JP摩根对国药控股的深度分析

Asia Pacific Equity Research 21 June 2010 Sinopharm Underweight 1099.HK, 1099 HK Lowering price target to HK$25 - Factoring in tougher environment for margins and acquisitions Price: HK$29.30 Price Target: HK$25.00 Previous: HK$30.00 China Healthcare Technology & Distribution Leon Chik, CFAAC (852) 2800-8590 Andrew Hsu (852) 2800-8572 J.P. Morgan Securities (Asia Pacific) Limited 243036HK$Jun-09 Sep-09 Dec-09 Mar-10 Jun-10Price Performance1099.HK share price (HK$HSCEI (rebased)YTD 1m 3m 12mAbs 6.4% -9.6% -10.5% 16.0%Rel 15.2% -11.3% -5.7% 4.5%Sinopharm (Reuters: 1099.HK, Bloomberg: 1099 HK) Rmb in , year-end Dec FY08A FY09A FY10E FY11E FY12ERevenue (Rmb mn) 38,187 47,046 66,107 86,493 104,866EBITDA (Rmb mn) 1,346 1,739 2,272 2,788 3,357Net Profit (Rmb mn) 588 846 1,302 1,544 1,788EPS (Rmb) 0.36 0.49 0.57 0.68 0.79DPS (Rmb) 0.06 0.36 0.14 0.17 0.20Revenue growth (%) 22.7% 23.2% 40.5% 30.8% 21.2%EPS growth (%) 56.5% 34.9% 18.2% 18.6% 15.8%ROCE 18.8% 16.5% 16.2% 16.7% 16.1%ROE 29.8% 12.8% 11.4% 12.4% 12.6%P/E 71.4 52.9 44.8 37.7 32.6P/BV 18.6 5.3 4.9 4.5 3.8EV/EBITDA 45.2 30.5 25.3 21.7 18.4Dividend Yield 0.3% 1.4% 0.6% 0.7% 0.8%Shares Outstanding (mn) 2,268Market Cap (Rmb mn) 58,297.28Market Cap - USD ($ mn) 8621.31Price (HK$) 29.30Date Of Price 18 Jun 10Free float (%) 27.6%3-mth trading value (HK$ mn) 243.113-mth trading value ($ mn) 31.243-mth trading volume (mn) 31.17HSCEI 11,623Exchange Rate 7.78Fiscal Year End DecSource: Company data, Bloomberg, J.P. Morgan estimates. See page 13 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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. News on NDRC scrutiny to hurt sentiment: Sinopharm is the largest distributor of medicine in China with a market cap of US$ 8.5 bn. The shares are down 11% over the past three months (underperforming the HSCEI by 6%). In this Note we update our company view for the impact of increased NDRC scrutiny on margins in the drug industry that could hurt sentiment on Sinopharm. Key impact would be on the pace of acquisitions: It is still too early to determine the full impact of the NDRCs new policies to reduce excessive margins in pharmaceutical distribution. However, the key impact of this newfound uncertainty would be on the pace that Sinopharm could make acquisitions and its participation in industry consolidation. We have lowered our expectations of Sinopharms 2011 acquisitions as well as being more conservative on GM for 2011 and 2012. Lowering sales and earnings estimates and lowering our price target to HK$25.0: We are lowering our 10E and 11E sales by 1.1% and 7.3%, respectively and lowering our 10E and 11E net profits by 4.8% and 18.3% respectively. Our new EPS estimates for 10E and 11E are now 2.5% and 14.0% lower than consensus (Bloomberg). We have also lowered our Dec-10 price target to HK$25.0 (previously HK$30.0). Sinopharm trades at a 44.8 10E P/E, 119.6% higher than the average 20.4x 10E P/E of the HK/China Healthcare Universe. Our new DCF-based price target (Dec-10) of HK$25.0 implies a CY11E P/E of 32.0 and a 11E P/B of 3.8x. We recommend switching to Mindray Medical (OW), which is trading at a CY11 P/E of 18.0x or United Laboratories (OW) which is trading at a CY11 P/E of 13.8x. Key risks to our rating and PT for Sinopharm include acquisitions of larger distribution competitors and changes in the regulatory policy to allow greater distribution margins on EDL-related sales. 