A Go-getter in the Pharmaceutical Distribution Market of ...

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Company Report: Charmacy Pharmaceutical (02289 HK) Kay Mai 麦梓琪

公司报告：创美药业 (02289 HK) +86 755 2397 6685

[email protected]

28 July 2017

A Go-getter in the Pharmaceutical Distribution Market of Guangdong Province, China, Initiate with “Accumulate” 中国广东医药分销市场的进取者，首次覆盖并给予“收集”的投资评级

Charmacy Pharmaceutical (“Charmacy Pharma” or “the Company”), a

pharmaceutical distributor operating in southern China, mainly serves

downstream customers related to the pharmaceutical retail market.

According to the MOFCOM of the PRC, Charmacy Pharma ranked 37th in the

PRC in terms of the scale of revenue derived from principal business; market

share stood at around 0.2%/2.3% in China/Guangdong Province in 2016.

Investment highlights include: 1) Focusing on business related to the

pharmaceutical retail market, the Company is expected to be barely affected

by the implementation of the two-invoice system and to benefit from the

outflow of prescriptions to retail pharmacies from public hospitals, which is

expected to boost the sales of the pharmaceutical retail market; 2) high

revenue CAGR of 12.6% in FY16-FY19F is expected thanks to the proactive

expansion of distribution network, customer base and product portfolio; 3)

improvement in gross margin is expected thanks to increasing contribution

from business with high gross margin, such as sales to retail pharmacies and

consultancy services, the expansion of business scale and the increase in

number of drug types sold by the Company as the primary distributor; and 4)

high dividend payout ratio is expected in FY17F-FY19F.

EPS is expected to grow YoY by -0.2%/18.7%/17.8% to RMB0.549/

RMB0.651/RMB0.767, in FY17F-FY19F, respectively. Initiate coverage with

“Accumulate” investment rating and a target price of HK$8.80,

representing 14.0x FY17F PER and 11.8x FY18F PER.

创美药业（“公司”）是于华南地区经营的医药分销商，主要服务于与医药零售市场相关

的下游客户。根据中国商务部，2016 年创美药业按主营业务收入规模排行全国 37，公司在

全国/广东省的市占率约为 0.2%/2.3%。

投资亮点包括：1）着重于与医药零售市场相关的业务，公司预计不受两票制的实行影响同

时将受益于处方外流（处方外流将促进医药零售市场销售额提高）；2）2016 财年-2019

财年高收入年复合增长率（12.6%）可期，主要得益于对分销网络、产品组合以及客户群体

的积极拓展；3）毛利率预计将有所提升，主要是由于拥有较高毛利率的业务如对零售药房

销售以及咨询服务对收入贡献度有所提高、业务规模扩大以及公司作为一级分销商的产品

数目有所增加；以及 4）2017 财年-2019 财年股利分配率预期较高。

每股盈利预计将于 2017-2019 财年分别同比增长-0.2%/18.7%/17.8%至人民币 0.549/人民

币 0.651/人民币 0.767。首次覆盖给予“收集”投资评级，目标价为 8.80 港元，对应 14.0

倍 2017 财年的市盈率以及 11.8 倍 2018 财年的市盈率。

Rating: Accumulate

Initial

评级：收集 (首次研究)

6-18m TP 目标价: HK$8.80

Share price 股价： HK$8.110

Stock performance 股价表现

(15.0)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

% of return

HSI Charmacy Pharma

Change in Share Price

股价变动

1 M

1 个月

3 M

3 个月

1 Y

1 年

Abs. % 绝对变动 %

(4.8) 2.0 (3.8)

Rel. % to HS index 相对恒指变动 %

(6.8) (6.8) (26.2)

Avg. share price(HK$) 平均股价（港元）

8.0 7.9 8.1

Source: Bloomberg, Guotai Junan International.

Year End 年结

Turnover 收入

Net Profit 股东净利

EPS 每股净利

EPS 每股净利变动

PER 市盈率

BPS 每股净资产

PBR 市净率

DPS 每股股息

Yield 股息率

ROE 净资产收益率

12/31 (RMB m) (RMB m) (RMB) (△%) (x) (RMB) (x) (RMB) (%) (%)

2015A 3,397 26 0.323 (29.1) 21.0 5.076 1.3 0.575 8.5 8.0

2016A 3,669 59 0.550 70.1 13.2 4.189 1.7 0.400 5.5 13.7

2017F 4,046 59 0.549 (0.2) 12.9 4.401 1.6 0.274 3.9 12.8

2018F 4,762 70 0.651 18.7 10.9 4.752 1.5 0.326 4.6 14.2

2019F 5,237 83 0.767 17.8 9.2 5.165 1.4 0.384 5.4 15.5

Shares in issue (m) 总股数 (m) 108.0 Major shareholder 大股东 Mr. Yao Chuanglong 54.63%

Market cap. (HK$ m) 市值 (HK$ m) 875.9 Free float (%) 自由流通比率 (%) 13.2%

3 month average vol. 3 个月平均成交股数 (‘000) 9.7 FY17 Net gearing (%) FY17 净负债/股东资金 (%) 97.0

52 Weeks high/low (HK$) 52 周高/低 9.200 / 6.600 FY17 Est. NAV (HK$) FY17 每股估值（港元） 11.92

Source: the Company, Guotai Junan International.

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Charmacy Pharmaceutical (02289 HK)


INDUSTRY OVERVIEW

Industry Drivers

The PRC health care industry is one of the largest and one of the most rapidly growing components of the national

economy with promising growth opportunities. It is believed that the growth of the PRC health care industry will continue

to outpace the national GDP growth rate in the long run, primarily favored by sustainable growth in medical demand, triggered

by an aging population and a raise in the payment level from individuals, government and insurance. The expected raise in

payment level is mainly driven by 1) increasing per capita disposable income with rising healthcare awareness; 2) growing

healthcare expenditure from the Chinese government, which still has ample room to be improved; and 3) increasing payment

from insurance, supported by relative sufficient surplus of basic medical insurance funds as well as the commercial health

insurance market, which is expected to boom under encouragement by the Chinese government.

Figure-1: 2010-2016 Total Population in the PRC and the Proportion of Population Aged over 65

Figure-2: 1Q13-1H17 China’s YTD Per Capita Disposal Income

8.90 9.109.40

9.7010.10

10.5010.80

5.0

7.0

9.0

11.0

13.0

1,320

1,330

1,340

1,350

1,360

1,370

1,380

1,390

Total Population (LHS)Proportion of Population Aged over 65 (RHS)

Million %

8.18.6

8.38.28.08.17.67.7

7.4

6.56.56.36.3

7.0 7.3

0.0

2.0

4.0

6.0

8.0

10.0

0

5,000

10,000

15,000

20,000

25,000

30,000

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

China's Per Capita Disposable Income (LHS)

YTD YoY Growth of China's Per Capita Disposable Income (RHS)

RMB %

Source: National Bureau of Statistics of China, Guotai Junan International. Source: National Bureau of Statistics of China, Guotai Junan International.

