650.SZ 16.50 18.61 10.47 1,021 33.0 25.3 0.07 0.07 0.10 144 171 203 15.8 11.9 30.5 Jiangsu Kanion Pharmaceutical Co 600557.SS 15.81 15.65 7.60 968 23.5 18.7 0.07 0.10 0.12 142 189 237 15.1 36.1 26.1 MaYingLong Pharma Group Co 600993.SS 39.48 44.88 22.57 964 37.6 29.4 0.16 0.15 0.20 150 190 236 124.8 (3.4) 28.0 Zhangzhou Pientzehuang Pharma 600436.SS 46.10 49.45 27.70 938 39.3 35.3 0.14 0.17 0.19 102 125 153 (9.0) 27.0 11.4 Guizhou Bailing Group Pharmal Co 002424.SZ 42.60 50.23 34.42 922 42.4 32.3 N/A 0.15 0.19 N/A 132 160 N/M N/M 31.1 Shanghai Kaibao Pharmaceutical Co 300039.SZ 32.64 39.48 23.91 843 55.3 38.2 0.10 0.09 0.13 68 101 134 N/M (11.2) 44.8 Yabao Pharmaceutical Group Co Ltd 600351.SS 9.33 11.60 5.48 870 31.0 24.8 0.03 0.04 0.06 218 266 315 38.3 49.1 25.0 Jinling Pharmaceutical Co 000919.SZ 10.64 14.34 8.18 790 22.7 18.1 0.07 0.07 0.09 288 321 369 157.6 4.0 25.0 Zhuzhou Qianjin Pharmaceutical Co 600479.SS 16.87 22.76 12.34 757 29.3 23.0 0.06 0.08 0.11 132 169 206 0.2 34.1 27.6 Guizhou Yibai Pharmaceutical Co Ltd 600594.SS 21.50 26.38 11.40 745 28.8 21.8 0.08 0.11 0.15 192 233 288 33.9 34.5 32.0 Zhejiang CONBA Pharmaceutical Co 600572.SS 15.14 17.90 7.52 722 33.8 23.5 0.05 0.07 0.10 206 212 340 96.9 31.5 44.2 Guangdong Zhongsheng Pharma Co 002317.SZ 39.00 63.33 31.70 689 34.8 26.2 0.18 0.17 0.22 84 100 127 N/M (6.2) 32.7 Guilin Layn Natural Ingredients Corp 002166.SZ 33.38 36.00 13.01 637 95.3 N/M 0.01 0.05 N/A 19 N/A N/A 238.2 431.5 N/M Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates 1325 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 13 Figure 4: TCM peer comparison as of 23 August 2010 Contd Company Ticker Price 52 wk Mkt Cap P/E EPS (USD) Sales (USD) EPS Growth rate (%) Lccy High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011Gansu Duyiwei Biological Pharma Co 002219.SZ 22.48 30.00 14.40 618 55.8 41.9 0.04 0.06 0.08 42 64 N/A (6.3) 57.5 33.2 Kunming Pharmaceutical Corp 600422.SS 12.76 14.48 7.17 590 42.5 28.3 0.04 0.04 0.07 210 248 293 62.2 25.1 50.0 Chongqing Taiji Industry (Group) Co 600129.SS 9.16 12.58 6.01 576 58.7 40.9 0.01 0.02 0.03 773 862 967 N/M 87.3 43.5 Jiuzhitang Co Ltd 000989.SZ 13.10 16.32 9.40 574 23.1 18.0 0.08 0.08 0.11 162 191 216 (14.0) 6.5 28.1 Chengdu Huasun Group Inc Ltd 000790.SZ 14.44 15.48 5.47 552 160.1 106.7 0.01 0.01 0.02 56 78 94 39.8 89.5 50.0 Holley Pharmaceuticals (Chongqing) 000607.SZ 7.37 9.60 5.15 529 N/M N/M (0.01) N/A N/A 286 N/A N/A 61.3 N/M N/M Tonghua Golden-Horse Pharma Ind 000766.SZ 7.58 10.11 5.69 501 N/M N/M 0.01 N/A N/A 25 N/A N/A 19.7 N/M N/M Guizhou Xinbang Pharmaceutical Co 002390.SZ 37.09 59.00 30.61 474 53.6 41.1 N/A 0.10 0.13 N/A 59 77 N/M N/M 30.4 Henan Taloph Pharmaceutical Stock 600222.SS 7.21 9.52 4.75 438 4.5 4.7 0.01 0.24 0.23 119 N/A N/A 27.3 1,961.0 (3.8)Jilin Zixin Pharmaceutical Industrial 002118.SZ 14.19 16.15 8.53 432 54.5 31.7 0.05 0.04 0.07 38 34 N/A 19.4 (15.9) 72.2 Hunan Hansen Pharmaceutical Co 002412.SZ 36.25 43.50 30.15 395 40.4 31.6 N/A 0.13 0.17 N/A 55 70 N/M N/M 28.0 Wuhan Jianmin Pharma Groups Co 600976.SS 16.30 17.80 8.60 368 36.0 28.8 0.06 0.07 0.08 225 266 318 167.3 7.7 24.8 Shandong Wohua Pharmaceutical Co 002107.SZ 14.91 29.84 12.17 360 23.0 N/M 0.04 0.10 N/A 25 51 N/A (23.9) 133.9 N/M Inner Mongolia Free Han & Mongolia 300049.SZ 32.80 40.60 27.89 357 39.6 30.2 0.08 0.12 0.16 26 39 55 N/M 60.5 31.1 Guangdong Jiaying Pharma Co Ltd 002198.SZ 28.51 32.89 15.07 344 68.9 N/M 0.03 0.06 N/A 9 17 N/A 6.7 131.1 N/M Shanghai Furen Industrial (Group) Co 600781.SS 13.00 17.39 6.30 340 N/M N/M 0.02 N/A N/A 36 N/A N/A (25.6) N/M N/M Henan Lingrui Pharmaceutical Co Ltd 600285.SS 10.59 14.68 8.15 313 41.0 34.4 0.03 0.04 0.05 68 N/A N/A 156.4 30.4 19.2 Unisplendour Guhan 000590.SZ 10.23 11.17 5.80 306 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Nantong Jinghua Pharmaceutical Co 002349.SZ 30.63 36.10 22.68 271 56.0 42.8 0.08 0.08 0.11 38 44 53 19.5 1.2 30.9 Tibet Rhodiola Pharma Holding 600211.SS 13.29 17.88 8.78 271 N/M N/M 0.02 N/A N/A 163 N/A N/A 28.8 N/M N/M Hangzhou Tian-Mu-Shan Pharma Ent 600671.SS 12.42 14.93 8.15 223 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Shanghai Wingsung Inv. Mgmt 600613.SS 11.40 15.29 9.40 172 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M China listed average 41.8 30.5 0.07 0.10 0.13 245 289 385 43.5 94.9 30.7 Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates 1425 August 2010 Health Care China Healthcare Page 14 Deutsche Bank AG/Hong Kong Figure 5: Distribution peer comparison as of 23 August 2010 Company