2 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Company Description P&L sensitivity metrics EBIT EPS FY09E impact (%) impact (%) Chinese herbs Impact of each 5 percentage increase 4.2% 8.8% Selling cost Impact of each 5 percentage points increase 4.0% 7.4% Demand for products under EDL Impact of each 5 percentage points increase 3.3% 6.1% GM: 1% Increase Impact of each 1% increase 3.0% 4.2% Source: J.P. Morgan estimates. Sinopharm was established in 2003 and is the largest pharmaceutical distributor in China with approximately 11-12% market share. The largest shareholder is Fosun Investment, which is also a major pharmaceutical manufacturer based in Shanghai. Products are sold directly to hospitals or through local third-party distributors. Price target and valuation analysis Revenue mix (2009) Our price target is based upon DCF methodology. The nature of the industry leads us to apply a terminal growth of 6% (the high end of the 3%-6% growth rate used for healthcare stocks). The driver of our PT change is the downward revision in sales and earnings for 2010, 2011 and subsequent years. Risk free rate: 4.20% Market risk premium: 6.00% Beta: 1.00 Cost of equity 9.00% Sales to local Distributors49%Hospital sales44%Others4%Retail3%Terminal “g”: 6.00% Source: J.P. Morgan estimates. EPS: J.P. Morgan vs consensus J. P. Morgan Consensus FY10E 0.57 0.585 FY11E 0.68 0.787 FY12E 0.79 0.991 Source: Bloomberg and J.P. Morgan. Our PT (Dec-10, DCF-derived) of HK$25 implies a P/BV of 3.8x (FY11E) and P/E of 32.0x (FY11E). The key risk to our target price and investment thesis includes regulatory measures on pricing of medicines and the risk of competitive threats from international competitors. Valuation comparison Company Name Code Price (PT) MCAP (US$MM) Vol (US$MM) 3M Chg (%) 10E P/E (x) 11E P/E (x) 10E EV/ EBITDA (x) ROE (%) P/BV (x) Yield (%) Healthcare CHINA MEDIC-ADR (NR) CMED US 11.50 371 4.2 (4.2) (20.9) 8.3 7.0 15.0 13.0 1.4 CHINA PHARMACEUT (NR) 1093 HK 4.74 937 3.8 3.7 7.7 9.7 11.8 5.8 13.2 1.4 CHINA SHINEWAY (OW)* 2877 HK 22.7 (30) 2,416 10.8 (7.7) 7.3 20.3 16.3 14.5 27.0 5.2 GOLDEN MEDITECH (NR) 801 HK 1.63 355 0.9 1.2 (25.9) 19.2 12.1 10.3 3.8 0.8 GZ PHAR-H (NR) 874 HK 6.90 1,110 1.7 (8.4) (7.1) 17.0 13.8 19.9 7.6 1.4 HUA HAN BIO-PHAR (NR) 587 HK 2.77 568 2.9 4.9 (5.5) 17.0 9.5 4.8 11.6 2.1 LIJUN INTL PHARM (NR) 2005 HK 2.93 888 9.7 5.0 62.8 24.2 20.4 13.8 14.7 3.8 MINDRAY (OW)* MR US 31.1 (43) 3,546 41.1 1.4 (17.8) 23.0 17.9 17.0 21.8 6.0 MINGYUAN MEDICA (NR) 233 HK 0.86 389 2.1 (1.1) (30.1) 13.2 10.9 6.4 15.7 2.1 SD WEIGAO (OW)* 8199 HK 35 (33) 4,842 3.9 4.6 19.9 40.7 32.0 39.5 25.2 8.9 SINOPHARM (UW)* 1099 HK 29.7 (25) 8,643 31.3 2.1 (10.0) 43.1 31.2 22.7 12.0 4.9 TONG REN TANG-H (NR) 8069 HK 15.30 389 0.6 0.5 11.7 13.2 11.5 na 13.5 na UNITED LAB (OW)* 3933 HK 10.3 (16) 1,651 6.6 3.1 95.4 17.3 14.7 10.7 17.6 2.8 Source: Company data, Bloomberg for non-rated stocks, J.P. Morgan estimates for rated stocks (*). Share prices are as of close of 21 June 2010 (Intraday) 3 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Healthcare stocks fall on NDRC plans to monitor prices The National Development and Reform Commissions (NDRC) policies for reviewing the prices of drugs and price caps were widely reported on 17 June and healthcare stocks in both the Hong Kong and Chinese markets reacted negatively. Summary of NDRC goals: NDRC is planning to set some upper limits on the price margins to: A) pharmaceutical product margins； B) distributors wholesale margins； and C) hospital level retail margin. NDRC noted some hospitals earning extremely high margins on their drugs. One notable example is a drug which only costs Rmb15.5 ex factory but has a retail price of over Rmb200. Premium pricing There are certain drugs which the central government is allowing the companies to charge premium pricing if they have contributed considerably to research and development. We believe that it is too early to assess the impact and it is easy to over-react to the news. We note that policies to cut the drug price or lower the price caps on drugs have been discussed for at least five years and so far there are still many companies and products that generate very high margins. We believe that these are the key themes arising out of the latest NDRC policy statements. 