Figure-3: Jan. 2013-June 2017 YTD Government Health Expenditure

Figure-4: Jan. 2013-May 2017 YTD Collection/Payment of Basic Medical Insurance Fund

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0

200

400

600

800

1,000

1,200

1,400

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Government Health Expenditure (LHS)

YTD YoY Growth of Government Health Expenditure (RHS)

Government Health Expenditure as % of Government Spending (RHS)

RMB in Billion %

0.0

10.0

20.0

30.0

40.0

50.0

60.0

0

200

400

600

800

1,000

1,200

1,400

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

YTD Payment of Bacis Medical Insurance FundYTD Collection of Bacis Medical Insurance FundYTD YoY Growth of Payment of Bacis Medical Insurance FundYTD YoY Growth of Collection of Bacis Medical Insurance FundYTD YoY Growth of Number of Participants of the Basic Medical Insurance

Billion %

Source: Ministry of Finance of China , Guotai Junan International. Note: Government health expenditure includes spending on family planning.

Source: Ministry of Human Resources and Social Security of China, Guotai Junan International.

The Pharmaceutical Distribution Industry

The growth rate of the pharmaceutical distribution industry showed a rebound for the first time in 2016 after suffering

a couple of years of slowdown. According to the Ministry of Commerce of the People's Republic of China (MOFCOM), sales

growth of the pharmaceutical distribution industry dropped by 8.3 ppts in 2011-2015 from 18.5% to 10.2% as a result of

national economy slowdown, price control brought about through the medical insurance system and drug price cuts brought by

provincial tenders. With the weakening impact from such factors, the growth rate of the pharmaceutical distribution industry

rebounded slightly by 0.2 ppts to 10.4% in 2016.

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Distribution business to retail pharmacies is estimated to have an opportunity to boom in the coming years while

distribution business to public hospitals may remain under pressure. During the past several years, the Chinese

government has introduced a series of policies to reduce patients' spending on drugs, but most of which are aimed at public

hospitals rather than retail pharmacies because public hospital terminals account for the biggest market share of drug sales to

end-customers; drug sales in public hospitals can be up to three times higher than in retail pharmacies. Therefore, the growth

rate of drug sales in public hospitals has suffered sustained downward pressure and fell below the growth rate of drug sales in

retail pharmacies in 2016 for the first time. We expect the growth rate of drug sales in retail pharmacies to continue outpacing

that of the drug sales in public hospitals in 2017, mainly considering that the execution of the 30% cap on proportion of drug

sales to total revenue of hospitals and zero-markup policy nationwide by the end of 2017 will lead to further downward

pressure on drug sales volume growth in public hospitals as well as the outflow of prescriptions to retail pharmacies from

public hospitals. In addition, the separation of medical treatment and drug sales is expected to be a long-term trend that

cannot be avoided; this trend is expected to keep boosting drug sales growth in retail pharmacies, hence, the distribution

business to retail pharmacy customers.

The industry has undergone significant consolidation and is expected to experience further consolidation in the

coming years. Driven by government encouragement, drug price cuts, the enforcement of the more stringent Good Supply

Practices for Pharmaceutical Products policy, which has brought huge challenges to many enterprises, especially small- and

medium-sized ones, the pharmaceutical distribution industry in China has been confronted with consolidation in 2012-2016.

The number of pharmaceutical distributors fell to 12,975 in 2016 from 16,295 in 2012, while the market share of the top 100

largest pharmaceutical distributors ratcheted up from 64.0% to 70.9% in the same period. With the consolidation of the

industry, gross margin of the overall pharmaceutical distribution industry increased slightly by 0.1 ppt to 7.0% in 2016 from

6.9% in 2012, even under the backdrop of drug price cuts. Considering that the two-invoice system, which facilitates the

flattening of distribution channels to public hospitals and primary healthcare institutions, will be implemented nationwide by the

end of 2018, we expect the consolidation process of the whole industry to accelerate over the next couple years.

Figure-5: 2012-2016 Total Sales and Gross Margin of the Pharmaceutical Distribution Industry in China

Figure-6: Market Share of the Top 100 Largest Pharmaceutical Distributors in China

18.5016.70

15.20

10.20 10.40

6.90 6.70 6.80 6.90 7.00

0.00

5.00

10.00

15.00

20.00

0

500

1,000

1,500

2,000

2012 2013 2014 2015 2016

Total Sales of the Pharmaceutical Distribution Industry (LHS)

YoY Growth (RHS)

Gross Margin (RHS)

RMB in billion %

64.0 64.3

65.9

68.9

70.9

60.0

62.0

64.0

66.0

68.0

70.0

72.0

2012 2013 2014 2015 2016

Market Share of the Top 100 Largest Pharmaceutical Distributors

%

Source: MOFCOM, Guotai Junan International. Source: MOFCOM, Guotai Junan International.

Figure-7: 2012-2016 YoY Growth of Drug Sales in Terminals in China

Figure-8: 2012-2016 Total Sales of the Pharmaceutical Distribution Industry in Guangdong Province

18.4%

14.8%13.7%

10.7%

7.6%

13.4% 12.8%10.6% 10.0%

8.5%

31.4%

23.5%

19.0%

16.3%

13.2%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2012 2013 2014 2015 2016

Public Hospital Pharmacies Retail Pharmacies

Primary Healthcare Institutions

7.6

8.0 7.98.0

8.7

7.00

8.00

9.00

0

50

100

150

200

2012 2013 2014 2015 2016Sales of the Pharmaceutical Distribution Industry in Guangdong

Province (LHS)The Proportion of Sales of the Pharmaceutical Distribution Industry

in Guangdong Province (RHS)

RMB in billion %

Source: Menet, Guotai Junan International. Source: MOFCOM, Guotai Junan International.

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Market Landscape of Guangdong Province

Guangdong owns the biggest pharmaceutical distribution market among other provinces in China with a market

share of 8.7% in 2016, according to MOFCOM. Total sales of the pharmaceutical distribution market in Guangdong was

about RMB160 billion in 2016, with a CAGR of around 17% from 2010 to 2016, outperforming the overall industry. We expect

that the pharmaceutical distribution market in Guangdong Province will continue to outgrow those of most other areas,

primarily in view of the above-average estimation of GDP growth rate of Guangdong Province, which is expected to lead to a

higher payment level of Guangdong residents than those of other areas in the country.