Ticker Price 52 wk Mkt Cap P/E EPS (USD) Sales (USD) EPS Growth rate Lccy High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011China Nepstar Chain Drugstore Ltd NPD.N 2.80 8.06 2.47 295 42.1 20.3 0.10 0.07 0.14 325 352 387 (24.8) (31.7) 107.1 China Jo Jo Drugstores Inc CJJD.OQ 5.75 11.00 1.20 77 7.0 5.0 N/A 0.83 1.16 N/A 78 123 N/M N/M 40.6 US-listed average 24.5 12.6 0.10 0.45 0.65 325 215 255 (24.8) (31.7) 73.8 Sinopharm Group Co 1099.HK 29.90 38.60 17.82 8,708 46.0 34.4 0.07 0.08 0.11 6,891 9,520 12,372 22.9 28.0 33.8 United Gene High-Tech Group Ltd 0399.HK 0.21 0.49 0.20 295 N/M N/M 0.01 N/A N/A 48 N/A N/A N/M N/M N/M Extrawell Pharma Holdings Ltd 0858.HK 0.85 1.97 0.56 250 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Yunnan Enterprises Holdings Ltd 0455.HK 0.45 0.84 0.33 77 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M HK-listed average 46.0 34.4 0.04 0.08 0.11 3,470 9,520 12,372 22.9 28.0 33.8 Shanghai Pharma Holding Co Ltd 601607.SS 18.50 20.29 12.90 5,429 28.4 21.3 0.08 0.10 0.13 2,866 5,725 7,184 106.5 27.2 33.0 Liaoning Cheng Da Co 600739.SS 27.89 44.00 21.90 3,712 17.3 13.2 0.22 0.24 0.31 589 690 793 43.4 7.5 30.9 China National Medicines Corp Ltd 600511.SS 23.32 29.28 16.55 1,644 36.6 29.6 0.07 0.09 0.12 761 971 1,168 19.0 31.4 23.4 Huadong Medicine Co 000963.SZ 23.66 28.50 11.95 1,512 29.2 23.4 0.13 0.12 0.15 1,146 1,371 1,687 97.2 (9.9) 24.7 Shenzhen Accord Pharmaceutical Co 000028.SZ 29.05 35.36 19.88 783 32.2 25.0 0.10 0.13 0.17 1,601 2,028 2,545 25.0 33.0 28.6 Shenzhen Accord Pharmaceutical Co 200028.SZ 19.38 22.38 10.14 718 19.0 14.9 0.10 0.13 0.17 1,604 1,974 2,506 31.5 27.4 27.4 China Meheco Corp 600056.SS 15.23 25.39 10.59 697 30.2 24.3 0.09 0.07 0.09 702 824 966 6.8 (20.7) 24.2 NanJing Pharmaceutical Co 600713.SS 12.22 14.04 7.02 542 55.8 42.4 0.02 0.03 0.04 2,054 2,466 2,959 5.9 89.5 31.8 Chongqing Tongjunge Co Ltd 000591.SZ 11.07 14.56 6.06 320 77.6 62.7 0.01 0.02 0.03 561 643 737 N/M 130.5 23.8 Shanghai No.1 Pharmacy Co Ltd 600833.SS 11.66 15.39 7.68 274 41.9 40.9 N/A 0.04 0.04 N/A 182 191 N/M N/M 2.4 Beihai Gofar Marine Biological Industry 600538.SS 5.49 10.51 4.32 226 24.5 21.4 0.02 0.03 0.04 42 51 60 N/M 33.0 14.7 Zhejiang Zhenyuan Share CO LTD 000705.SZ 10.80 13.05 6.91 199 N/M N/M 0.03 N/A N/A 187 N/A N/A 36.2 N/M N/M China-listed average 35.7 29.0 0.08 0.09 0.12 1,101 1,539 1,891 41.3 34.9 24.1 Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates Figure 6: Services peer comparison as of 23 August 2010 Company Ticker Price 52 wk Mkt Cap P/E EPS (USD) Sales (USD) EPS Growth rate (%) Lccy High Low (USDm) 2010 2011 2009 2010 2011 2009 2010 2011 2009 2010 2011WuXi PharmaTech Cayman Inc WX.N 15.14 20.13 10.77 1,053 17.5 14.9 0.09 0.87 1.01 270 325 389 89.8 856.1 17.0 Concord Medical Services Holding CCM.N 6.37 10.70 5.36 313 16.3 11.6 0.27 0.39 0.55 43 57 82 N/M 42.7 41.0 China Cord Blood Corp CO.N 4.56 12.85 4.50 308 26.3 21.0 0.09 0.17 0.22 38 52 65 (10.0) 92.6 25.0 Chindex International Inc CHDX.OQ 13.50 16.25 9.94 202 30.2 17.7 0.51 0.45 0.76 176 171 194 63.0 (11.4) 70.6 Tongji Healthcare Group Inc TONJ.OB 0.21 0.70 0.21 3 N/M N/M 0.00 N/A N/A 2 N/A N/A N/M N/M N/M US-listed average 22.6 16.3 0.19 0.47 0.64 106 151 183 47.6 245.0 38.4 Quality HealthCare Asia Ltd 0593.HK 4.33 4.95 3.20 125 N/M N/M 0.04 N/A N/A 142 N/A N/A 22.3 N/M N/M Hua Xia Healthcare Holdings Ltd 8143.HK 0.10 0.14 0.05 58 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Town Health Int. Investments Ltd 3886.HK 1.32 1.48 0.87 55 N/M N/M (0.35) N/A N/A 44 N/A N/A N/M N/M N/M Venturepharm Laboratories Ltd 8225.HK 0.73 1.20 0.42 34 N/M N/M 0.00 N/A N/A 7 N/A N/A N/M N/M N/M China HealthCare Holdings Ltd 0673.HK 0.85 0.96 0.31 29 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M Hong Kong Health Check & Lab.Hold. 0397.HK 0.24 0.79 0.21 25 N/M N/M 0.01 N/A N/A 14 N/A N/A (71.6) N/M N/M China Natural Investment Co Ltd 8250.HK 0.27 0.95 0.21 8 N/M N/M 0.27 N/A N/A 1 N/A N/A N/M N/M N/M HK-listed average N/M N/M (0.01) N/M N/M 41 N/M N/M (24.6) N/M N/MAier Eye Hospital Group Co Ltd 38.97 49.57 19.51 1,532 86.8 65.1 0.06 0.07 0.09 88 121 156 50.0 10.2 33.3 38.97 Topchoice Medical Investment Co 12.92 14.68 7.05 305 46.0 32.2 0.02 0.04 0.06 28 40 55 55.4 70.4 42.9 12.92 Chang An Information Industry (Grp) 9.06 10.91 7.52 117 N/M N/M N/A N/A N/A N/A N/A N/A N/M N/M N/M 9.06 China-listed average 66.4 48.7 0.04 0.05 0.07 58 80 105 52.7 40.3 38.1 Source: Deutsche Bank, Reuters, Bloomberg Finance LP, all forecasts are based on consensus estimates 