1) Focus is on distribution first The easy margin for the government to cut is the retail margin at the hospital and the distribution margin. At the hospital level, the lower income will be compensated for by greater government subsidies (direct to hospitals) and the government has allocated funds for this. For the distributors, the multiple layers of distribution causing high wholesale margins is a key area that the government finds wasteful and plans to cut. 2) Government does not want to stop R&D It is difficult for the government to cut the price of high-end expensive drugs with high margins because it would impact R&D and quality. Our understanding is the latest move is to cut the price of generic drugs that do not require much R&D and there are plenty of suppliers. However, typically these have lower margins already. The government will likely offer low prices for those willing to supply to the essential drug list tenders. 4 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 3) There is always an option for strong players Companies with strong brands or R&D can opt not to sell into the EDL tendering process. They may lose sales to smaller companies that are willing to sell at a lower government-imposed price. However, the higher-cost drugs can sell side by side with the lower-cost EDL drugs and may still have enough customer or patient loyalty to capture a large part of the market. 4) New products key to high margins The most impacted would be the distributors, followed by generic pharmaceutical producers who plan to sell into the EDL tenders. Overall the ones with strong R&D or a strong brand would be under less pressure to cut prices due to this NDRC policy. Key impact on Sinopharm We believe the key tangible impact on Sinopharm would be that acquisitions would be a lot slower given the uncertainties of future margins owing to the new NDRC scrutiny on margins. We believe that acquisitions of weaker peers and market consolidation is a major part of the investment case for Sinopharm. Without acquisitions, we believe that Sinopharm cannot achieve sales growth of more than the market growth of 20% a year. Even after our downward sales revisions, we are still expecting sales growth of 26% during 2010 to 2012. We had already been cautious on new acquisitions as we believed that Sinopharm would be unable to acquire the large (top 20) national or regional distributors. These large distributors have relationships with the drug manufacturers and do numerous value-added type of work such as branding and marketing as well as logistics and distribution. Most of these large (top 20) distributors in China are well financed and controlled by local governments or large groups and are unlikely to be willing to sell to Sinopharm, in our view. We expect Sinopharms acquisitions to be focused on smaller sub-distributors. These distributors have the main responsibilities of logistics and distribution but source drugs from national distributors such as Sinopharm. The company conducts about half of its distribution businesses through sub-distributors. The key concerns with buying sub-distributors is that due to the simpler nature of their work (logistics and distribution with little branding and marketing), the margins tend to be lower. Furthermore, the nature of the sub-distribution business entails higher working capital for receivables (about 100 days compared to less than 50 days for main distribution business). Sub-distributors tend to extend longer credit terms to hospitals than main distributors extend credit terms to sub-distributors. Another impact on Sinopharm would be a risk that the gross and EBIT margin for its existing business could be under scrutiny by the NDRC. In 2009, Sinopharm achieved gross profit margin of 8.0%, EBIT margin of 3.1% and net margin of 1.66%. While the net margin figure does not look high in absolute terms, they are much higher than the net margins that are typical for the distribution business in China and the 1.0%-1.2% that can be achieved by peers in mature markets. We have assumed a lower level of margins in our estimates but note that we have still assumed the long term net margin to remain above 1.6%. There is a risk that regulations could put further downward pressure on this margin. 