Implications Bioxun primarily produces and sells transfusion safety test kits used inimmunodiagnostics. The firm’s micro-column gel immunoassay providestesting for blood type, antibodies, cross matching of blood, hemolyticdisease and more. Bioxun sells mostly through retail agents. In 2011 it hadrevenues of Rmb80.86mn, net profit of Rmb36 mn and net margins of44.5%. Bioxun has pledged 2012/13/14 net earnings (excluding nonrecurringgains and losses) of Rmb45/50/55 mn. If Shinva takes a 75%stake, the additional earnings would represent roughly a 20% increasefrom our 2012/13/14E net earnings of Rmb176/222/280 mn. The privateplacement is equivalent to 8.3% of Shinva’s capital stock, and implies anacquisition price of less than 10X 2012E P/E. We think the acquisition aimsto extend Shinva’s product line and provide a platform to develop biologicdiagnostic tests. While we don’t see much synergy in the short term, in thelong term Shinva might expand its diagnostics line, developing it into animportant earnings driver. Valuation We maintain our earnings forecasts, EV/GCI vs. CROCI/WACC 12-monthtarget price of Rmb33.7 (25% upside), and Buy rating as the acquisitionawaits approval from shareholders, the Shandong SASAC and the CSRC. Key risks Slower-than-expected increase in profitability; delayed product launch.

Dong-E E-Jiao announced 9M11 results, with revenue of Rmb1,863mn(+5% yoy); net earnings were Rmb613mn (+46% yoy, below our full yearestimate of +64%). 1) E-Jiao’s block sales recovery was slower than weexpected. We calculate E-Jiao block sales grew by 33% yoy in 3Q11 (vs. 17% yoy in 1H11), a pickup in ytd terms. However, we think 3Q11 salesvolume is still down by 15% yoy, slower pick-up than we expected. 2) EJiaowill fully spin off its distribution segment and sell its 65% holdingin Hubei Jinma to Beijing Pharmaceutical Co. Ltd, moving faster than weexpected. We estimate the distribution section will contribute revenues ofaround Rmb200mn (-63% yoy) in 2011E. What to do with the stock。 We maintain our Buy on the shares. E-Jiao block sales volume is upqoq, and volume has been flat yoy since Oct. We also expect seasonalhigh selling in 4Q11E (e.g., 4Q10 accounted for 35% of 2010 sales). Wethink company will retain its value return strategy, and possibly raise EJiaoblock price after sales get back on track this year. Valuation: Due to3Q E-Jiao block sales below our expectations, and our expectation of aprice increase in 2012E, we cut our revenue forecast by 6%/3%/3%, andrevise our net earnings forecast by -6%/2%/5%; our Director’s Cut based12m TP is unchanged at Rmb52.9, implying 30X 2012E P/E. Risks: Slowerthan-expected E-Jiao block sales volume; higher raw material costs.

Kunming Pharma announced 9M11 results, with rev. of Rmb1,706mn(+32% yoy) and net profit of Rmb92mn (+50% yoy); 3Q11 rev./net profit up41%/24% respectively, largely in line. We see 1) sustained growth fromcore products. Tianxuanqing’s 3Q revenue increased around 40% yoy as aresult of promotions of scientific advances. Furthermore, Xuesaitongpowder syringes’ sales volume increased by about 50% yoy, benefitingfrom the aggressive sales channels and agent coverage expansion. Thesetwo main products accounted for roughly 50% of TCM rev. and are maindrivers of company growth. 2) Distribution segment exceedingexpectations. We est. 9M11 distribution sales is up by around 40% yoy,but 9M11 net earnings of less than Rmb5mn, a relatively small contributorto company earnings. 3) higher-than-expectation 3Q11 selling costs ofRmb117mn, 18.5% of rev. vs. 16.8% in 1H11, mainly due to greater effortsin Tianxuanqing’s promotion, and adjustment in proprietary selling andagent’s joint effort. What to do with the stock。 We maintain CL-Buy rating. Our calculation suggests a 15% drop in raw herbTCM prices, esp. Sanqi, and could boost 2012E-13E net profit by 5%. Sanqiprices have already declined by 30% compared with May 2011’s high. If thecurrent Sanqi price remains steady, costs could go down by 15% on average. We think earnings might surprise in 2012E. Valuation: We raise our distributionestimates, and 2011E-13E rev. by 7%/9%/9%; thus, EPS increases by 0.3%. OurDirector’s Cut based 12m TP remains Rmb18.3, implying 29X 2012E P/E. Risks:Rising TCM costs; slower-than-expectation reform progress in TCM plants.