1525 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 15 Stock performance: Domestic outperformed HK/US-listed The following charts indicate that domestically listed A shares consistently outperformed HK- and US-listed stocks, while US-listed stocks, as a group, were the worst performers. Chinese healthcare stocks listed in the US To compare the price performance of the US-listed China HC companies, we took a basket of the top US-listed Chinese HC stocks by market cap, tracked their performance from November 2007 to today, and compared them against the S&P. Figure 7 shows the price performance of China-based HC companies with a market cap above USD300m vs. the S&P, and Figure 8 shows the comparative performance of China-based HC companies with a market cap between USD200-300m. As can be seen in Figure 7, all of the US-listed HC stocks above a market cap of USD300m, with the exception of Mindray, underperformed the S&P. A similar trend can be seen in the US-listed HC companies with a market cap between USD200-300m. It is also interesting to note that all of the US-listed HC stocks, regardless of market cap, are trading at a lower price as of July 2010 than their trading price in November 2007. Figure 7: Price performance of US-listed China HC companies (Mkt Cap USD300m) Figure 8: Price performance of US-listed China HC companies (Mkt Cap USD200-300m) 020406080100120140160Nov-07Jan-08Mar-08May-08Jul-08Sep-08Nov-08Jan-09Mar-09May-09Jul-09Sep-09Nov-09Jan-10Mar-10May-10Jul-10Price Performance (%)MR.N WX.N SCR.N CMED.OQ NPD.N S&P5001030507090110130150170Nov-07Jan-08Mar-08May-08Jul-08Sep-08Nov-08Jan-09Mar-09May-09Jul-09Sep-09Nov-09Jan-10Mar-10May-10Jul-10PricePerformance (%) SSRX.OQ SVA.OQ AOB.N BJGP.OQ S&P500Source: Deutsche Bank, Reuters Source: Deutsche Bank, Reuters Chinese healthcare stocks listed in Hong Kong To compare the price performance of the HK-listed China HC companies, we took a basket of the top Chinese HC stocks by market cap, tracked their performance from January 2006 to date, and compared them against the HSI. Figure 9 shows the price performance of China-based HC companies with a market cap above USD1bn vs. the HSI, and Figure 10 shows the comparative performance of China-based HC companies with a market cap between USD500m-1bn. The Hong Kong-listed Chinese HC companies have a different performance story. All of the selected stocks, with the exception of biotech company CK Life Sciences (775.HK), outperformed the HSI and have held their value over the period of observation. Moreover, with the exception of 775.HK, none of the HK-listed HC companies tracked the performance of the HSI over the period of observation. Clear outperformers in the HK group are Shandong Weigao (1066.HK), Shandong Luoxin (8058.HK) and Lijun Intl Pharma (2005.HK), which generated annualized returns of 93.2%,108.6% and 40.7%, respectively, over the time. Mindray Medical is the top US-listed stock performer Shandong Weigao is the top HK-listed stock performer 1625 August 2010 Health Care China Healthcare Page 16 Deutsche Bank AG/Hong Kong Figure 9: Price performance of HK-listed China HC companies (Mkt Cap USD1bn) Figure 10: Price performance of HK-listed China HC companies (Mkt cap USD500m-1bn) 04008001200160020002400Jan-06Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Price Performance (%)8199.HK 2877.HK 1177.HK 0874.HK HSI04008001,2001,6002,0002,4002,8003,2003,6004,000Jan-06Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07Jan-08Apr-08Jul-08Oct-08Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Price Performance (%)1093.HK 2005.HK 8058.HK 0775.HK 0587.HK HSISource: Deutsche Bank, Reuters Source: Deutsche Bank, Reuters Chinese healthcare stocks listed in China To compare the price performance of the China-listed HC companies, we took a basket of the top Chinese HC stocks by three tiers of market cap ( USD2.0bn, USD1.5-2bn and USD1-1.5bn), tracked their performance from January 2006 to date, and compared them against the SHSE Composite. We have presented the price performance of these three baskets (based on market cap) by the top five price performers and the remaining companies within the basket. Similar to the Hong Kong-listed Chinese healthcare companies, the top listed companies in China have outperformed the index and held their value. USD2.0bn: All of the stocks in this basket outperformed the SHSE Composite and held their value over the period of observation. Clear outperformers in the USD2bn group are Liaoning Cheng Da (600739.SS), Hualan Biological