Cutting mid-term ROIC by 5pptWe believe quality-consistency evaluations will affect the progress of Er-Kang's starchcapsules in capturing share from traditional gelatin capsules. The auxiliary materials andtechnologies used to make preparations, including the type of capsule used, can impactwhether a pharmaceutical preparation is able to pass quality-consistency evaluations. With this in mind, we think drug makers may avoid switching to this new product,instead preferring to conservatively stick with the gelatin capsules that have been inwidespread use for over 50 years. We therefore estimate that replacement of gelatincapsules with Er-Kang's starch capsules may lose momentum in China, which leads usto cut our mid-term ROIC by 5ppt and lower our PT to Rmb17.84. Controlling shareholder to trim stake by up to 9.66% of outstanding sharesOn 7 December, the company announced that Mr. Fangwen Shuai (its controllingshareholder and effective controller) and Ms. Zaiyun Cao, who acts in concert with Mr. Shuai, plan to trim their stake in the company by no more than 9.66% of totaloutstanding shares, bringing their combined stake to 36.83%, with the action to becompleted within six months of 12 December. We remain optimistic on long-term potential of starch capsulesEr-kang's starch capsule series posted revenue of Rmb683m in H116, up 161.09%YoY. We are positive on the use of starch capsules in the pharmaceutical and foodsectors, given starch capsules' advantages over gelatin capsules (better safety andstability) and our view that replacement of gelatin capsules with starch capsules is along-term trend. Moreover, Er-Kang is the world's only company to have successfullycommercialised starch capsules, and we expect the company will leverage its starchcapsules to gradually expand into the downstream capsule drug preparation market. Valuation: Lowering PT to Rmb17.84; maintain Buy ratingWe are lowering our DCF-derived PT by 9.1% to Rmb17.84 (WACC 7.9%), implying35x 2017E PE, while our Buy rating remains unchanged.

New products likely to be main driver of revenue growthNhwa's stable overall revenue growth is mainly driven by new products, as older onesare entering a mature period with limited growth. Among Nhwa's new products, webelieve duloxetine (psychotropic), aripiprazole tablets (psychotropic), propofol(anaesthetic), remifentanil (anaesthetic) and dexmedetomidine (anaesthetic) have bettergrowth potential. Duloxetine/aripiprazole tablets have global peak sales potential ofUS$4bn/7bn, we estimate, in addition to a favourable competitive landscape in China. Rich R&D pipelineNhwa has more than 50 R&D projects, covering a full spectrum of central nervoussystem drugs. Also, it has a well-established R&D platform for original psychotropic andanalgesic drugs. It received regulatory approval for clinical trials on five of its productsin H116. New products in the pipeline may be able to support Nhwa's sustainabledevelopment. Increased spending on salesAmong Nhwa's main products, new ones are replacing older ones. A ramp-up in newproduct sales could be the key to Nhwa's growth, which requires increased spendingon sales. Nhwa's selling expense ratio rose c4ppts YoY in Q316. Valuation: Cutting price target to Rmb26.09; maintain BuyWe are raising our 2016-18E selling expense ratio 0.9/0.9/1.1ppts because we expectNhwa to increase spending on sales. As a result, our 2016-18E EPS fall 9%/10%/10%to Rmb0.54/0.69/0.90. Our new DCF-based price target of Rmb26.09 assumes WACCof 6.6% (down from 7.2%) and medium-term ROIC of 19% (down from 21% toreflect the tough operating environment facing drug manufacturers). We maintain ourBuy rating, as we believe Nhwa's business mix is improving and growth couldaccelerate on the ramp-up in new product sales.