BUSINESS OVERVIEW

Company Profile

Charmacy Pharmaceutical Co., Ltd. (“Charmacy Pharma” or “the Company") is a pharmaceutical distributor

operating in southern China. Established in 2000, the Company mainly engages in the distribution of pharmaceutical

products in Guangdong Province and other surrounding provinces. As of FY16, the Company recorded revenue of RMB3,669

million with a YoY growth rate of 8.0% and a gross margin of 4.9%. According to MOFCOM, Charmacy Pharma ranked 37th in

the PRC in terms of scale of revenue derived from principal business, and it possessed a market share of around 0.2% in 2016.

The Company was listed on the stock exchange of Hong Kong on 14 December 2015. Mr. Yao Chuanglong, Charmacy

Pharma’s Chairman, Executive Director and CEO, together with his spouse Ms. You Zeyan currently possesses the largest

stake in the Company (54.63% interest as at 13 April 2017).

Figure-9: Charmacy Pharma’s Shareholding Structure as at 13 April 2017

Source: the Company.

Notes:

1. Other shareholders of domestic shares include Shantou Zhichuang Investment Management Limited Partnership, Shantou Meizhi Investment Management

Limited Partnership, Shantou Youran Investment Management Limited Partnership, Binhua Wu, Jigui Liu and others.

2. Mr. Lin Zhixiong, Executive Director, joint company secretary and CFO of Charmacy Pharma, owns 2.96% interest of the Company through Shantou Meizhi

Investment Management Limited Partnership as of 6 January 2017.

3. Ms. Zheng Yuyan ,Vice president, Executive Director and CMO of Charmacy Pharma, possesses 1.57% interest of the Company through Shantou Youran

Investment Management Limited Partnership as of 6 January 2017.

4. Guangzhou Pharmaceutical Baiyunshan Hong Kong Company Limited is a wholly-owned subsidiary of Guangzhou Baiyunshan Pharmaceutical Holdings

Company Limited (600332 CH), which in turn is held by Guangzhou Pharmaceutical Holdings Limited as to 45.23%.

5. Xiangxue Group (Hong Kong) Company Limited is a wholly-owned subsidiary of Xiangxue Pharmaceutical Factory Co., Ltd. (300147 CH).

6. Kingworld Medicines Health Management Limited is a wholly-owned subsidiary of Kingworld Medicines Group Limited (01110 HK).

Business Model

The distribution of pharmaceutical products is Charmacy Pharma’s principal business. The Company primarily

procures pharmaceutical products from pharmaceutical manufacturers and distributor suppliers and then resells such products

to distributors, retail pharmacies, hospitals, clinics, health centers and others. The Company also provides consultancy

services to its suppliers on marketing strategy and provides information services on customer preferences, affordability and

other related information. As of FY16, sales of goods, of which most were pharmaceutical products, accounted for 99.2% of

Charmacy Pharma’s total revenue and the rest was derived from services income.

Mr. Yao Chuanglong

Ms. You Zeyan

Charmacy Pharma

54.63%

19.44%

Other shareholders of domestic shares

Guangzhou Pharmaceutical

Baiyunshan Hong Kong Company Limited

Xiangxue Group (Hong Kong) Company

Limited

Kingworld Medicines Health Management

Limited.

Other public shareholders of

H shares

7.32%

3.23%

2.13%

13.24%

Domestic Share H Share

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Figure-10: Distribution Business Model of Charmacy Pharma

Source: the Company.

Figure-11: Revenue Structure of Charmacy Pharma as of FY16

Services income0.76%

To distributors69.44%

To retail pharmacies27.97%

To hospitals, clinics, health

centres and others1.83%

Sales of Goods99.24%


The Company serves downstream customers that are mainly related to the pharmaceutical retail market. As of FY16,

the Company had 5,674 customers (vs. 5,245 in FY15), including 3,496 retail pharmacies, 783 distributors which primarily

serve retail pharmacies, and 1,395 hospitals, clinics, health centers and others (non-public healthcare institutions). Sales to

distributor customers and retail pharmacies contributed more than 95% of Charmacy Pharma's total revenue in

recent years.

The distribution network of the Company primarily covers Guangdong Province with revenue derived from

Guangdong Province making up more than 80% of the Company's total revenue in recent years. Currently, the

Company possesses two logistics centers under operation located in Shantou and Foshan of Guangdong Province and two

under establishment located in Zhuhai and Guangzhou of Guangdong Province, which have enabled the Company to deliver

distribution operations in the eastern region and Pearl River Delta region of Guangdong Province. The Company has further

extended its distribution range to cover surrounding provinces such as Fujian, Guangxi, Hainan and Hunan through third party

logistics service providers.

Figure-12: Distribution Range of Charmacy Pharma as of 30 June 2015

Figure-13: Distribution Network of Charmacy Pharma in Guangdong Province as of 19 July 2017

Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

Distributor suppliers

Distributor customers

Pharmaceutical manufacturers

The Company

Retail pharmacies, hospitals, clinics

and health centers

End-customers

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The Company offered 6,069 products as of FY16 (vs. 5,561 in FY15), most of which were western medicines and

Chinese patent medicines. Other products include healthcare products, Chinese medicine material and decoction pieces,

medical devices and cosmetic products. As of FY16, the Company is the primary distributor of 4,509 products (74.3% of total

products), compared to 3,794 (68.2% of total products) in FY15. Sales of western medicines and Chinese patent medicines

contributed to over 90.0% of the Company's total revenue in recent years.

Strategy and Outlook

Primary Strategy: to gain additional market share so as to grow into one of the pharmaceutical distribution industry’s

leaders through M&As and/or establishment of new logistics centers over the next couple years. So far, with regard to

this goal, the Company entered into a capital contribution agreement with Zhuhai Hengxiang Pharmaceutical Limited ("Zhuhai

Hengxiang") and also entered into a Sale and Purchase Agreement in relation to the acquisition of a property located in

Guangzhou, Guangdong Province. In addition, Charmacy Pharma intends to establish a new subsidiary in Shenzhen,

Guangdong Province, in order to extend its distribution network to Shenzhen and surrounding cities. It also plans to issue no

more than 20 million A-Shares of the Company on the Shenzhen Stock Exchange in mainland China (representing

approximately 18.52%/15.63% of total existing issued share capital of the Company before/after the issuance) to support

possible M&As or other investments in the future as well as to further optimize the corporate governance structure.