5 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Changes to estimates We are lowering our 10E and 11E sales by 1.1% and 7.3%, respectively and lowering our 10E and 11E net profits by 4.8% and 18.3% respectively. The decrease in sales is mostly due to the fact that we lowered our estimates for new acquisitions for the company. Previously, we had expected acquisitions amounting to about Rmb 2.0bn a year but have revised this down to Rmb1.0bn a year since it would be much tougher to negotiate transitions given the NDRC overhang in terms of regulatory scrutiny on margins. We also lowered our GM expectations by 0.17% in 10E and 0.26% in 11E to factor in a possible reduction in margins on drugs that are related to the essential drug list. Our new EPS estimates for 10E and 11E are now 2.5% and 14.0% lower than consensus (Bloomberg). We have also lowered our Dec-10 price target to HK$25.0 (previously HK$30.0). Table 1: Changes to estimates - New - - Old - - Change - Rmb MM, YE Dec FY10E FY11E FY10E FY11E FY10E FY11E Turnover 66,107 86,493 66,869 93,319 -1.1% -7.3% Gross profit 5,155 6,584 5,331 7,343 -3.3% -10.3% EBIT 2,065 2,558 2,150 2,912 -3.9% -12.2% Net profit 1,302 1,544 1,368 1,889 -4.8% -18.3% EPS 0.57 0.68 0.60 0.83 -4.8% -18.3% Gross margin 7.8% 7.6% 8.0% 7.9% -0.17% -0.26% Source: J.P. Morgan estimates. 6 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Valuation and share price analysis DCF valuation Our new Dec-10 price target is based on a DCF valuation that assumes a cost of equity of 6.0% and a risk-free rate of 4.2% (yield on 10-year government notes in China). We have assumed a beta of 1.0 (sector long-term beta). Accordingly, WACC is assumed at 9.0%. We have estimated free cash flow for Sinopharm until 2015 and assume a terminal growth rate of 6.0%. We also analyzed the DCF price sensitivity to WACC, and the terminal multiple. Table 2: Sinopharm - Base-case DCF analysis Rmb MM, YE Dec FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E Cash flow estimates Sales 31,110 38,187 47,046 66,107 86,493 104,866 125,858 149,643 176,366 EBIT 789 1,172 1,550 2,065 2,558 3,101 3,845 4,580 5,413 NOPAT 396 766 1,041 1,388 1,744 2,136 2,662 3,199 3,812 Capex, net (258) (299) (333) (401) (463) (512) (563) (616) (671) Depreciation 135 174 188 207 230 256 285 316 349 Change in working capital (1,029) (647) (4,315) (5,345) (4,110) (3,661) (4,094) (4,617) (5,145) Free Cash Flows (756) (6) (3,419) (4,151) (2,599) (1,781) (1,710) (1,718) (1,655) DCF Parameters Assumptions Liabilities as a % of EV 20% Terminal growth 6.0% WACC 9.0% Risk-free rate 4.2% Market risk 6.0% Enterprise NPV (10E-16E) 59,622 Beta 1.00 + Net cash (debt), current 800 Cost of debt 6.2% - Minorities (Market value) (10,142) +/- Other items 0 Implied exit P/E multiple (x) 18x = Equity value 50,279 / Number of shares 2,268 = Equity value per share (HK$) 25.0 Source: Company data, J.P. Morgan estimates. Table 3: Sinopharm - Sensitivity analysis based on WACC and perpetual terminal growth rate Terminal growth rate 30.4 4.5% 5% 5.5% 6.0% 6.5% 7.0% 7.5% 7.5% 29.2 36.2 46.7 64.2 99.3 204.4 n/a 8.0% 23.2 28.0 34.8 44.9 61.8 95.7 197.2 8.5% 18.7 22.2 26.8 33.4 43.2 59.5 92.2 9.0% 15.2 17.8 21.2 25.7 32.0 41.5 57.3 9.5% 12.4 14.4 17.0 20.2 24.6 30.7 39.8 10.0% 10.1 11.8 13.7 16.2 19.3 23.5 29.4 WACC 10.5% 8.3 9.6 11.1 13.0 15.4 18.4 22.5 Source: J.P. Morgan estimates. 7 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Financial analysis Table 4: Sinopharm - Revenue mix Rmb MM, YE Dec FY06 FY07 FY08 FY09 FY10E FY11E FY12E Pharmacy Distribution - Hospitals direct 9,642 13,216 16,719 20,834 26,957 33,547 40,113 YoY na 37.1% 26.5% 24.6% 29.4% 24.4% 19.6% % of total 40.6% 42.5% 43.8% 44.3% 40.8% 38.8% 38.3% Pharmacy Distribution - distributors 10,927 13,753 16,263 19,876 25,718 32,006 38,269 YoY na 25.9% 18.3% 22.2% 29.4% 24.4% 19.6% % of total 46.0% 44.2% 42.6% 42.2% 38.9% 37.0% 36.5% Retail pharmacy 823 835 952 1,216 1,552 1,920 2,337 YoY na 1.5% 14.0% 27.7% 27.7% 23.7% 21.7% % of total 3.5% 2.7% 2.5% 2.6% 2.3% 2.2% 2.2% Others 2,345 3,306 4,253 5,120 11,879 19,020 24,147 YoY na 41.0% 28.6% 20.4% 