Product line expanding. Huahai has received ANDA approvals for 3 generics and clinical trial approvals for 5drugs since August. New ANDA and clinical trial approvals are laying a foundation forthe company's long-term development at home and abroad. We believe the technicaladvantages Huahai has accumulated over many years in generic drug productionprocesses, quality control, etc., along with substantial R&D investment, will helpsupport ongoing product line updates, driving its long-term development. Fast growth overseas. Generic drug exports are one of the company's core competencies. Huahai has receivedover 20 ANDA approvals, including 6 YTD in 2016. It is gradually moving towards highdifficulty,high-value-added generics and high-end preparations. Given its global costadvantages and future product launches, its overseas preparation business is likely tomaintain rapid growth. Giving higher priority to domestic preparation business. China's rollout of policies covering areas such as drug evaluations and generic drugconformity assessments are positive for drug-makers such as Huahai, which have strongproduction processes and high-quality generic drugs. In response to policy trends, thecompany has ramped up investment in its domestic preparation business. Although thiswill result in higher marketing and R&D expenses in the short term, the advantages ofthe company's high-quality preparations should become increasingly apparent asprovince-level tendering policies fall into place, resulting in robust growth for itsdomestic business. Valuation: Raising PT to Rmb31.19; maintain Buy. The company has ratcheted up R&D spending to support long-term growth. Althoughwe expect that to negatively impact mid-term ROIC, new products are likely to drivegrowth over the long term. As a result, despite cutting our mid-term ROIC estimate to18% from 20%, we are raising our terminal growth assumption to 5% from 4%. Ournew DCF-derived PT of Rmb31.19 assumes 7.3% WACC and implies 53x/41x 2016/17EPE. We maintain our Buy rating.

Revenue growth fell in Q3 Salubris posted Q1-Q316 revenue of Rmb2.83bn, up 10.19% YoY. The growth ratewas down 4ppts sequentially. Revenue rose 3% YoY in Q3, confirming a trend ofslowing revenue growth. We believe the company is at an important stage in itsproduct mix adjustment, with big sales and stable growth for its core Talcom product. IfTalcom re-enters the Guangdong market, it would add incremental volume. Expectations for the company's revenue growth are built more on a ramp-up in secondlinedrug sales. Gross margin expanded slightly YoY in Q1-Q3; expenses under control Q1-Q316 gross margin edged up 0.5ppt YoY to 74.35%. Expenses were kept undercontrol, with the expense ratio down 0.4ppt YoY. Meanwhile, net profit jumped12.3% YoY, a slight pick-up from Q1-Q2, due to increased government subsidies. Netoperating cash flow increased 66.88% YoY. Stepping up acquisitions to build multi-product platform The company has stepped up acquisitions, as evidenced by the recent week'sannouncements of investments in Keyidun Biomedical, Salubris Biotherapeutics, Inc.,Zhongke Health and Yalun Biotech (Beijing). Those investments were mainly made toacquire/raise new capital for products under R&D and bolster the company's "drug,equipment and overall solution" presence, laying the foundation for long-term growth. Valuation: Price target of Rmb40.66; maintain Buy Our DCF-based price target of Rmb40.66 (WACC 6.8%) implies 29/24x 2016/17E PE. We maintain our Buy rating.

Stable top-line growth 9M16 sales were Rmb2.26bn, up 11.72% YoY, decelerating 1ppt from H1. Thisincluded sales of Rmb750m in Q3, up 9.84% YoY. Net profit grew 17.8% YoY in9M16. The company's core business is posting steady revenue growth, with newproducts likely to be the key driver in future. Of the company's new products launchedin the last several years, we think the following have high growth potential: duloxetineand aripiprazole tablets (psychotropic drugs) and propofol/remifentanil anddexmedetomidine (anaesthetics). Duloxetine is currently performing well in tenders;global sales of this product could peak at US$4bn, and it faces a benign competitivelandscape in China, with just three manufacturers (Lilly, Zhongxi and Nhwa). Globalsales of aripiprazole tablets could peak at US$7bn, and this product is currently sold byfour companies in China (Otsuka, Kanghong, Zhongxi and Nhwa). GPM improved on higher weighting of drug manufacturing in total revenue Gross profit margin (GPM) increased to 45.01% in 9M16, up nearly 4ppt from thesame time last year. The increase in GPM was mainly due to revenue mix changes, withthe higher-margin drug manufacturing business accounting for a bigger share of totalrevenue, and brisk growth in preparations. Overall expense ratio rose markedly The overall expense ratio reached 30.23% in 9M16, up nearly 3ppt from the same timelast year. This was chiefly driven by a higher selling expense ratio (+3.9ppt YoY). Theadministrative expense ratio stayed broadly flat, while the financial expense ratiodeclined nearly 0.6ppt YoY due to a big dip in financial expenses resulting from theparent company's bank loan repayments and wealth-management product income. Valuation: Maintain Rmb28.67 price target, Buy rating 9M16 net profit was Rmb254m, up 17.8% YoY, with net profit growth outpacingrevenue. We expect net profit to grow 15-30% YoY in full-year 2016. Our DCF-basedprice target is Rmb28.67. We believe the company's business mix is continuing toimprove, and although its major products are negatively affected by tender price cuts,the impact appears to be limited. Furthermore, we see high growth potential for certainpsychotropic and anaesthetic products launched in the past several years. We maintainour Buy rating.