Table-1: Recent M&As and Investments

Announcement Date

Event Consideration Comment

2017/3/13

Acquisition of the control right of Zhuhai Hengxiang Pharmaceutical

Limited through a raise of the Company’s contribution to the

registered capital of Zhuhai Hengxiang to 70%

RMB 18,000,000

Zhuhai Hengxiang Pharmaceutical Limited is an established pharmaceutical distribution company based in Zhuhai, Guangdong

Province. We believe the Investment will extend the Company's network to cover the entire end market of Zhuhai and part of the

Zhongshan market. Furthermore, the Company is estimated to gain 1,100 new downstream customers and 1,400 new products upon

the completion of the Investment.

2017/7/13

Entrance into a Sale and Purchase Agreement in relation to the

acquisition of a property located at Guangzhou, Guangdong Province

RMB 131,000,000 (tax included)

A new logistics center is expected to be established in the target property, through which Charmacy Pharma will develop new

businesses in Guangzhou (referred to as "Guangzhou business"). We believe such investment will enhance Charmacy Pharma's distribution network to Guangzhou and assists the Company to develop new end market in Guangzhou and other surrounding

cities.


With the expansion of its distribution channels, the revenue growth of the Company is expected to speed up and its

profitability is expected to be improved. As of 2016, Charmacy Pharma accounted for approximately 2.3% of the

pharmaceutical distribution market in Guangdong Province, according to MOFCOM. As the pharmaceutical distribution market

in Guangdong Province remains somewhat fragmented, we believe the room for Charmacy Pharma to gain additional market

share in Guangdong Province is large and hence, such network expansion will be one of the major growth drivers for the

Company over the next few years. We also believe Charmacy Pharma will achieve better profitability thanks to economies of

scale and the increasing bargaining power of the Company (which means bigger purchase discounts from manufacturer

suppliers can be achieved) induced by sales boost. Through channel expansion, the Company is expected to reach around

8,000 downstream customers (+41.0% YoY), especially retail pharmacies by the end of FY17 and 10,000 (+25.0% YoY) by the

end of FY18.

Along with the distribution network expansion, enlargement of the product portfolio is another strategy in plan,

which we expect to be advantageous to gross margin and revenue growth of the Company. Charmacy Pharma intends

to continuously introduce new pharmaceutical and healthcare products, especially prescription drugs, to enrich its product

diversity. We believe, with its ever-expanding product portfolio, Charmacy Pharma will 1) be capable of meeting diversified

demand from downstream customers and enjoy greater customer reliance and loyalty, and thus further strengthen its

competitive position and boost sales volume; 2) be able to better catch opportunities induced by the outflow of prescriptions

from hospitals and eventually realize sales boost; and 3) obtain a higher degree of flexibility to adjust its products to diminish or

even eliminate the impact of different industry policies and/or to achieve better margins and credit terms. In addition, the

Company's plan to increase the proportion of products sold by the Company as the primary distributor is favorable to the

overall gross margin of the Company as the primary distributors commonly enjoy higher gross margin than sub-distributors.

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In addition, the Company plans to further upgrade/utilize the B2B e-commerce platform “Charmacy e-Medicine” and

information systems to increase operating efficiency. Based on the B2B e-commerce platform, Charmacy Pharma intends

to replace offline orders with online ones through gradually introducing existing customers to the online platform from 2H17

and to proactively embrace new retail pharmacy customers. We regard such a plan as a strategy that fits the demand of

modern logistics and will improve the operational efficiency of the Company through saving staff expenses and shortening

order processing time. Through the improvement in operational efficiency, we think that the Company will be able to reduce

their reliance on sub-distributors and will be able to serve more retail pharmacies directly and efficiently. Since sales to retail

pharmacies commonly enjoy a higher gross margin than sales to distributors, we expect an improvement in the gross margin

of the Company with the better use of the B2B e-commerce platform. As at FY16, the B2B e-commerce platform had 4,759

registered customers (83.9% of total customers), which were mainly retail pharmacies. The revenue generated through the

B2B e-commerce platform in FY16 was approximately RMB177.48 million, representing 4.8% of the Company’s total revenue.

FINANCIAL ANALYSIS

Revenue

CAGR of total revenue is estimated to be 12.6% in FY16-FY19F. We forecast that total revenue will grow by 10.3% YoY,

17.7% YoY and 10.0% YoY to RMB4,046 million, RMB4,762 million and RMB5,237 million in FY17F, FY18F and FY19F,

respectively, with consideration to 1) market share gains triggered by the proactive expansion of distribution network,

customer base and product portfolio, and 2) organic sales growth of existing customers which benefit from the outflow of

prescriptions to retail pharmacies from public hospitals and barely suffer from the implementation of the two-invoice system.

Strong top-line growth of 17.7% YoY is expected in FY18F, mainly due to the full year contributions from Zhuhai

Hengxiang and Guangzhou business for the first time. On 13 March 2017, the acquisition of Zhuhai Hengxiang was

completed, yet, we don’t expect it to significantly contribute to revenue growth of the Company until FY18F as the Company

intends to upgrade the logistics center in Zhuhai and the related business will be therefore negatively impacted in FY17F.

However, with the new logistics center put into operation, we expect that Zhuhai Hengxiang will provide Charmacy Pharma

with more than RMB300 million in revenue in FY18F. In addition, we expect the new logistics center under construction in

Guangzhou will be put into use in 4Q17 and will help contributing around RMB100 million in revenue to the Company in FY18F.

We believe the contribution from the newly added business in Zhuhai and Guangzhou, as well as the existing business, will

together lead to robust revenue growth of 17.7% YoY in FY18F.

Figure-14: Charmacy Pharma's Revenue Breakdown in FY15-FY19F (Amount)

Figure-15 Charmacy Pharma's Revenue Breakdown in FY15-FY19F (%)

12.7%

8.0%

10.3%

17.7%

10.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

FY15 FY16 FY17F FY18F FY19F

Services income (LHS)

Sales of goods - to distributors (LHS)

Sales of goods - to retail pharmacies (LHS)

Sales of goods - to hospitals, clinics, health centres and others (LHS)

YoY growth of total revenue (RHS)

RMB in million

0.5% 0.8% 1.1% 1.4% 1.9%

70.7% 69.4% 67.3% 66.2% 64.6%

27.0% 28.0% 29.8% 30.7% 31.9%

1.8% 1.8% 1.8% 1.7% 1.6%

0%

50%

100%


Services incomeSales of goods - to distributorsSales of goods - to retail pharmaciesSales of goods - to hospitals, clinics, health centres and others


Revenue growth is expected to be mostly reflected in sales to retail pharmacies in FY17F-FY19F even though sales to

distributor customers will remain as the largest portion of the Company's total sales. We expect growth in sales to retail

pharmacies will be faster than growth in sales to distributor customers or to hospitals, clinics, health centers and others,

considering that the Company will be able to reduce the dependency on distributor customers to serve end-customers and will

be able to serve more retail pharmacies directly in the future by taking advantage of the ever-expanding distribution network

and the increasingly widely used B2B e-commerce platform. We expect sales to distributor customers/retail

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pharmacies/hospitals, clinics, health centers and others to grow at a CAGR of 9.9%/17.7%/8.6% in FY16-FY19F, respectively.