Engineering (002007.SZ) and Kangmei Pharmaceutical (600518.SS), with annualized returns of 82.6%, 101.5% and 80.9%, respectively. USD2.0-1.5bn: All of the stocks in this basket outperformed the SHSE Composite, with the exception of TCM manufacturer Beijing Tongrentang (600085.SS), and have held their value over the period of observation. Clear outperformers in the USD1.5-2bn group are China National Medicines (600511.SS, China listing of Sinopharm) and Zhejiang NHU (002001.SZ), with annualized returns of 74.2% and 63.4%, respectively. USD1-1.5bn: All of the stocks in this basket outperformed the SHSE Composite, with the exception of TCM manufacturer Guangzhou Pharma (600332.SS), and have held their value over the period of observation. Guangxi Wuzhou Zhongzheng (600252.SS), Beijing SL Pharmaceutical (002038.SZ), Shenzhen Accord Pharmaceutical (200028.SZ) and Shenzhen Neptunus Bioengineering (000078.SZ) posted annualized returns of 79.0%, 72.8% and 43.8%, respectively. 1725 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 17 Figure 11: China-listed HC companies (Mkt Cap USD2bn) Top five price performers (total basket of 13)Figure 12: China-listed HC companies (Mkt Cap USD2bn) Rest of the basket 02004006008001,0001,2001,4001,6001,8002,0002,2002,4002,6002,8003,0003,2003,4003,600Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10Price Performance (%)600276.SS 002007.SZ 600739.SS 600518.SS 000623.SZ SHSE Composite0100200300400500600700800Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10Price Performance (%)000538.SZ 601607.SS 000999.SZ 600196.SS 600664.SS000423.SZ 600062.SS 600535.SS SHSE CompositeSource: Deutsche Bank, Reuters Source: Deutsche Bank, Reuters Figure 13: China-listed HC companies (Mkt Cap USD1.5-2bn) Top 5 price performers (total basket of nine) Figure 14: China-listed HC companies (Mkt Cap USD1.5-2bn) Rest of the basket 01002003004005006007008009001,0001,1001,2001,3001,4001,5001,6001,700Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10Price Performance (%)002001.SZ 600216.SS 600161.SS 600812.SS 600511.SS SHSE Composite 0100200300400500600700Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10Price Performance (%)600085.SS 600267.SS 000963.SZ 600380.SS SHSE CompositeSource: Deutsche Bank, Reuters Source: Deutsche Bank, Reuters Figure 15: China-listed HC companies (Mkt Cap USD1-1.5bn) Top 5 price performers (total basket of 16) Figure 16: China-listed HC companies (Mkt Cap USD1-1.5bn) Rest of the basket 02004006008001,0001,2001,4001,6001,800Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10Price Performance (%) 002038.SZ 600252.SS 600750.SS 600079.SS 200028.SZ SHSE Composite01002003004005006007008009001,0001,1001,200Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10Price Performance (%)600195.SS 600277.SS 000513.SZ 200513.SZ 002022.SZ 000028.SZ600332.SS 000078.SZ 600329.SS 600829.SS 000627.SZ SHSE CompositeSource: Deutsche Bank, Reuters Source: Deutsche Bank, Reuters 1825 August 2010 Health Care China Healthcare Page 18 Deutsche Bank AG/Hong Kong The USD199bn investable universe Investment landscape For an investor looking to gain exposure to the Chinese healthcare space, the investable landscape for Chinese HC stocks is quite limited vis-vis the US healthcare space. China HC companies are listed in the following countries: China (Shenzhen and Shanghai), Hong Kong (HSI and GEM), the US (AMEX, NASD, NYSE, OTC), Singapore (SIN) and the UK (LSE). We focus only on the companies listed in China, HK and the US, as these markets have a greater number of listings compared with Singapore, which has only nine listed Chinese HC companies, and London, which has only two listed Chinese HC companies. The total market cap of all Chinese healthcare stocks listed in China, Hong Kong and the US pales in comparison to that of the investable healthcare space in the US. The total market cap for all Chinese HC stocks was approximately USD199bn as of August 2010, which is roughly one-tenth the size of the total market cap of US-listed healthcare stocks (which include some Chinese HC stocks) at USD1,467bn (as of August 2010). The aggregate market cap of Chinese HC companies comprises only around 6% of the total market capitalization of the Shenzhen and Shanghai stock exchanges, as opposed to the US, where the aggregate market cap of HC companies comprises 10.3% of the total market capitalization of all US listed stocks. As a percentage of GDP, the aggregate market cap for HC stocks in the US was also 10.3%, whilst Chinese HC stocks market cap