Q1-Q316 revenue/net profit up 26.62%/32.17% YoY Q1-Q316 revenue was Rmb1.406bn (+26.62% YoY), net profit was Rmb607m(+32.17% YoY) and EPS were Rmb0.65. Revenue rose 21.20% YoY to Rmb550m inQ3 and net profit jumped 31.72% YoY to Rmb197m. The company expects 2016 netprofit to grow 25-35% YoY, largely in line with our expectation. Strong fundamentals for blood product segment The blood product segment is the company's main growth driver. With the approval ofnew plasma collection stations, coupled with the exploitation of the potential of oldstations, the company’s plasma collection volume could surpass 1,000 tonnes in 2016. Furthermore, rising blood product prices could further raise earnings. Currently, theprices of prothrombin complex concentrates, coagulation factors and humanimmunoglobulins for intravenous injection are up 36-50%, c15% and c15%,respectively, compared with early this year. In addition, the operation of a newproduction line for freeze-dried products will add momentum to the company's bloodproduct business development. Gross margin up slightly; expenses under control Q1-Q316 gross margin rose a slight 1ppt YoY, to 61.5%, due to higher blood productprices. Expenses were kept under control, with selling/administrative expense ratiosdown 0.2/1.5ppt YoY. Valuation: Price target of Rmb46.54; maintain Buy Our price target of Rmb46.54 is based on DCF. As a leading player in the blood productsector, with broad regional coverage, a high share of new plasma collection stations,big potential for plasma collection volume growth and a rich product line-up, the wellmanagedcompany is better placed to benefit from the strong fundamentals of theblood product sector, in our view. Additionally, the company's vaccine business is still atthe bottom and its monoclonal antibody business still requires investment, withpotential to overshoot expectations. We maintain our Buy rating.

Stable growth ahead for Talcom, which is likely to re-enter Guangdong. Salubris' Talcom and Sanofi's Plavix are about to start competing in the same biddingtier (tier 3) within Guangdong province as a result of new interim rules that take effectin January. Therefore, if Salubris is the only successful bidder in this tier, it will shareGuangdong's nearly Rmb800m clopidogrel market with just one rival, Lepu Medical. Talcom's stable growth is also supported by increasing percutaneous coronaryinterventions (PCI) and applications in neurology and preventive treatment. Given theuncertain timing of Talcom's return to Guangdong, however, we are cutting our2016/17/18E EPS and terminal ROIC. Second-line drugs have significant potential. Of the company's second-line drugs, Taijianing (bivalirudin), a class 3.1 drug, is quicklyramping up, while Xinlitan (allisartan isoproxil), a class 1.1 hypertension drug, is now inthe tendering & promotion stage and undergoing preparations to enter the nationalmedical insurance reimbursement list. Both products are likely to become new profitgrowth drivers. Increased R&D investment and stronger pipeline. Salubris has developed innovative short-, mid- and long-term product pipelines throughacquisitions and internal R&D. On the one hand, multiple new biopharmaceutical drugsare on course to launch in the next two-to-three years. In H216, Salubris plans to applyfor production approval for recombinant human parathyroid hormone 1-34 (rhPTH1-34) lyophilized powder, and it has completed phase II trial enrolment for recombinanthuman keratinocyte growth factor (rhKGF). Meanwhile, medical device products underR&D include a left atrial appendage closure device and delayed vena cava filter. Thesenew products are poised to underpin the company's growth over the long term. Valuation: Trimming price target to Rmb40.66; maintain Buy rating. Considering the uncertain timing of Talcom's return to Guangdong, we are loweringour 2016/17/18E EPS by 2% in each year to Rmb1.42/1.71/2.04, and lowering terminalROIC to 8.2% from 9%. Our Rmb40.66 price target is based on DCF (WACC 6.8%)and implies 29x/24x 2016/17E PE. We maintain our Buy rating.