In 2016, sales to distributor customers/retail pharmacies/hospitals, clinics, health centers and others, accounted for 69.4%,

28.0%, and 1.8% of sales of goods revenue, respectively. In FY19F, we expect sales to distributor customers, retail

pharmacies, and hospitals, clinics, health centers and others to account for 64.6%, 31.9%, and 1.6% of total revenue,

respectively. In addition, we expect service income from consultancy services to upstream pharmaceutical manufacturers to

grow faster than sales of goods. As of FY19F, sales of goods is projected to account for about 98.1% of Charmacy Pharma’s

total revenue (vs. 99.2% in FY16) and the rest will derive from services income.

Gross Profit

Gross margin is expected to improve gradually from 4.9% in FY16 to 5.2% in FY19F, given 1) business with higher gross

margin, such as sales to retail pharmacies and consultancy services, will account for a higher proportion of total sales; 2) the

expansion of business scale will lead to bigger purchase discounts from manufacturer suppliers and the number of drug types

sold by the Company as the primary distributor, which enjoys relatively high gross margin, is expected to increase; and 3) the

Company will periodically adjust product structure to prevent a significant decrease in the gross margin of the product mix. We

expect gross profit to be RMB202 million, RMB242 million and RMB272 million, up 11.9% YoY, 20.2% YoY and 12.3% YoY in

FY17F, FY18F and FY19F, respectively.

Figure-16: Charmacy Pharma's Gross Profit and Operating Profit

Figure-17: Charmacy Pharma's Margins and Expenses Ratios

165 180 202 242 27260 85 100 121 140

20.7%

9.5%11.9%

20.2%

12.3%

-5.3%

40.8%

17.7%21.3%

16.2%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

0

50

100

150

200

250

300


Gross Prof it (LHS)

Operating Prof it (LHS)

YoY Growth of Gross Prof it (RHS)

YoY Growth of Operating Prof it (RHS)

RMB in million

4.85% 4.91% 4.98% 5.09% 5.20%

1.77%

2.31% 2.46% 2.54% 2.68%

1.19% 1.31% 1.23% 1.23% 1.23%

1.89%

1.29% 1.29% 1.32% 1.29%


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Gross Margin Operating Margin

S&D Expenses Ratio Administrative Expenses Ratio Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

Operating Profit

The operating margin is expected to improve from 2.3% in FY16 to 2.7% in FY19F, mainly due to the improvement in

gross margin. We define operating profit as the residual value after gross profit minus selling & distribution expenses and

administrative expenses. We expect that the S&D expenses ratio will stabilize at the historic average of 1.2% under the

combined effect of efficiency improvement brought by the increasingly widely used B2B e-commerce platform and the

increase in marketing expenses related to the development of new customers. We also expect that the new logistics center in

Guangzhou will depreciate after FY17F, leading to a rise in administrative expenses ratio to 1.32% in FY18F, and that the

administrative expenses ratio will start to decrease in FY19F, primarily thanks to economies of scale. We forecast operating

profit to grow by 17.7% YoY, 21.3% YoY and 16.2% YoY to RMB100 million, RMB121 million and RMB140 million in FY17F,

FY18F and FY19F, respectively.

Other Income

Other income is projected to grow by -53.7% YoY, 51.5 YoY and 26.3% YoY to RMB5 million, RMB8 million and RMB10

million in FY17F, FY18F and FY19F, respectively. Other income is mainly derived from bank interest income, government

grants and exchange gain/loss. With regard to exchange gain/loss, the Company obtained exchange gains of RMB5.4 million

in FY16, due to a significant depreciation of the RMB exchange rate to HKD, yet, we assume that the RMB exchange rate to

HKD will remain relatively stable in FY17F-FY19F, so that the amount of exchange gain/loss will be relatively small. The

increase in other income in FY18F and FY19F is mainly attributable to the rise in bank interest income, supported by a surge

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in restricted cash (used as deposits for bills payables) and interest rate.

Financial Costs and Gearing

We expect financial costs to grow at a CAGR of 32.0% in FY16-FY19F, as a result of the rise in total borrowing as well

as effective interest rate. We expect that the Company will borrow additional loans to fund part of the investments related to

the business expansion and the increase of the working capital induced by the business expansion and that total borrowing

will surge to RMB588 million in FY19F from RMB421 million, with a forecast that effective interest rate will rise to 6.8% from

4.7%.

Increasing financial burden of the Company is expected, but is bearable. Net gearing ratio of the Company is estimated

to surge from 66.7% to 98.0% in FY16-FY19F, however, the financial position of the Company is considered to still be healthy,

given that 1) the Company has a big pile of restricted cash amounting to RMB394 million-RMB484 million in FY17F-FY18F,

representing 79.8%-82.3% of total debt; and 2) liquidity of the Company is expected not to be poor since the interest coverage

ratio will remain at around 4.0x in FY17F-FY19F and OCF/financial costs as well as current ratio will stay above 1.0x in

FY17F-FY19F.

Figure-18: Charmacy Pharma's Financial Cost and Effective Interest Rate

Figure-19: Charmacy Pharma's Net Profit and Net Profit Margin

24

17

25

3338

8.14%

4.66%5.50%

6.50%6.80%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0

5

10

15

20

25

30

35

40

45


Finance Costs (LHS) Ef fective Interest Rate (RHS)

RMB in million

26

59 5970

83

0.78%

1.62%1.46% 1.48%

1.58%

0.0%

1.0%

2.0%

0

10

20

30

40

50

60

70

80

90


Net Prof it (LHS) Net Prof it Margin (RHS)

RMB in million


Net Profit

We expect that net profit margin will trend up slightly from 1.5% in FY17F to 1.6% in FY19F, mainly because the

increasing financial cost will partially offset the improvement in the operating margin. Net profit is expected to grow by -0.2%

YoY, 18.7% YoY and 17.8% YoY to RMB59 million, RMB70 million and RMB83 million in FY17F, FY18F and FY19F,

respectively, representing EPS of RMB0.549, RMB0.651 and RMB0.767, respectively. We expect that growth of net profit will

be flat in FY17F as a result of a significant surge in financial costs and a significant decrease in exchange gains.