What's changed Oct 15, Kunming Pharma announced a public offering of no more than 68mnshares (vs. current 314.18mn shares) to unspecified parties. According to theannouncement, the offering price should be no lower than the avg price of thecompany's shares in the 20 trading days before the publication of the offeringprospectus or the avg price of the previous trading day. Per the statement, theoffering is expected to raise around Rmb700mn, for projects on: 1) Intl. dosagescapacity expansion; 2) Small-vol. injection capacity expansion; 3) R&D centersetup; 4) Traditional Chinese Medicine (TCM) capacity expansion. Totalinvestment needed for these projects was stated at Rmb769mn. Theoffering requires approvals from the general shareholders’ meeting and CSRC. Implications Public offering aimed at long-term growth: The products involved includeall major TCM specifications, except for the Xuesaitong frozen powder injection,for which the additional 30mn units are planned to come online in 1Q12E. Webelieve the current round of capacity expansion will secure the company’scapacity needs for the next 5-8 years. We estimate 2011-15E revenue CAGR ofproducts involved to reach 25.5%: We estimate these products to account for57% of all TCM revenues in 2011E. According to the company, most of theseproducts will achieve full capacity by 2015E, and we expect 2011-15E rev. CAGRfor: 1) artemether injection to be 24%; 2) Tianxuanqing to be 40%; 3) Xuesaitonginjection to be 20%; 4) TCM plant to be 27%. R&D project to enhanceinnovation capabilities: The company will focus on artemether injection,synthetic scutellarin and mangiferin series, and will strive to obtain approval of:1) artemether and c-GMP compliant lines; 2) 2 Grade A new chemical druglicenses and 1 new TCM drug license, to bolster the company’s growth. Valuation Retain CL-Buy and Director’s Cut 12-m TP of Rmb18.3 (29X ‘12E P/E, 22% upside). Key risks Rising raw material prices; uncertainties over pending offering.

Zhongheng announced 1H11 results with revenue of Rmb752mn (up 98.4%yoy, 31.4% of our full year estimate, proportionally in line with prior years),net earnings of Rmb350mn (up 158.9% vs. 151.6% of 2011E GHe, 34.9% ofour full-year estimate), and ex-post earnings up 120.4% (vs. 120.0% of2011E GHe), in line with expectation. 1) Xueshuantong growth belowexpectation, with sales of Rmb578mn. Our calculation suggests 1H salesvolume of 80mn units, up 92.4%, and is slightly below our expectation of120.6%. 2) Gross margin (GM) down by 10.0 pps, within expectation. Due to rising raw material and labor cost, 1H pharma GM dropped by 6.7pps. The fast growing property business, which has relatively low margin,further dragged down the overall GM. 3) Better-than-expectationperiodic cost control. As Buchang has assumed the role of distributionmanager, and with benefits from scale, SG&A expenses rose only by43.8%, far below the growth in sales. What to do with the stock。 Company’s sales agreement with Buchang is still under negotiation,so we maintain our CL-Buy rating, earnings estimate and 12m TP ofRmb26.7 before further disclosure. We think Buchang’s execution of theexisting sales agreement is below expectation, so the sales model andchannel management needs to be re-evaluated. The negotiation willbolster development for dual parties. With regard to possible outcomes,we present 3 cases and analyze respective impact for 2011E-13E earnings(Exh.1). 1) Current case: Sales agreement unchanged, Buchang carriesthrough the agreement with Zhongheng’s toll. 2) Moderate case:Zhongheng recalls previous distributors, and Buchang remains a majorone. 3) Worst case: agreement forfeited, cooperation terminates. Ifworst/moderate case happen, we think upside for the share pricewill be limited in the short run. We will publish further analysis aftermore details are disclosed.