Steady revenue growth; higher spending on new product development At our China A-share Conference in Shenzhen, Salubris' secretary of the board gave abriefing on the company's H116 operations and development expectations. H116revenue was Rmb1.89bn (+14.1% YoY), net profit attributable to the parent wasRmb690m (+12.16% YoY), net profit excluding one-offs was Rmb690m (+11.43%YoY), and EPS was Rmb0.66 (+11.86% YoY). The company's H116 earnings slightlymissed UBS-S and consensus expectations, mainly due to the 40.74% YoY increase inadministrative expenses resulting from higher investment in development of newproducts. R&D spending was Rmb135m (+64.80% YoY) in H116. Gross margins improved; ample cash For the pharmaceutical manufacturing segment, overall gross margin expanded 0.2pptYoY in H116. Within the segment, preparations saw a 0.59ppt YoY improvement ingross margin, while active pharmaceutical ingredients (API) saw a 5.97ppt YoY declinein gross margin due to cost increases. The company's earnings were stable, with cashflow from operating activities up 72.55% YoY. Cash on its books rose 214.86% YoY toRmb370m. Competitive landscape of clopidogrel drugs is favourable The results of Guangdong province's tender for drugs on the essential and nonessentialdrug lists in August show that the winning bidders are Sanofi and LepuPharmaceuticals. Salubris' Talcom has yet to enter the Guangdong market. However,the interim measures on transactions of drugs for medical institutions in Guangdongprovince (issued by Guangdong province in August 2016), which came into effect on 2September 2016, should help Talcom return to the Guangdong market as a nonessentialdrug. We are therefore upbeat on the sales of clopidogrel drugs in H2. Valuation: Maintain Rmb44.86 price target, Buy ratingWe derive our DCF-based price target of Rmb44.86 (WACC 6.9%) and maintain ourBuy rating.

H116revenue and net profit growth in line with expectations Hengrui's H116revenue was Rmb5.279bn (+20.36% YoY), net profit was Rmb1.314bn(+23.85% YoY), and EPS was Rmb0.56. The company's earnings growth significantlyoutpaced the industry's c10% growth, driven by its continued efforts to push forwardits technological innovation and internationalisation strategies in response to thepharmaceutical industry's slowing revenue growth. Internationalisation strategy progressing steadily Hengrui has stepped up efforts to drive its internationalisation strategy to actively tapinto overseas markets. As a result, the company's overseas sales revenue increased48.11% YoY to Rmb336m in H116. Its certified products mainly include injections(oxaliplatin, cyclophosphamide and irinotecan) and sevoflurane. Cyclophosphamide isthe main overseas revenue contributor. We estimate its overseas revenue shouldincrease 108%/63%/37% YoY to Rmb0.744bn/1.215bn/1.660bn in 2016-18. Novel drugs driving earnings growth Hengrui's H116tablet preparation revenue was Rmb1.346bn (+40.69% YoY) and grossmargin was 89.28% (+2.59ppt YoY). Remaining focused on R&D investment, thecompany's R&D spending came to Rmb489m in H116, representing 9.26% of salesrevenue. The company has been filing clinical trial applications for novel drugs orlaunching such products onto the market almost every year. Apatinib, launched in2014, has reportedly proved effective for patients with gastric cancer in China, whichsuggests the product has a promising outlook going forward. We believe its sales arelikely to reach Rmb700m+ in 2016. Valuation: Maintain PT of Rmb57.75and Buy rating We derive our PT of Rmb57.75based on a DCF model (WACC=5.8%), implying 47x2016E PE. We maintain our Buy rating.