132.0% 60.1% 27.0% % of total 9.9% 10.6% 11.1% 10.9% 18.0% 22.0% 23.0% Total 23,737 31,110 38,187 47,046 66,107 86,493 104,866 YoY na 31.1% 22.7% 23.2% 40.5% 30.8% 21.2% Source: Company data, J.P. Morgan estimates. Table 5: Sinopharm - P&L statement Rmb MM, YE Dec FY06 FY07 FY08 FY09 FY10E FY11E FY12E Total Revenues 23,737 31,110 38,187 47,046 66,107 86,493 104,866 YoY change (%) na 31.1% 22.7% 23.2% 40.5% 30.8% 21.2% Cost of Goods Sold (21,747) (28,560) (35,153) (43,261) (60,951) (79,909) (96,818) YoY change (%) na 31.3% 23.1% 23.1% 40.9% 31.1% 21.2% Gross Profit 1,990 2,550 3,035 3,785 5,155 6,584 8,048 YoY change (%) na 28.2% 19.0% 24.7% 36.2% 27.7% 22.2% Gross Margin 8.4% 8.2% 7.9% 8.0% 7.8% 7.6% 7.7% SGA (1,527) (1,785) (1,936) (2,287) (3,148) (4,090) (5,017) YoY change (%) na 16.9% 8.4% 18.2% 37.6% 29.9% 22.7% Other Income/(Expenses) 0 0 70 53 58 64 70 Operating profit 463 765 1,169 1,550 2,065 2,558 3,101 EBITDA 590 900 1,343 1,739 2,272 2,788 3,357 EBITDA margin 2.5% 2.9% 3.5% 3.7% 3.4% 3.2% 3.2% Depreciation & Amortization (127) (135) (174) (188) (207) (230) (256) YoY change (%) na 6.5% 28.9% 8.3% 9.7% 11.1% 11.4% EBIT 480 789 1,172 1,550 2,065 2,558 3,101 EBIT margin 2.0% 2.5% 3.1% 3.3% 3.1% 3.0% 3.0% Net Interest Expense (90) (133) (241) (216) 24 (106) (233) Exceptional item (45) 125 103 171 119 127 109 Associates 19 40 55 67 94 123 149 Gains/losses (0) (0) (10) 0 0 0 0 Net Income Before Taxes 364 820 1,079 1,572 2,303 2,702 3,127 YoY change (%) na 125.4% 31.6% 45.7% 46.5% 17.3% 15.7% Tax (182) (284) (259) (386) (566) (664) (782) Effective Tax rate 49.9% 34.7% 24.0% 24.6% 24.6% 24.6% 25.0% Minority Interests (81) (155) (232) (340) (435) (494) (557) Net Income 101 381 588 846 1,302 1,544 1,788 YoY change (%) na 275.9% 54.3% 43.9% 54.0% 18.6% 15.8% Net margin 0.3% 1.1% 1.4% 1.7% 1.8% 1.6% 1.6% Source: Company data, J.P. Morgan estimates. 8 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Table 6: Sinopharm - Interim estimates Rmb MM, YE Dec 1H08 2H08 1H09 2H09E 1H10E 2H10E 1H11 2H11Total Revenues 18,285 19,902 22,014 25,032 30,221 35,886 39,952 18,285Gross Profit 1,471 1,564 1,742 2,043 2,318 2,837 3,137 1,471EBIT 624 545 838 712 1,031 1,035 1,290 624Net Income Before Taxes 611 469 876 696 1,149 1,154 1,362 611Net Income 329 258 477 369 650 652 779 329Diluted EPS (CNY) 0.200 0.160 0.290 0.185 0.287 0.288 0.343 0.200Revenue split 47.9% 52.1% 46.8% 53.2% 45.7% 54.3% 46.2% 47.9%GPM 8.0% 7.9% 7.9% 8.2% 7.7% 7.9% 7.9% 8.0%EBIT margin 3.4% 2.7% 3.8% 2.8% 3.4% 2.9% 3.2% 3.4%NPM 1.8% 1.3% 2.2% 1.5% 2.2% 1.8% 1.9% 1.8%YoY Revenue na na 20.4% 25.8% 37.3% 43.4% 32.2% naGP na na 18.4% 30.6% 33.1% 38.9% 35.3% naEBIT na na 34.3% 30.7% 23.0% 45.3% 25.1% naNP na na 44.6% 43.0% 36.4% 76.7% 19.8% naSource: Company data, J.P. Morgan estimates. 9 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Table 7: Sinopharm - Balance sheet Rmb MM, YE Dec FY06 FY07 FY08 FY09 FY10E FY11E FY12E Cash and Cash Equivalents 1,839 1,956 1,712 6,617 2,134 2,136 2,303 Inventories 2,043 2,634 3,155 4,273 6,063 7,976 9,681 Accounts receivable 4,872 6,110 7,912 10,464 14,848 19,337 23,236 Other Current Assets 644 1,255 903 3,934 4,868 5,657 6,405 Total Current Assets 9,398 11,955 13,681 25,287 27,913 35,106 41,626 Intangible Assets 0 0 0 0 0 0 0 Property and Equipment, Net 1,486 1,578 1,660 1,952 2,018 2,251 2,506 Other Assets 707 754 773 1,036 3,369 4,394 5,524 Non-Current assets 2,193 2,332 1,452 2,988 5,387 6,645 8,030 Total Assets 11,590 14,287 16,115 28,275 33,301 41,750 49,656 Accounts Payable 4,242 5,298 6,380 8,144 11,443 14,972 18,153 Other Accrued Expenses 936 1,576 1,321 5,200 5,334 5,505 5,714 Taxes Payable 0 0 0 127 306 404 522 ST and current LT debts 3,092 4,073 4,177 1,284 1,018 2,872 3,283 Total Current Liabilities 8,270 10,947 11,878 14,755 18,102 23,755 27,672 Long-term Debt 178 158 130 50 317 1,462 2,551 Other Noncurrent Liability 553 564 697 966 966 966 966 Noncurrent liabilities 730 722 827 1,016 1,283 2,428 3,517 Total Liabilities 9,000 11,669 12,704 15,771 19,385 26,182 31,190 Share capital 1,648 1,648 1,893 2,265 2,265 2,265 2,265 Reserves and Surplus 111 36 372 8,646 9,623 10,781 13,122 Total Shareholders Equity 1,760 1,684 2,265 10,911 11,888 13,046 15,387 Minority Interest 831 935 1,146 1,594 2,028 2,522 3,079 Total Shareholders Equity 2,590 2,618 3,412 12,504 13,916 15,568 18,466 Total Liabilities and Equity 11,590 14,287 16,116 28,275 33,301 41,750 49,656 Source: Company data, J.P. Morgan estimates. 