as a percentage of China GDP was only around 4%. Figure 17: Aggregate market cap of Chinese HC companies (listed in China, Hong Kong and the US) vs. US-listed HC companies Chinese USMarket cap of healthcare stocks (in USDbn) 199 1,467 as a % of total market capitalization 5.9% 10.3%Market cap as % of GDP 3.8% 10.3%Source: Deutsche Bank； Bloomberg Finance LP market cap as of 23 August 2010 66% of Chinese healthcare stocks are listed in China Of the 230 Chinese HC stocks, 151 companies (two-thirds) are listed in China, whilst the remaining 79 Chinese HC companies are listed in Hong Kong and the US. However, HC companies listed in China trade at higher P/E multiples due to investment restrictions, thus commanding a P/E premium. As a result, the investable universe of Chinese healthcare stocks is very limited. Figure 18: Composition of Chinese healthcare stocks by listing Number of stocks Proportion Mkt cap (USDbn) ProportionHong Kong-listed 50 22% 30 15%China-listed 151 66% 161 81%US -listed 29 13% 8 4%Total 230 100% 199 100% Source: Deutsche Bank, Bloomberg Finance LP as of Aug 23, 2010 Out of the total Chinese HC stocks listed in Hong Kong, China and the US, there are only three HC companies listed in the US market, 10 HC companies in Hong Kong and 98 HC companies listed in China with a market cap above USD500m. If we define investable universe to reflect companies with a market cap above USD500m, only 48% (about 111) of the 230 names in the HC universe would fulfill this market cap criterion. However, using the same definition we can identify over 200 investable healthcare companies listed in the US. We focus on Chinese HC companies listed in the US, HK and China Aggregate market cap of Chinese HC stocks is one-tenth the size of aggregate market cap of HC stocks listed in the US Of the investable Chinese HC companies, 13 are listed in the US and HK, while 98 are listed in China 1925 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 19 Figure 19: Number of Chinese HC companies listed in US, HK and China with a market cap USD500m Sub Segment US HK ChinaMedical Equipment 1 1 6Pharma (chem) 0 4 31TCM 0 3 35Biotech 1 1 18Distribution 0 1 8HC Services 1 0 0Total 3 10 98Source: Deutsche Bank, Bloomberg Finance LP as of Aug 23, 2010 Pharmaceuticals dominate the investable healthcare landscape The largest constituent in the healthcare space in both China and the US in terms of market cap is the pharmaceuticals subsector. Pharmaceuticals (chemical) represent 32% of the Chinese HC companies and 45% of the US HC companies. If we broaden the definition of pharmaceuticals to include traditional Chinese medicine (TCM) and biotech, the pharmaceutical sector would represent 79% of the Chinese healthcare landscape and 61% of the US market. TCM, which is a pharma sub-segment unique to Chinese HC companies, represents 29% of the aggregate market cap of Chinese healthcare stocks. Wider spectrum of healthcare investing options in the US compared to Chinese stocks The US HC market, with over 1,168 listed companies, has a wider spectrum of investable companies spanning a range of subsectors. This is in direct contrast to the smaller exposure range available in China. The lack of variety within the Chinese HC companies is a result of 1) government involvement in healthcare services (i.e., most hospitals in China are government-run) and 2) lack of niche players within the China healthcare space, as most Chinese HC companies have highly diversified operations. As can be seen in Figure 20, the bulk of investable Chinese healthcare companies are in pharmaceuticals, whilst there are only 18 companies in the medical devices sub-segment (which includes equipment and supplies), or 8% of the total number of Chinese HC companies. Meanwhile, there are 31 companies within the services/providers sub-segments, 13% of the total number of Chinese HC companies. In contrast to the US, there is a diversified mix of investable names. Roughly one-third of the healthcare companies listed in the US can be categorized as medical devices and 19% are in services/providers. The remaining portion is in pharmaceuticals, representing 48% of total US-listed HC companies. Figure 20: Chinese healthcare stocks vs. US-listed healthcare stocks by subsector Chinese stocks US stocks # of companiesMarket cap (USDbn)% of total mkt cap# of companies Market cap (USDbn)% of total mkt capEquipment 267 207 14%Supplies 127 147 10%Medical devices 18 19 10%394 353 24%Drugs 74 63 32%267 667 45%Biotech 42 36 18%289 231 16%TCM 65 58 29%0 