H116 revenue/net profit growth in line H116 revenue/net profit increased 67.22%/84.98% YoY to Rmb1.303bn/527m,respectively, with EPS of Rmb0.26. While drug manufacturing revenue grew slowerYoY, ER-KANG continued to focus on channels/profit for core/non-core products,ramping up marketing efforts for new products (eg, starch and starch capsules), whichprovide solid support for fast earnings growth. Healthy growth in the starch segment The starch segment produces ordinary starch, modified starch and starch capsules. InH116, the segment generated revenue of Rmb683m, up 161.09% YoY. We arepositive on its starch capsules being widely used in the pharmaceutical and foodindustry. ER-KANG was the first to commercialize starch capsules, which we think arelikely to become the core product of the starch segment. We estimate ER-KANG'sstarch capsule revenue will increase 200%/80%/50% in 2016-18, respectively, andaccount for 26%/36%/44% of the company's gross profit, with a gross profit CAGR of64%. Finished drug segment resumed growth In H116, ER-KANG's sulbenicillin sodium for injection generated Rmb187m in revenue,up 72.90% YoY. Affected by government policies (eg, restrictions on the use ofantibiotics and caps on drug tender prices), ER-KANG's antibiotics segment hasdecreased in the past few years, with the share of finished drugs in the company'sgross profit falling from nearly 40% in 2014 to 20% in H116. As the government stillplaces rigid restrictions on antibiotics used at level 2/3 hospitals, we think it will be hardfor the finished drug segment to record fast growth. Valuation: Price target of Rmb19.63, maintain Buy We derive our price target of Rmb19.63 using DCF-based methodology (7.6% WACC)and maintain our Buy rating.

H116 revenue/net profit fell on lower demand Tofflon reported H116 revenue/net profit of Rmb726/143m, down 8.13%/28.25%YoY. Meanwhile, EPS was Rmb0.23. Revenue and net profit fell mainly because thedrug manufacturing equipment sector entered a period of capacity adjustments ondecreased demand and saw growth decline, as new GMP certification ended and drugmanufacturers' GMP-related plant upgrades peaked. Gross margin contraction amid intense competition With overall freeze-dryer prices lower amid competition, Tofflon's gross margin fell to43.34% in H116 from 47.18%. Freeze-dryers saw revenue rise 32.25% YoY and grossmargin fall 5.97ppts. Freeze-dry systems posted a 23.49% drop in revenue and a3.06ppt decline in gross margin. Other drug manufacturing equipment had revenuegrowth of 19.77% YoY, with a 3.09ppt drop in gross margin. Tofflon continued tostep up new product development and sales and promotion of system integrationprojects, enabling it to maintain rapid growth in freeze-dryers and other drugmanufacturing equipment. Enriched product portfolio thanks to acquisition Apart from the traditional drug manufacturing equipment area, Tofflon has activelyinvested in areas such as medical equipment and precision medicine. In 2015, Tofflonacquired Genuine Technology to tap into IT-enabled drug manufacturing and usheredin a manufacturing industry 4.0 era with turnkey contracting. In our view, although thecompany will likely see revenue/profit growth fall in the short term under the overallpressure on the industry, the development of the industry 4.0 business could greatlyoffset the risk of declining growth in freeze-dry system revenue in the long run. Valuation: PT of 24.99; maintain Buy rating Our DCF-based price target of Rmb24.99 uses a WACC of 8.5%. We maintain our Buyrating.