Shinva reported 1H11 revenue of Rmb954mn (+86% yoy, 47.8% of 2011EGHe); net profit of Rmb49mn (+95% vs. GHe of 97% yoy, 45.8% of 2011EGHe), in line with expectations. 1) Rev from distribution of Rmb194mn,above expectations. Company acquired 3 distributors in 2H10, and wethink they contributed limited net earnings of less than Rmb5mn in 1H11. 2) Rev from mfg. up 59.9%, in line. Disinfection and sterilization (D&S)equipment, the core product, enjoys rapid growth from market expansion,and we expect this rate to remain at 30%+. 3) Net margin from mfg. ataround 5.74%, +0.6pp yoy, due to better cost control and higher marginfrom new products. We think an improvement in mgmt capability will leadto SG&A cost savings and drive net margins further up in the future. What to do with the stock。 Buy maintained: 1) We estimate new business 2010-13E sales to growat a CAGR of 30%, and see continued rapid growth in D&S equipment inthe next 3 years. Hospital-use equipment should also accelerate, owing tohospital D&S integrated solutions. 2) Growth from new business. Due tolimitations in funding and training, hospital D&S integrated solutions havenot maximized potential; we expect new orders to drive future profitability. Catalyst: Potential M&A. Shinva has expressed its will to acquire highqualitycompanies in the equipment, consumables and services sectors,and we are positive on the company's acquisition plans. Valuation: Weraise slightly distribution rev CAGR, hence we raise our 2011E-13E revforecast by 2% and net profit by 0.1%. We maintain our DC-based 12-m TPof Rmb43.1, implying 34X 2012E P/E and 24% upside. Risks: Higher-thanexpectedraw material cost; slower new order growth.

Last night, Zhongheng (ZH) announced results of its negotiation withBuchang (BC) on their sales agreement. Because BC failed to accomplishsales goals in its prior Protocol of General Agency, ZH stated it wouldterminate their agreement in the long-term interest of the company and itsshareholders. The company also stated it would further investigate breachof contract afterwards. Analysis。 BC’s contribution to Xueshuangtong (XST) sales has been limited,according to the announcement; BC’s sales team completed less than 5%of the sales target in 1H, per management, mainly due to: 1) a lack ofknowledge in XST’s sales activity and ineffective sales channels; 2) BC notimplementing the necessary academic promotion as indicated in the salesagreement with ZH; and 3) ongoing conflicts between BC and ZH’sprevious distributors. Despite the possible near-term negative impact to the company’s earnings,we believe termination of the agreement should prevent further conflicts. Should ZH recall the distribution rights from BC, we believe it could focuson building its own sales channels: 1) Improve policies and detailedmanagement plan on its original market segment; 2) Increase coverage tonew hospitals and mid-/low-end medical service providers; 3) Enhancetendering process; 4) Deepen academic promotions. ZH expects to securesales of 235mn bottles of XST in 2011, only 10mn bottles less than ourforecast. We think this goal could be too aggressive to achieve given theagreement has now been terminated. Implications。 Our estimates and target price are under review pending further analysis.

NHWA announced 1H11 results with revenue of Rmb776mn (up 21.9%yoy), and net earnings of Rmb57mn (up 35.7% yoy), in-line withpreliminary results and our expectations. 1) Anesthetics sales rose 13.3%(vs. GHe of 21.0%) yoy, with core products Liyuexi/Fu’erli up 20%+/15%,and other anesthetic products up 10%-. We think as NHWA posts salesstaff by product category, 2011E sales growth of the segment will pick upand stay at 20%. 2) Psychotropic(Psy.)/API/Other dosage achievedhigher-than-expected growth. NHWA’s products are excluded fromNDRC’s CNS price control list released on Aug 4, so the price overhanghas been removed, and we expect high growth in 2H11E. In addition, salesconsolidation and subsidiary Hengyuan’s earnings normalization havedriven up Psy./API growth. 3) Distribution sales grew by 24.2% (vs. GHeof 19.0%) from vigorous development and we believe growth will remainhealthy in 2H11E. 4) Gross margin sits at 37.2% (down 1.1% yoy), due toslightly slower growth in anesthetics, which enjoys highest GM, andhigher contribution from distribution segment, which has lowest GM. Wethink 2011E GM will return to 38.0%. 5) Selling/G&A expenses are downby 1.6/1.0 pps, mainly driven by economies of scale, gradual maturity inR&D and higher growth in distribution segment. We think company’s costcontrol measures will be sustained. What to do with the stock。 We maintain Buy as we think 1) new product Dexmedetomidine, whichcould act as both a sedative and an analgesic, will be approved by Sept2011. The product has passed on-site inspection and only the finalapproval letter is pending. 2) Per management Fentanyl will be approvedand launched by end of 2011. Valuation: We increase our 2011-13Eestimates of sales by 2%/3%/4% and earnings by 0.3%/0.3%/0.4%, due toadjustment in distribution/anesthetics segments respectively. Our 12mEV/GCI vs. CROCI/WACC TP remains unchanged at Rmb24.6, implying 37X2012EP/E. Risks: Slower-than-expected drug approvals.