Cash Conversion Cycle

The cash conversion cycle of the Company is smaller than other pharmaceutical distributors, mainly because it

possesses a longer DPO. We believe that Charmacy Pharma has a similar level of high operational efficiency as Sinopharm,

in terms of the management of inventories and trade & bills receivables as both companies have similar DSI and DSO.

However, the DPO of Charmacy Pharma is around 30 days longer than that of Sinopharm in FY16, leading to a much smaller

CCC of Charmacy Pharma. We do no regard a longer DPO as a signal of better operational efficiency, since there is

commonly a tradeoff between gross margin and DPO, which means that a longer DPO (or a longer credit term granted by

suppliers) will raise procurement costs and drag down the gross margin of the Company. Yet, we cannot deny that a longer

DPO will help the Company ease short-term financial burden.

We expect the CCC to increase from 0.5 day in FY16 to 8.2 days in FY19F, as a result of 1) expectations that DSI will

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remain at a low level of around 35 days thanks to the application of the Company's effective information system; 2) DSO is

expected to decrease in FY17F and FY18F due to the increase in the proportion of retail pharmacy customers, which is

commonly granted shorter credit terms than distributor customers, to then rebound in FY19F as we assume that longer

business relations with downstream customers will be achieved, leading to a rise in the credit terms; 3) DPO is projected to be

on the decline gradually in FY16-FY17F considering that the Company is expected to lack cash to place as restricted cash in

order to support part of the increase in bills payables.

Figure-20: Charmacy Pharma's Cash Conversion Cycle Figure-21: Sinopharm's Cash Conversion Cycle

31.8 35.3 35.7 34.7 35.6

95.1101.4 100.4 96.5 99.9

125.5136.3

130.4125.2 127.3

1.5 0.55.7 6.0 8.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0


Days Sales Of Inventory - DSI Days Sales Outstanding - DSO

Days Payable Outstanding - DPO Cash conversion cycle

36.7 37.3 37.1 37.0 36.5 36.0

107.5104.7

94.8 97.1 99.0 98.5

98.2 99.3 97.0 97.0 96.8 96.6

46.142.6

35.0 37.1 38.7 37.9

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

FY14 FY15 FY16 FY17F FY18F FY19F

DSI (LHS) DSO (RHS) DPO (RHS) CCC (LHS)

Source: the Company, Guotai Junan International. Source: Sinopharm, Guotai Junan International.

Table-2: Estimates of Charmacy Pharma

RMB million FY17F FY18F FY19F

Revenue 4,046 4,762 5,237

- Sales of goods 4,003 4,695 5,139

---- To distributors 2,723 3,154 3,381

---- To retail pharmacies 1,207 1,461 1,673

---- To hospitals, clinics, health centers and others 72 80 86

- Services income 43 67 98

Gross profit 202 242 272

Operating profit 100 121 140

Financial cost (25) (33) (38)

Net profit 59 70 83

EPS (RMB) 0.549 0.651 0.767

DPS (RMB) 0.274 0.326 0.384 Source: the Company, Guotai Junan International.

VALUATION

Investment highlights of Charmacy Pharma include: 1) Focusing on business to the pharmaceutical retail market, the

Company is expected to be barely influenced by the implementation of the two-invoice system and to benefit from the outflow

of prescriptions to retail pharmacies from public hospitals, which is expected to boost sales within the pharmaceutical retail

market; 2) High revenue growth is expected especially in FY18F through the proactive expansion of distribution network,

customer base and product portfolio; 3) Improvement in gross margin is expected thanks to increasing contribution from

business with higher gross margins such as sales to retail pharmacies and consultancy services, the expansion of business

scale, and the increase in the number of drug types sold by the Company as the primary distributor; and 4) High dividend

payout ratio is expected in FY17F-FY19F.

We initiate coverage with “Accumulate” investment rating and a TP price of HK$8.80. We benchmark our target PER

against the typical pharmaceutical distributors operating in mainland China and listed in Hong Kong, among which we think

Sinopharm (01099 HK) is the most comparable peer as pharmaceutical distribution business made up most of its revenue and

net profit while other peers such as CR Pharma (03320 HK), Shanghai Pharma (02607 HK) and GZ Baiyunshan Pharma

(00874 HK) are involved largely in pharmaceutical manufacturing. Comparing with Sinopharm, Charmacy Pharma 1) is less

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negatively impacted by policies related to healthcare reform as Charmacy Pharma is mainly involved in business to the retail

pharmacy terminal rather than the public hospital terminal which Sinopharm concentrates on; 2) has similar efficiency and

higher growth potential; but 3) has much smaller business scale, lower profitability, as well as a higher financial burden.

Summing up, we believe that Charmacy Pharma should be valued at a discount to Sinopharm which is trading at 15.1x, 13.3x

and 12.3x FY17F-FY19F PER, respectively. We apply a 14.0x FY17F PER or 11.8x FY18F PER (representing a 7%/11%

discount to Sinopharm’s FY17F/FY18F trading PER), with TP of HK$8.80 and “Accumulate” investment rating. Current price

level is equivalent to 12.9x FY17F PER and 10.9x FY18F PER.

Table-3: Comparison between Charmacy Pharma and Sinopharm (as of FY16)

Charmacy Pharma Sinopharm

Business Scale

--Distribution network Mainly in Guangdong Province Nationwide, 31 Provinces

--Number of customers

----Retail pharmacy 3,496 79,839

----Distributors 783 n.a.

----Nationally-ranked hospitals 0 14,231

----Other healthcare institutions 1,395 119,931

--Number of products 6,069 ~20,000

--Sales amount from distribution business RMB3,669 million RMB246,459 million

Profitability

--Gross margin 4.9% 8.0%

--Operating margin 2.4% 3.8%

--PAT margin 1.6% 2.7%

--Net margin 1.6% 1.8%

--ROE 13.7% 15.0%

--ROA 2.8% 4.6%

Efficiency

--DSI 35.3 days 37.1 days

--DSO 101.4 days 94.8 days

--DPO 136.3 days 97.0 days

--CCC 0.5 days 35.0 days

Growth

--FY14-FY16 CAGR of total revenue 10.3% 13.6%

--FY14-FY16 CAGR of net profit 27.6% 27.1%

--FY16-FY19F CAGR of total revenue 12.6% 9.6%

--FY16-FY19F CAGR of net profit 11.8% 11.3%

Financial Burden

--Net debt/shareholder's Equity 66.7% 24.9%

--Effective interest rate on bank borrowings 5.0% 4.0%

--Current ratio 1.1x 1.3x

--OCF/interest paid -6.1x 4.2x Source: the Company, Sinopharm, Guotai Junan International. Note: 1. Operating profit is defined as the residual value after the gross profit minus selling & distribution expenses and administrative expenses. Operating margin is the defined operating profit divided by total sales. 2. FY16-FY19F CAGR of total revenue and FY16-FY19F CAGR of net profit are estimated by Guotai Junan International. 3. Restricted cash is not deducted from net debt in this case.