Saike Pharmaceutical will improve preparation product mix Double-Crane recently announced China Resources Saike, its wholly-owned subsidiary,received Chinese GMP certifications for its amlodipine besylate tablet (1bn tablets/year,treating hypertension and chronic stable angina) and valsartan capsule (300m capsules/year) production lines. Saike registered three types of amlodipine besylate tablets(2.5mg/5mg/10mg) with the US FDA. Amlodipine besylate tablets, as a brand-namedrug (Norvasc) made by Pfizer, were sold in the US from 1987 and generated US$991mof sales for Pfizer in 2105. Valsartan, treating mild to moderate essential hypertensionand first made by Novartis, generated US$1.284bn of sales for the original producer.We estimate Double-Crane's preparation revenue will increase c20% in 2016-18. H116 earnings increased quickly H116 operating revenue/net profit rose 10.97%/5.58% YoY to Rmb2.79bn/430m (netprofit up 30% excluding one-offs). Double-Crane focused on the development ofcardio-cerebrovascular and endocrine preparations, with revenue from drugs treatingchronic diseases up 31% YoY in H116. In this segment, revenue from Hypertensive No.0, its core cardio-cerebrovascular product, increased 4.2% YoY due to optimizedchannels/end-market retailers and low-cost drug policies. Revenue from Glurenorm, forglycemic control, rose 4.2% YoY, driven by the extension of channels to lower-tiercities. Revenue from pitavastatin increased 74.1% YoY. Decline at infusion segment narrowed While revenue at the infusion segment decreased 9.8% YoY in H116, sales volume ofDouble-Crane's new infusion products using the BFS technology rose 41% YoY. Inrecent years, Double-Crane has focused on product mix optimization and a packagingmaterial upgrade and has lifted the share of therapeutic infusion products in its salesand the share of plastic-package infusion products in its non-therapeutic segment. Theinfusion segment represented only 29% of Double-Crane's gross profit in H116. Valuation: Maintain Buy and price target of Rmb32.74 We derive our price target of Rmb32.74 using DCF-based methodology (7.7% WACC)and maintain our Buy rating.

Modest recovery in drug manufacturing revenue growth H116revenue was Rmb1.808bn (+15.34% YoY) and net profit was Rmb110m (-5.31%YoY). EPS came in at Rmb0.22. Meanwhile, Jinling maintained sound operations, with amodest recovery in manufacturing growth. Traditional Chinese medicine (TCM) revenuerose 6.39% YoY to Rmb384m in H116. In contrast, TCM product (Mailuoning) revenuefell YoY in 2014/15. Pharma distribution revenue maintained rapid growth on resource integration Revenue from chemical drugs was Rmb935m in H1, up 20.43% YoY. The chemicaldrug business mainly involves delivering drugs to Jinling's hospitals. As part of its pushfor supply chain integration in the healthcare services segment, Jinling linked its sales,healthcare and retail pharmacy platforms and maintained rapid growth inpharmaceutical distribution revenue. In 2013-15, chemical drugs had revenue growthof 18.65%/11.22%/23.24%. Sustained robust growth in healthcare services Revenue in the healthcare services segment jumped 11.31% YoY to Rmb402m in H1.With healthcare services as the key direction of its transformation, Jinling has designeddevelopment strategies for its hospitals based on their different development stages,leading to sustained robust growth in healthcare services. At Suqian Hospital, workcontinues to centre on joining the ranks of grade 3, class A hospitals. Yizheng Hospitalis using new grade 3hospital standards as its management requirements anddeveloping key specialty services, such as cardiac intervention. Anqing Hospital isfocusing on market expansion and brand building. Valuation: Maintain Rmb17.18price target and Buy rating Our DCF-based price target of Rmb17.18(WACC 8.2%) implies 31x 2016E PE. Webelieve the solid growth potential of Jinling's healthcare services segment has not beenfully priced in and maintain our Buy rating.