10 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 JPM Q-ProfileSinopharm Group Co. Ltd. (CHINA / Health Care)As Of: 18-Jun-2010 Quant_SLocal Share Price Current: 29.30 12 Mth Forward EPS Current: 0.68Earnings Yield (& local bond Yield) Current: 3% Implied Value Of Growth* Current: 68.06%PE (1Yr Forward) Current: 37.7x Price/Book Value Current: 5.3xROE (Trailing) Current: 12.84 Dividend Yield (Trailing) Current: 0.04SummarySinopharm Group Co. Ltd. 9015.93 As Of:CHINA 29.60483 SEDOL B3ZVDV0 Local Price: 29.30Health Care Health Care Providers & Servic EPS: 0.68Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 37.68x 37.68 50.65 43.78 44.39 52.94 35.84 0% 34% 16% 18%P/BV (Trailing) 5.33x 5.03 15.41 6.37 8.16 16.22 0.11 -6% 189% 19% 53%Dividend Yield (Trailing) 0.04 0.00 0.04 0.03 0.03 0.06 -0.01 -100% 11% -12% -32%ROE (Trailing) 12.84 12.84 29.75 22.12 22.98 36.03 9.92 0% 132% 72% 79%Implied Value of Growth 68.1% 0.68 0.77 0.73 0.73 0.79 0.68 0% 13% 8% 8%Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)18-Jun-100.0000.400.500.600.700.80May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-100%1%1%2%2%3%3%4%4%5%5%May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-1012Mth fwd EY China BY Proxy0.005.0010.0015.0020.0025.0030.0035.0040.00May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-100.0000.400.500.600.700.800.90May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-100.0x10.0x20.0x30.0x40.0x50.0x60.0xMay-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-100.0x2.0x4.0x6.0x8.0x10.0x12.0x14.0x16.0x18.0xMay-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-10PBV hist PBV Forward0.005.0010.0015.0020.0025.0030.0035.00May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-100.00.00.00.00.00.00.00.00.00.0May-95May-96May-97May-98May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09May-10 11 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 All Data As Of 18-Jun-10Quant Return Drivers (a Score 50% indicates company ranks above average) J.P. Morgan Composite Q-ScoreScore 0% (worst) to 100% (best) vs Industry Raw ValueValueP/E Vs Market (12mth fwd EPS) 0% 3.0xP/E Vs Sector (12mth fwd EPS) 9% 1.3xEPS Growth (forecast) 66% 29.8%Value Score 8%Price Momentum12 Month Price Momentum 0.0%1 Month Price Reversion 72% -5.8%Momentum ScoreQualityReturn On Equity (forecast) 56% 12.9%Earnings Risk (Variation in Consensus) 93% 0.05 Quant Return Drivers Summary (vs Country)Quality Score 82%Earnings & SentimentEarnings Momentum 3mth (risk adjusted) 40% 7.41 Mth Change in Avg Recom. 64% 0.12Net Revisions FY2 EPS 3% -100%Earnings & Sentiment Score 17%COMPOSITE Q-SCORE* (0% To 100%) 11%Targets & Recommendations* EPS Revisions* Historical Total Return (%)Consensus Growth Outlook (%)Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths)Code Industry ADV PE FY1 Q-Score*489-HK 41.70 9.1 75%1109-HK 34.27 17.4 8%836-HK 14.26 13.1 23%1044-HK 16.62 29.0 69%347-HK 27.25 12.2 26%1099-HK 31.35 47.3 23%291-HK 16.85 31.4 11%1618-HK 6.68 10.2 61%1766-HK 5.53 23.1 72%83-HK 14.74 19.2 17%1128-HK 19.60 19.1 98%Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit /qsnapshot/Q-Snapshots are a product of J.P. Morgans Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company Q-Score.Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts recommendation. * The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one monthexpected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. * The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus. 9,4379,6989,684Trucks/Construction/Farm MachineryQ-Snapshot: Sinopharm Group Co. Ltd.EPS Momentum (%)I N D U S T R Y68%41%95%9,63048%13%Motor VehiclesReal Estate DevelopmentElectric UtilitiesUSD MCAPChina South Locomotive & Rolling Stock Corp. LtSino Land Co. Ltd.Dongfeng Motor Group Co. Ltd.23%Sinopharm Group Co. Ltd.Wynn Macau Ltd.9,2028,8268,4348,7818,4348,402Engineering & ConstructionFood Retail9,010Casinos/Gaming30%China Resources Land Ltd.China Resources Power Holdings Co. Ltd.China Resources Enterprise Ltd.Metallurgical Corp. of China Ltd.Hengan International Group Co. Ltd.Real Estate Developmentvs Country20%3%16%67%68%Household/Personal CareSteelMedical Distributors76%NameAngang Steel Co. Ltd.-6-5-6-6-6-5-5-5-5-51Mth 3Mth 1Yr 3Yr(LocalCurrency%)024681012Up Dn UnchangedConsensusChanges(4wks)Targets Recoms0246810Up Dn UnchangedConsensusChanges(4wks)FY1 FY2-0.20.00.81.0-1 Mth -3 Mth(%)FY1 FY2HIGH/STRONGER0%25%50%75%100%0% 25% 50% 75% 100%LOW/WEAKERCOUNTRY22.337.227.535.231.00.010.020.030.040.0EPS Actual To FY1 EPS FY1 To FY2 EPS FY2 To FY3 Dividends FY1 To FY2 Sales FY1ToFY20%25%50%75%100%VALUE PRICE QUALITY EARNINGS 12 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Sinopharm: Summary of Financials Income Statement Cash flow statement Rmb in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Rmb in millions, year end Dec FY08 FY09 FY10E FY11E FY12ERevenues 38,187 47,046 66,107 86,493 104,866 EBIT 1,172 1,550 2,065 2,558 3,101% change Y/Y 22.7% 23.2% 40.5% 30.8% 21.2% Depr. & amortization 174 188 207 230 256Gross Profit 3,035 3,785 5,155 6,584 8,048 Change in working capital -647 -4,315 -3,012 -3,085 -2,531% change Y/Y 19.0% 24.7% 36.2% 27.7% 22.2% Taxes 0 -259 -386 -566 -664EBITDA 1,346 1,739 2,272 2,788 3,357 Cash flow from operations 459 -3,052 -1,102 -970 -71% change Y/Y 45.6% 29.2% 30.7% 22.7% 20.4% EBIT 1,172 1,550 2,065 2,558 3,101 Capex -299 -333 -401 -463 -512% change Y/Y 48.5% 32.3% 33.2% 23.9% 21.2% Net Interest -241 -216 24 -106 -233EBIT Margin 3.1% 3.3% 3.1% 3.0% 3.0% Other 0 -137 -170 -185 -204Net Interest -241 -216 24 -106 -233 Free cash flow 160 -3,385 -1,503 -1,432 -582Earnings before tax 1,079 1,572 2,303 2,702 3,127 % change Y/Y 31.6% 45.7% 46.5% 17.3% 15.7% Tax - - - - - Equity raised/(repaid) 0 8,786 - - 1,000as % of EBT - - - - - Debt raised/(repaid) -80 269 0 3,000 1,500Net income (reported) 588 846 1,302 1,544 1,788 Other -21 - - - -% change Y/Y 54.3% 43.9% 54.0% 18.6% 15.8% Dividends paid -128 -366 -476 -356 -417Shares outstanding 1,637 2,268 2,268 2,268 2,268 Beginning cash 1,956 1,712 6,617 2,134 2,136EPS (reported) 0.36 0.49 0.57 0.68 0.79 Ending cash 1,712 6,617 2,134 2,136 2,303% change Y/Y 56.5% 34.9% 18.2% 18.6% 15.8% DPS 0.06 0.36 0.14 0.17 0.20Balance sheet Ratio Analysis Rmb in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Rmb in millions, year end Dec FY08 FY09 FY10E FY11E FY12ECash and cash equivalents 1,712 6,617 2,134 2,136 2,303 Gross margin 7.9% 8.0% 7.8% 7.6% 7.7%Accounts receivable 7,912 10,464 14,848 19,337 23,236 EBITDA margin 3.5% 3.7% 3.4% 3.2% 3.2%Inventories 3,155 4,273 6,063 7,976 9,681 Operating margin 3.1% 3.3% 3.1% 3.0% 3.0%Others 903 3,934 4,868 5,657 6,405 Net margin 1.5% 1.8% 2.0% 1.8% 1.7%Current assets 13,681 25,287 27,913 35,106 41,626 Sales per share growth 24.5% 15.5% 7.9% 30.8% 21.2%LT investments 773 1,036 3,369 4,394 5,524 Sales growth 22.7% 23.2% 40.5% 30.8% 21.2%Net fixed assets 1,660 1,952 2,018 2,251 2,506 Net profit growth 54.3% 43.9% 54.0% 18.6% 15.8%Total Assets 16,116 28,275 33,301 41,750 49,656 EPS growth 56.5% 34.9% 18.2% 18.6% 15.8%Liabilities Interest coverage (x) 5.59 8.05 - 26.20 14.40Short-term loans 4,177 1,284 1,018 2,872 3,283 Payables 6,380 8,144 11,443 14,972 18,153 Net debt to equity 114.5% -48.4% -6.7% 16.9% 22.9%Others 1,321 5,327 5,641 5,910 6,236 Working Capital to Sales 12.3% 14.0% 14.3% 14.3% 14.1%Total current liabilities 11,878 14,755 18,102 23,755 27,672 Sales/assets 2.51 2.12 2.15 2.30 2.29Long-term debt 130 50 317 1,462 2,551 Assets/equity 7.11 2.59 2.80 3.20 3.23Other liabilities 697 966 966 966 966 ROE 29.8% 12.8% 11.4% 12.4% 12.6%Total Liabilities 12,704 15,771 19,385 26,182 31,190 ROCE 18.8% 16.5% 16.2% 16.7% 16.1%Shareholders equity 2,265 10,911 11,888 13,046 15,387 BVPS 1.38 4.81 5.24 5.75 6.78Source: Company reports and J.P. Morgan estimates. 