0 0%Pharmaceuticals 181 157 79%556 898 61%Distribution 16 20 10%Services 15 4 2%Providers 31 24 12%218 216 15%Total 230 199 100%1,168 1,467 100%Source: Deutsche Bank, Bloomberg Finance LP as of Aug 23, 2010 2025 August 2010 Health Care China Healthcare Page 20 Deutsche Bank AG/Hong Kong Services make up only 2% of the total market cap for Chinese healthcare. This subsector includes 15 public companies (7% of the total number of HC stocks), including Wuxi Pharmatech (contract research organization； terminated sale to Charles River) and Concord Medical Services (radiography service provider). The distribution segment includes only 16 companies (7% of the total number of HC stocks). However, as a percentage of market cap, this segment represented approximately 10% of the aggregate Chinese HC market cap, and includes companies such as Sinopharm, a drug distribution company, and Nepstar, a chain of drug stores. However, the inclusion of Sinopharm misrepresents the size of the HC distribution universe (as a percentage of market cap), as Sinopharm, with a market cap of USD9bn, represents about 44% of the market cap value of this subsegment. In contrast to Chinas HC services and distribution segment, providers in the US include, in addition to drug distributors and stores, prescription benefit services (PBMs), health insurers, for-profit hospitals, assisted living centers, respiratory therapy suppliers, dialysis centers and other niche services. China does not have any listed pure play health insurance companies and the hospital system is still very much government-run in China. As such, there are very few investment opportunities in specialty HC services/providers. Figure 21: Subsector composition of Chinese healthcare stocks by market cap Figure 22: Composition of US healthcare stocks by market cap Pharma (chem), 32%TCM, 29%Biotech, 18%Equipment, 9%Distribution, 10%HC Services, 2%Drugs, 45%Medical Equipment, 14%Biotech, 16%Supplies, 10%Providers, 15%Source: Deutsche Bank, Reuters as of August 23, 2010 Source: Deutsche Bank, Reuters as of August 23, 2010 No shortage of capital in the East From 2005 to YTD July 2010, roughly one-third (in USD) of the total healthcare IPOs in the US, China and Hong Kong were in Hong Kong and China. However, recently, theres been a shift of increased IPO activity towards Hong Kong and China, as evidenced from 2008 to YTD July 2010 when contributions from IPO listings contributed 65% of the USD volume of healthcare IPOs. Year-to-date July 2010, alone, Hong Kong and China contributed 82% of the healthcare IPO market. In the past, many Chinese healthcare companies filed their IPOs in the US, mainly due to the more knowledgeable healthcare investor base. However, better valuations and a more knowledgeable healthcare investor base in Asia explain why more Chinese companies now prefer to file in Hong Kong and China. We believe this trend of IPO activity in Hong Kong and China should progressively increase as a result of the high growth prospects of China healthcare due to the aging population, rising income and government support to increase accessibility and affordability. Moreover, Year-to-date July 2010, Hong Kong and China represented 82% of the healthcare IPO market Better valuations and a more knowledgeable healthcare investor base in Asia explain why more Chinese companies now prefer to file in Hong Kong and China 2125 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 21 the regulatory clampdown on non-compliant Chinese manufacturers and a focus on quality, as demanded by the government, should make these companies more transparent and poised for an IPO. Note that the China IPO market has stopped for several periods, such as from 26 August 2004 until 23 January 2005, and from 25 May 2005 until 2 June 2006. Figure 23: Volume of healthcare IPOs (US ex-Chinese vs. HK and China and US-listed Chinese HC companies in USD m 2005 2006 2007 2008 2009 YTD 2010 TotalUS ex-Chinese 2,172 3,233 3,563 215 2,272 779 12,233 Hong Kong 15 8 208 10 1,119 282 1,644China - 75 66 405 1,336 3,272 5,154 US-listed Chinese 96 270 633 - 177 - 1,176 Total 2,283 3,586 4,470 630 4,904 4,333 20,207 Source: Deutsche Bank, Dealogic, Reuters Figure 24: Number of US HC company IPOs vs. China HC company IPOs over 2005-YTD 2010 1673 4 9 16 36383119440246810121416182005 2006 2007 2008 2009 YTD 2010-5101520253035404550HK China US-Chinese USSource: Deutsche Bank, Dealogic, Reuters Figure 25: Total value of US HC company IPO listing over 2005-YTD2010 Figure 26: Total value of