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Table-4: Peers Group Comparison of Charmacy Pharma

Company Stock Code Currency Last price Market Cap PE (fiscal year) PB (fiscal year) ROE(%) ROA(%) EV/EBITDA

HKD mil 16A 17F 18F 19F 16A 17F 18F 19F 17F 17F 17F 18F

HK - Listed Peers

Charmacy Pharma-H 2289 HK HKD 8.11

876 12.6 11.4 9.6 8.0

1.7 1.6 1.5 1.4

12.8

2.5

n.a. n.a.

Sinopharm-H 1099 HK HKD 33.30

92,144 17.0 15.1 13.3 12.3

2.6 2.1 1.9 1.4

14.9

3.1

7.9 6.7

CR Pharma 3320 HK HKD 9.53

59,891 16.7 17.6 15.3 13.5

1.6 1.4 1.2 1.2

7.9

3.7

7.8 6.7

Shanghai Pharma-H 2607 HK HKD 21.05

72,548 15.1 13.6 12.0 10.8

1.6 1.4 1.3 1.3

10.7

4.1

12.2 10.9

GZ Baiyunshan Pharma-H 874 HK HKD 20.70

47,938 16.5 18.5 16.9 16.5

1.7 1.6 1.4 1.4

8.7

6.3

n.a. n.a.

Universal Health 2211 HK HKD 0.17

494 n.a. n.a. n.a. n.a.

0.1 n.a. n.a. n.a.

n.a.

n.a.

n.a. n.a.

Wanjia Group 401 HK HKD 0.29

188 n.a. n.a. n.a. n.a.

0.8 1.0 n.a. n.a.

(12.6)

(4.3)

n.a. n.a.

Simple Average 15.6 15.2 13.4 12.2 1.5 1.5 1.5 1.3 7.1 2.6 9.3 8.1

Weighted Average 16.3 15.8 14.0 12.9 2.0 1.7 1.5 1.3 11.1 4.1 9.3 8.1

China - Listed Peers

Shanghai Pharma-A 601607 CH CNY 25.32

72,547 21.3 18.9 16.6 14.8

2.2 1.9 1.7 1.7

10.7

4.1

12.6 11.0

Huadong Medicine-A 000963 CH CNY 46.96

52,902 31.3 25.1 20.3 16.6

6.3 5.2 4.5 3.6

21.7

11.7

n.a. n.a.

Jointown Pharma-A 600998 CH CNY 20.20

39,693 37.4 30.2 24.2 20.2

3.5 2.7 2.5 2.3

9.2

2.5

15.4 12.8

China National Med-A 600511 CH CNY 30.98

27,534 27.1 22.5 18.9 16.6

4.2 2.4 2.1 1.8

14.7

6.8

n.a. n.a.

Realcan Pharma-A 002589 CH CNY 14.79

25,790 33.8 20.0 14.9 10.7

3.2 2.8 2.4 2.0

12.8

4.2

15.4 12.3

GX Liuzhou Pharma-A 603368 CH CNY 53.83

11,544 29.9 24.8 20.0 15.9

3.1 2.8 2.5 2.2

11.8

6.3

n.a. n.a.

Nanjing Pharma-A 600713 CH CNY 7.09

7,373 35.3 27.3 22.2 16.9

2.4 2.3 2.1 1.8

8.2

1.8

n.a. n.a.

ZJ Huatong Pharma-A 002758 CH CNY 12.76

3,105 66.0 35.4 17.2 12.2

4.8 3.5 2.8 2.3

10.0

6.0

n.a. n.a.

ZJ Zhenyuan-A 000705 CH CNY 9.73

3,767 69.5 n.a. n.a. n.a.

2.5 n.a. n.a. n.a.

n.a.

n.a.

n.a. n.a.

China Meheco-A 600056 CH CNY 24.07

29,804 26.1 21.1 17.4 14.1

3.7 3.3 2.8 2.4

15.5

5.9

n.a. n.a.

Luyan Pharma-A 002788 CH CNY 32.50

4,827 34.2 n.a. n.a. n.a.

3.0 n.a. n.a. n.a.

n.a.

n.a.

n.a. n.a.

Humanwell Healthcare-A 600079 CH CNY 18.26

27,214 28.2 22.7 17.8 15.1

2.3 2.3 2.0 1.8

10.2

3.7

13.3 11.2

XJ Ready Health-A 600090 CH CNY 9.12

15,215 24.0 n.a. n.a. n.a.

2.4 n.a. n.a. n.a.

n.a.

n.a.

n.a. n.a.

Simple Average 35.7 24.8 19.0 15.3 3.4 2.9 2.5 2.2 12.5 5.3 14.2 11.8

Weighted Average 29.4 23.1 18.8 15.7 3.5 3.0 2.6 2.3 13.4 5.7 13.8 11.7

Source: Bloomberg, Guotai Junan International.

Figure-22: Forward PE Band of Charmacy Pharma Figure-23: Forward PB Band of Charmacy Pharma

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Ju

n-1

6

Ju

l-1

6

Au

g-1

6

Se

p-1

6

Oct-

16

No

v-1

6

De

c-1

6

Ja

n-1

7

Fe

b-1

7

Ma

r-1

7

Ap

r-1

7

Ma

y-1

7

Ju

n-1

7

Ju

l-1

7

Forward PE since Listing Average Forward PE

Average Forward PE + 1 x SD Average Forward PE - 1 x SD

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Ju

n-1

6

Ju

l-1

6

Au

g-1

6

Se

p-1

6

Oct-

16

No

v-1

6

De

c-1

6

Ja

n-1

7

Fe

b-1

7

Ma

r-1

7

Ap

r-1

7

Ma

y-1

7

Ju

n-1

7

Ju

l-1

7

Forward PB since Listing Average Forward PB

Average Forward PB + 1 x SD Average Forward PB - 1 x SD Source: the Company, Bloomberg, Guotai Junan International. Source: the Company, Bloomberg, Guotai Junan International.