13 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Other Companies Recommended in This Report (all prices in this report as of market close on 18 June 2010) Mindray Medical (MR/$31.08/Overweight), The United Laboratories (3933.HK/HK$9.95/Overweight) Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers； and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Client of the Firm: Mindray Medical is or was in the past 12 months a client of JPMSI； during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Mindray Medical. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Mindray Medical. Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgans website /disclosures/company or by calling this U.S. toll-free number (1-800-477-0406) 01530456075Price($)Oct06Jul07Apr08Jan09Oct09Mindray Medical (MR) Price ChartN $34N $21.5 N $41 N $36 OW $30 N $30 OW $43Source: Bloomberg and J.P. Morgan； price data adjusted for stock splits and dividends.This chart shows J.P. Morgans continuing coverage of this stock； the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.Date Rating Share Price ($) Price Target ($) 06-Nov-06 N 19.71 21.50 26-Sep-07 N 41.73 41.00 06-Mar-08 N 34.49 36.00 18-Feb-09 OW 22.47 30.00 12-Aug-09 N 31.21 30.00 18-Nov-09 N 31.62 34.00 12-May-10 OW 33.25 43.00 14 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 0102030405060Price(HK$)Oct09Nov09Jan10Mar10May10Sinopharm (1099.HK) Price ChartOW HK$36 UW HK$30Source: Bloomberg and J.P. Morgan； price data adjusted for stock splits and dividends.Initiated coverage Nov 18, 2009. This chart shows J.P. Morgans continuing coverage of this stock； the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.Date Rating Share Price (HK$) Price Target (HK$) 18-Nov-09 OW 25.05 36.00 07-Apr-10 UW 38.40 30.00 061218Price(HK$)Jun07Sep07Dec07Mar08Jun08Sep08Dec08Mar09Jun09Sep09Dec09Mar10Jun10The United Laboratories (3933.HK) Price ChartOW HK$16Source: Bloomberg and J.P. Morgan； price data adjusted for stock splits and dividends.Initiated coverage Jun 17, 2010. This chart shows J.P. Morgans continuing coverage of this stock； the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.Date Rating Share Price (HK$) Price Target (HK$) 17-Jun-10 OW 10.84 16.00 Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe. Neutral Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe. Underweight Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe. J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories； however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Leon Chik, CFA: China Shineway Pharmaceutical Group Limited (2877.HK), Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (1938.HK), Concord Medical Services Holdings Limited (CCM), Evergrande Real 15 Asia Pacific Equity Research 21 June 2010Leon Chik, CFA (852) 2800-8590 Estate Group (3333.HK), Kingboard Chemical (0148.HK), Kingboard Laminates (1888.HK), Lee & Man Paper Manufacturing (2314.HK), Mindray Medical (MR), Nine Dragons Paper Holdings Ltd (2689.HK), Shandong Chenming Paper (1812.HK), Shandong Weigao Group Medical Polymer Co. Ltd. (8199.HK), Shougang Concord International (0697.HK), Sinopharm (1099.HK), Skyworth Digital Holdings (0751.HK), TCL Multimedia (1070.HK), Techtronic Industries (0669.HK), The United Laboratories (3933.HK), WSP Holdings (WH), Xinyi Glass (0868.HK) J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2010 Overweight (buy) Neutral (hold) Underweight (sell) JPM Global Equity Research Coverage 45% 42% 13% IB clients* 48% 46% 32% JPMSI Equity Research Coverage 42% 49% 10% IB clients* 70% 58% 48% *Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category； our Neutral rating falls into a hold rating category； and our Underweight rating falls into a sell rating category. Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. 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