H1results in line with expectations H1revenue/net profit excluding one-offs jumped 14.1%/36%, matching expectations.We think the insulin market has significant potential and that Dongbao has a clearadvantage in the primary market. We see a five-year revenue CAGR of 20%+ forDongbao, as the online platform could further increase doctor/patient engagement and3rd-gen insulin could get approved. We think profit growth will outpace revenuegrowth on economies of scale. With dilution from a private placement factored in,Dongbao is trading at 43x 2017E PE, in line with its historical average. We thinkvaluation still has room to rise as 3rd-gen insulin registration progresses steadily. Insulin bucked the trend and maintained rapid growth Revenue from insulin preparations increased 19% YoY in H1. Revenue in the insulinsegment rose only 15.2%, hit by a c50% decline in exports. Since Q2, the governmenthas strengthened its supervision over distribution, causing some small distributors todestock. The destocking has not yet ended, so we slightly cut our insulin revenueforecast for full-year 2016. Insulin gross margin expanded 3.5% YoY to 87.4% butDongbao said it sees little room for further growth. The selling expense ratio decreased4.2% YoY to 23.2%. Even considering that big events are largely concentrated in H2,the full-year selling expense ratio could still be much lower YoY. Blood glucose monitoring/online platform/3rd-gen insulin progress smoothly Having taken over Bionime's distributors, Dongbao is expanding equipment sales tomore hospitals. Dongbao's plan to add 1k hospitals this year (completed 400+ in H1)and 3k within three years could drive rapid equipment revenue growth. The rising shareof self-operated outlets could boost equipment sales gross margin. Dongbao's onlineplatform, which is under beta testing with c100,000/1,000+ patient-/doctor-users, maygo online in September. The platform mainly helps doctors manage their patients, witha low cost of bringing in users. Dongbao plans to apply for insulin glargine productionin H2. Insulin aspart completed a clinical trial in July and is undergoing data cleansing,with plans to apply for production in 2017. Further, Dongbao has begun to developantidiabetic drugs other than insulin. Valuation: Raising DCF-based PT to Rmb26.30, implying 49x 2017E PE Our new DCF-based PT is Rmb26.30(WACC 6.2%). Major changes: 1) slightly cut2017/18E earnings; 2) raise 3rd-gen insulin's chance of approval to 90% from 75%; 3)roll over valuation to end-2017; and 4) slight EPS dilution post private placement.

Results growth underpinned by novel drugs and internationalization. We are positive on the boost to the company's results from novel drugs andpreparations exports. Benefiting from innovation, product mix optimisation andpreparations exports, Hengrui's earnings growth has been notably faster than theindustry average (c10%). We estimate its revenue will increase 26%/18%/15% in2016-18 with gross profit growing at a CAGR of 16%. Anti-tumour drug revenue growth driven by novel drugs and exports. We believe China's anti-tumour drug market structure will be more aligned with globalmarket, with increasing novel drug sales. Sales of oxaliplatin (anti-tumour), docetaxeland irinotecan have increased steadily. Apatinib (a novel drug) has a good treatmenteffect, and we expect quick revenue growth given its visible treatment effect onChinese gastric cancer patients and the likely shift to higher tier status. The company'sdistribution partner for cyclophosphamide in the US is Sandoz and we expect its marketshare will expand further. We estimate its anti-tumour drug revenue growth at29%/16%/13% in 2016-18 with gross profit growing at a CAGR of 14%. Anaesthetic drugs benefited from tiered quality tendering system. Hengrui has leveraged its advantages in tiered quality tendering system to strengthenpromotion of its anaesthetic drugs and has achieved good results for its flagshipproducts. We estimate its anaesthetic drug revenue will increase 17%/13%/11% in2016-18 with gross profit growing at a CAGR of 12%. Valuation: Maintain PT of Rmb57.75 and Buy rating. We are raising our 2016-18E EPS by 7%/6%/6% because we are optimistic onHengrui's novel drug sales and exports. In addition, we are cutting our reinvestmentrate to 29% from 50% and second stage ROIC to 20% from 30%, while raising ourterminal growth assumption to 4.5% from 2.5%. We derive our PT of Rmb57.75 basedon DCF model (WACC=5.8%), implying 47x 2016E PE.