RISKS

Major risks include: 1) Further expansion plans will be limited by the financial position of high gearing if issuance of new

shares cannot be executed in time, which may lead to failure to grab more market share and to remain competitive; 2)

higher-than-expected financial costs will lead to a delay of strategy plan and raise financial burden; 3) lower- than-expected

industry growth may be triggered by multiple policies aiming to reduce patient expenditure on drugs; 4) uncertainty

surrounding government policies related to healthcare reform on the pharmaceutical retail market may bring about changes to

the outlook of the pharmaceutical retail market; and 5) increasing competition may be caused by the entry of new rivals from

the logistics industry.

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Financial Statements and Ratios Income Statement Cash Flow Statement

Year end Dec (RMB mn) 2015A 2016A 2017F 2018F 2019F Year end Dec (RMB mn) 2015A 2016A 2017F 2018F 2019F

Revenue 3,397 3,669 4,046 4,762 5,237 PBT 42 80 80 96 113

Cost of sales (3,232) (3,489) (3,844) (4,520) (4,965) D&A 9 9 10 16 16

Gross Profit 165 180 202 242 272 Other adjustments 21 13 23 28 31

Changes in WC 140 (185) (30) (25) (77)

Selling & distribution expenses (40) (48) (50) (59) (64) Income tax paid (18) (19) (20) (24) (28)

Administrative expenses (64) (47) (52) (63) (67) Operating Cash Flow 194 (101) 63 91 54

Opt. Profit 60 85 100 121 140

Capex (2) (22) (130) (9) (8)

Other income 6 12 5 8 10 Others (166) (9) (32) (55) (20)

Finance costs (24) (17) (25) (33) (38) Investing Cash Flow (168) (31) (162) (64) (29)

Share of profit of associates&JV 0 0 0 0 0

Profit before tax 42 80 80 96 113 Issues of shares 188 0 0 0 0

Debt paid/raised (11) 131 72 42 53

Taxation (15) (21) (20) (24) (28) Dividends paid (46) (21) (36) (32) (38)

Profit After Tax 26 59 59 72 85 Others (24) (14) (23) (31) (36)

Financing Cash Flow 108 96 12 (22) (22)

Minority Interest 0 0 0 1 2

Net Profit 26 59 59 70 83 Net Increase in Cash 133 (36) (87) 6 4

Cash at bgn of Yr 22 156 120 32 38

EPS (RMB) 0.323 0.550 0.549 0.651 0.767 FX adjustments 0 0 0 0 0

DPS (RMB) 0.575 0.400 0.274 0.326 0.384 Cash at end of Yr 156 120 32 38 42

Balance Sheet Margins and Efficiency

Year end Dec (RMB mn) 2015A 2016A 2017F 2018F 2019F 2015A 2016A 2017F 2018F 2019F

PP&E 118 130 250 242 234 Gross margin (%) 4.8% 4.9% 5.0% 5.1% 5.2%

Other non-current assets 97 94 91 88 85 EBITDA margin (%) 2.3% 3.0% 2.9% 3.1% 3.2%

Non-current Assets 215 224 341 330 319 Operating margin (%) 1.8% 2.3% 2.5% 2.5% 2.7%

Net Profit margin (%) 0.8% 1.6% 1.5% 1.5% 1.6%

Bank balances and cash 156 120 32 38 42 Dividend Payout Ratio (%) 178.0% 72.8% 50.0% 50.0% 50.0%

Pledged bank deposits 345 358 394 455 484 Inventory days 31.8 35.3 35.7 34.7 35.6

Inventories 318 357 396 463 506 Receivable days 95.1 101.4 100.4 96.5 99.9

Trade & other receivables 1,026 1,170 1,298 1,497 1,662 Payable days 125.5 136.3 130.4 125.2 127.3

Other current assets 3 3 3 3 3

Current Assets 1,848 2,007 2,123 2,457 2,697 Growth and Profitability

Total Assets 2,063 2,231 2,464 2,787 3,016 2015A 2016A 2017F 2018F 2019F

Revenue 12.7% 8.0% 10.3% 17.7% 10.0%

Non-current Liabilities 0 0 0 0 0 EBITDA -4.4% 40.9% 8.3% 25.6% 14.7%

Operating profit -5.3% 40.8% 17.7% 21.3% 16.2%

Short-term debts 291 421 493 536 588 Net Profit -27.7% 125.2% -0.2% 18.7% 17.8%

Trade & other payables 1,356 1,353 1,491 1,732 1,863 ROE 8.0% 13.7% 12.8% 14.2% 15.5%

Other current liabilities 2 4 4 4 4 ROA 1.5% 2.8% 2.5% 2.7% 2.9%

Current liabilities 1,649 1,778 1,988 2,272 2,455 ROIC 10.3% 8.9% 8.5% 9.6% 10.2%

Total liabilities 1,649 1,778 1,988 2,272 2,455

Financial Ratios

Equity to Shareholders 414 452 475 513 558 2015A 2016A 2017F 2018F 2019F

Minority Interest 0 0 0 2 3 Net Debt / Shareholder's Equity 32.6% 66.7% 97.0% 96.9% 98.0%

Total Equity 414 452 476 515 561 Liabilities/Assets 79.9% 79.7% 80.7% 81.5% 81.4%

Total Liability and Equity 2,063 2,231 2,464 2,787 3,016 Current ratio 1.1x 1.1x 1.1x 1.1x 1.1x

BVPS (RMB) 5.076 4.189 4.401 4.752 5.165 OCF/Financial costs 8.0x -6.1x 2.5x 2.7x 1.4x


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Company Rating Definition

The Benchmark: Hong Kong Hang Seng Index

Time Horizon: 6 to 18 months

Rating Definition

Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable.

Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable.

Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral.

Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable.

Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

Sector Rating Definition

The Benchmark: Hong Kong Hang Seng Index

Time Horizon: 6 to 18 months

Rating Definition

Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable.

Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral.

Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable.

DISCLOSURE OF INTERESTS

(1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for SMI Holdings Group Limited (00198 HK), Guotai Junan International Holdings Limited (01788 HK), Binhai Investment

Company Limited (02886 HK), Link Holdings Limited (08237 HK), GFI MSCI A I-R (CNY) (83156 HK), GFI MSCI A I (03156 HK) and CAM SCSMALLCAP (03157 HK), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report.

(4) Guotai Junan and its group companies have had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months.

(5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report.

(6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no an officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies.

DISCLAIMER

This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities

(Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. © 2017 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen’s Road Central, Hong Kong. Tel.: (852) 2509-9118 Fax: (852) 2509-7793 Website: www.gtja.com.hk

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