Chinese HC company IPO listings over 2005-YTD2010 2,1723,2333,5632152,27277905001,0001,5002,0002,5003,0003,5004,0002005 2006 2007 2008 2009 YTD 2010US$m 1113539074152,6333,55405001,0001,5002,0002,5003,0003,5004,0002005 2006 2007 2008 2009 YTD 2010US$mSource: Deutsche Ban, Dealogic, Reuters Source: Deutsche Bank, Dealogic, Reuters 2225 August 2010 Health Care China Healthcare Page 22 Deutsche Bank AG/Hong Kong China healthcare operational overview Healthcare sector grew at an 18% CAGR over 2007-09 We define the Chinese healthcare space as the 230 healthcare stocks listed across China, HK and the US. The sector as a whole generated total revenues of RMB370bn in 2009, having grown at an 18% CAGR over 2007-09. We attribute this aggressive growth trajectory to solid top-line growth across all six subsectors, supported by organic sales growth, market share gains by these top companies, and acquisitions. Companies in the healthcare universe have consistently delivered double-digit revenue growth rates over the past five years, as can be seen in Figure 27. Figure 27: HC sector aggregate revenue growth 2004-09 145,204170,283223,861265,809320,570370,207050,000100,000150,000200,000250,000300,000350,000400,0002004 2005 2006 2007 2008 2009RMBm18% CAGR (2007-2009)Source: Deutsche Bank, Reuters, Bloomberg Finance LP Pharmaceuticals subsector is the primary revenue contributor The largest portion of overall HC revenue was generated by the pharmaceutical (chemical) subsector (33% as of 2009), which comprised 74 listed companies, i.e., one-third of all listed companies in the China HC universe. Meanwhile, the distribution sector, despite having only 15 listed companies, generated 28% of total sector revenue. We attribute this strong revenue contribution to the high trading volumes an inherent characteristic of the business line. Overall healthcare sector revenue trends and the contribution from each subsector over 2004-09 are shown in Figure 28. Figure 28: Revenue breakdown by HC subsector (2004-09) 3% 3% 3% 3% 4% 4%42%40%35% 35% 35% 33%26%26%23% 22% 22% 23%13%13%12% 11% 11%10%16% 16%26% 27% 27%28%2%2%1%1%1%1%0%10%20%30%40%50%60%70%80%90%100%2004 2005 2006 2007 2008 2009Medical Equipment Pharma (chem) TCM Biotech Distribution HC ServicesSource: Deutsche Bank, Reuters, Bloomberg Finance LP Growth trajectory is a result of solid organic sales growth, market share gains by top companies, and acquisitions 2325 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 23 Medical devices recorded the strongest revenue CAGR of 28% over 2007-09 Medical devices had the highest growth in the HC space with a 3-year revenue CAGR (2007-09) of 28%, followed by the services and distribution subsegments. However, it should be noted that the 2009 listing of Sinopharm (which generated about 40% of total distribution segment revenue as of 2009) resulted in uncharacteristically high revenue growth rates in the distribution segment as of 2006 (due to data availability). As such, we have calculated a pro forma revenue growth rate for 2006 in the distribution segment. Figure 29: Revenue growth rates by subsector (2005-09) -102030405060702005 2006 2007 2008 2009(%) Medical Equipment Pharma (chem) TCM Biotech Distribution HC ServicesSource: Deutsche Bank, Reuters, Bloomberg Finance LP * Distribution growth rate for 2006 is a pro forma number, calculated to exclude the effect of the Sinopharm listing Of all the healthcare subsectors, the entire spectrum of pharmaceuticals grew more slowly than the overall sector. The overall sector grew at an 18% CAGR, while pharma (chem.), TCM and biotech grew at a 17%, 18% and 14% CAGR, respectively. Figure 30: Revenue growth rate of by subsector (2005-2009) as % 2005 2006 2007 2008 2009 CAGR (2007-09)Medical equipment 22.7 40.3 22.5 45.6 17.5 28.0%Pharma (chem.) 11.7 13.3 19.3 20.6 10.3 16.7%TCM 19.8 14.9 16.4 19.3 18.6 18.1%Biotech 20.8 19.3 10.7 16.4 13.9 13.7%Distribution 21.3 26.3 22.5 19.4 20.2 20.7%Healthcare Services 66.0 25.4 31.1 34.5 13.9 26.2%Total Healthcare 17.3 31.6 18.7 20.6 15.5 18.3%Source: Deutsche Bank, Reuters, Bloomberg Finance LP Revenue growth decelerated in 2009, led by lower YoY revenue growth from the pharmaceutical (chem.) and medical device subsegments. We believe that revenue growth in 2009 from these subsegments was lower than it was for TCM and distribution, as they had a higher revenue exposure, through exports, to external markets hit by the economic downturn and stiffer competition from MNCs. Whats driving the profits? Operating profit and net income profit, in HC space, grew at a CAGR of 35% and 48.4% over 2007-09 despite a revenue CAGR of 18%over the same period. We believe the exponential growth in profits is underpinned by: All of pharma had a lower CAGR than the overall sector CAGR In 2009, pharma (chem.) and medical devices were hit by exports and stiffer competition from MNCs 2425 August 2010 Health Care China Healthcare Page 24 Deutsche Bank AG/Hong Kong Economies of scale: Gross margin enhancement in the medical devices and pharmaceuticals (chemical drugs, bio and TCM) subsectors. Operating leverage: Lower SG&A costs (as a percentage of revenue), which declined by approx. 