Dong-E E-Jiao announced 1H11 results, with revenues of Rmb1,280mn (up2.9% yoy, 39.5% of our 2011E GHe), and net earnings of Rmb450mn (up 47.3%yoy, 46.6% of our 2011 GHe; proportion in line with prior years). However, EJiao’ssluggish revenue growth was due to 1) medical trade earnings ofmerely Rmb145mn, down 55.8% yoy. This is because the company hasinitiated a spin-off process for the medical trade business, and will focus onthe medical manufacturing segment. The process is faster than our priorexpectation, and we estimate 2011E medical trade sales to drop by 55%. 2) EJiaoseries up by 17.3%, and our calculation suggests that E-Jiao block volumeis down by 30%-40%, whereas E-Jiao Compound Syrup volume up 20%+. What to do with the stock。 We maintain Buy because we think 1) E-Jiao block sales will recover as thecompany’s value return strategy takes effect. We think the company willbook profit on 4Q11 seasonal high selling (i.e, 4Q10 accounted for 35% of2010 sales). 2) Compound E-Jiao Syrup will grow at 2010-15 CAGR of 20%-25%, as the company enhances promotion efforts, and we think the productwill be the new highlight in the future. 3) Channel expansion to speed up. EJiao’spredominant products are OTC drugs (over 80% of total sales), and by2015E company's split among OTC/health products/prescription drugs willbe 5:3:2, which implies high growth rate in products other than the E-Jiaoseries. Valuation: We lower 2011-13E sales forecasts by 8.6%/12.6%/12.5%,and EPS forecasts by 1.5%/2.9%/2.2%, due to faster-than-expected spin-off ofmedical trade business. We adjust our 12m EV/GCI vs. CROCI/WACC TP by -2% to Rmb52.9, implying 30X 2012E P/E. Risks: (1) Slower-than-expected EJiaoblock sales volume. (2) Higher raw material costs.

What surprised us. Zhongheng reported FY10/1Q11 results with earnings at Rmb398.6mn/Rmb215.8mn (+217%/+300% yoy). FY10/1Q11 revenue was Rmb1,426mn/Rmb297mn (+100%/+97% yoy). FY10 earnings were 3.4% lower than GHe ofRmb413 mn as Xueshuantong’s (XST) ex-factory price was 15% lower thanGHe, while SG&A was 40% below lower than GHe. Excluding the one-timegain from its property business, 1Q11 earnings were Rmb100 mn, up 133%yoy, exceeding our 2011E yoy growth of 103%. Excluding non-recurringitem, 1Q11 earnings account for 15% of GHe 2011E earnings, in line withhistorical seasonal levels and with our expectations. What to do with the stock. We reiterate our Buy rating (on CL) on the stock due to (1) the strong salesgrowth supports the solid performance of its Buchang partnership: weestimate 1Q XST sales volume to be 42 mn units. Given 1Q has accounted for15%-18% of full-year sales in the past, 2011E sales volume could be 233 mn-280 mn units. We thus raise our 2011E XST volume by 18% to 245 units whilecutting its ex-factory price by 15%; (2) Zhongheng also saw strong growth inother products, and we expect full-year growth of 145% yoy to Rmb260 mn forthis segment; (3) Now that Buchang will manage Zhongheng’s former salesagents, we expect to see greater operating efficiency. We raise our 2011E-2013E EPS (recurring) 6.6%/4.5%/3.6% to Rmb1.64/Rmb2.17/Rmb2.67 (andnon-recurring 2011E EPS +19.4% to Rmb1.84) due to the one-time gain fromthe property business. We raise our 12-m Director’s Cut-based TP to Rmb50.70(from Rmb47.40), implying 31X 2011E recurring EPS (unchanged), to reflectestimate revisions. Risks: Slower-than-expected growth post-Buchangpartnership and patient concerns on TCM injection use.