350bps over 2005-09 as a result of lower SG&A spending in all subsectors, with the exception of medical devices. Gross profit for the overall segment grew at a CAGR of 22.8% over 2007-09. Medical equipment recorded the fasted gross profit growth with a CAGR of 33.5% Figure 31: Sector gross profit growth (2004-09) 43,97849,16859,26173,95194,194109,676020,00040,00060,00080,000100,000120,0002004 2005 2006 2007 2008 2009RMB m22.8% CAGR (2007-2009)Source: Deutsche Bank, Reuters, Bloomberg Finance LP Figure 32: Subsector gross margins (2005-09) 2005 2006 2007 2008 2009Medical Equipment 44.6% 45.3% 46.7% 47.5% 51.4%Pharma (chem) 28.3% 27.9% 30.4% 33.1% 33.0%TCM 38.2% 38.0% 39.2% 40.5% 40.6%Biotech 26.7% 26.3% 27.8% 30.5% 34.0%Distribution 11.6% 10.8% 11.3% 10.8% 10.6%Healthcare Services 57.0% 54.7% 53.7% 51.6% 51.0%Total Healthcare 28.9% 26.5% 27.8% 29.4% 29.6%Source: Deutsche Bank, Reuters, Bloomberg Finance LP Gross margin pressure in the distribution subsector was largely due to increased competition and regulatory pressures. Meanwhile, tightening in overall HC services margins reflected margin pressures at WuXi (a CRO), which contributed to 25% of total gross profit from the HC services space. Despite pressure at the gross margin level, both subsectors posted healthy operating margins due to significant cost cutting at the SG&A level. We can observe operational efficiency within the subsectors by analyzing the difference between SG&A costs as a percentage of revenue in 2005-09. As can be seen in the following figure all sectors, with the exception of medical equipment, have reduced SG&A costs as a percentage of sales over the observable period, indicating increasing operational efficiency. 2525 August 2010 Health Care China Healthcare Deutsche Bank AG/Hong Kong Page 25 Figure 33: Aggregate bps change of SG&A as a percentage of revenue difference by subsector (2005-09) (3.9)%(7.1)%(3.6)%(6.0)%(1.0)%(1.2)%1.4% (8.0)(6.0)(4.0)(2.0)-2.04.0MedicalEquipmentPharma (chem) TCM Biotech Distribution HealthcareServicesTotalHealthcare(%)Source: Deutsche Bank, Reuters, Bloomberg Finance LP Healthcare sector R&D expenses grew at a 37% CAGR over 2007-09 The sector as a whole generated total R&D costs of RMB17bn in 2009, having grown at a 37% CAGR over 2007-09. We attribute this aggressive growth trajectory to R&D CAGRs of 43.5%, 43.2% and 38.7% over 2007-09 for R&D borne by the biotech, pharma (chem) and TCM subsectors, respectively. Figure 34: Sector R&D growth (2004-09) 4675126678101,3571,70702004006008001,0001,2001,4001,6001,8002004 2005 2006 2007 2008 2009RMB m36.8% CAGR (2007-09)Source: Deutsche Bank, Reuters, Bloomberg Finance LP Figure 35: R&D spending as a % of revenue by subsector (2005-09) R&D/Revenue 2005 2006 2007 2008 2009Medical Equipment 3.1% 3.8% 3.2% 4.2% 3.8%Pharma (chem) 0.2% 0.2% 0.3% 0.3% 0.4%TCM 0.1% 0.2% 0.3% 0.5% 0.4%Biotech 0.7% 0.5% 0.4% 0.5% 1.0%Distribution 0.0% 0.0% 0.0% 0.0% 0.0%Healthcare Services 0.0% 0.0% 0.0% 0.0% 0.0%Total Healthcare 0.3% 0.3% 0.3% 0.4% 0.5%Source: Deutsche Bank, Reuters, Bloomberg Finance LP 2625 August 2010 Health Care China Healthcare Page 26 Deutsche Bank AG/Hong Kong Figure 36: SG&A as a percentage of sales by subsector Figure 37: R&D as a percentage of sales by subsector Source: Deutsche Bank, Reuters, Bloomberg Finance LP Source: Deutsche Bank, Reuters, Bloomberg Finance LP Largest chunk of operating profit contribution derived from pharmaceuticals at 39% in 2009 Operating profit for the HC universe grew by 34.9% CAGR over 2007-09 as a result of top-line growth and margin improvement. Overall sector margins grew from 9.0% in 2007 to 10.5% in 2009. In terms of operating profit contribution, pharmaceuticals (defined as pharma chem.) generated approximately 39% of the operating income, whilst TCM generated 28% of the total operating income in 2009. Distribution, which generated 28% of the