Company Report

China Shineway Pharmaceutical

China Shineway Pharmaceutical

3 Nov 2010

Shiny Chinese medicine sales

Earnings Summary
Year-end 31 Dec Turnover (Rmb m) Net profit (Rmb m) Change (%) EPS (Rmb) Change (%) DPS (Rmb) P/E (x) Yield (%) 2008 1,275 398 -19 0.48 -19 0.25 49.8 0.9 2009 1,633 767 +93 0.93 +93 0.37 25.9 1.4 2010F 2,103 851 +11 1.03 +11 0.24 23.3 0.9 2011F 2,594 1,065 +25 1.29 +25 0.32 18.6 1.2 2012F 3,168 1,314 +23 1.59 +23 0.40 15.1 1.5

BUY
12M target price $30.80 (+13%) Stock Data Last price: $27.35 Stock code: 2877.HK Sector: Healthcare # shares: 827.0m Mktcap:$22,618m Free float: 28.9% Major shareholder: Chairman Li ZhenJiang (71.1%)

Hong Kong/China Equity

IBES consensus EPS estimates - FY10: Rmb0.98; FY11: Rmb1.21

Price Performance Price change: 1M: - 3M:+26% 12M: +151% 12M H/L: $28.25/$10.66 12M daily turnover: 0.8m shares Analyst: Helena Qiu (852) 3926 8928 helena.hy-qiu@taifook.com

Investment Summary
We are initiating coverage of China Shineway, a manufacturer of Chinese medicine injections, capsules and granules. For 1H10, sales climbed 32% yoy to Rmb936m while net profit excluding exchange gain/loss increased 29% yoy. A key driver, sales of anti-viral drugs increased 65% yoy to Rmb338m to account for 36% of the total, while revenue from cardiovascular drugs rose 13% to Rmb377m for a 40% share. Shineway is a leader in the anti-viral Chinese medicine injection market. Its sales of Qing Kai Ling injections reached Rmb304m for 1H10, up 87% yoy and representing 90% of Shineway's anti-viral sales. Of the top eight anti-viral Chinese medicine injections, Qing Kai Ling was the only one listed on the government's Essential Drug List. Shineway now holds 70% of the Qing Kai Ling injection market after registering a 5-year CAGR of 23% in sales from FY04-09. Shineway has two new anti-viral products in the R&D stage that are expected to appear on the market in three to five years. Shineway has great potential in the country's cardiovascular medicine market. It currently has two blockbuster Chinese medicine injections with annual sales of over Rmb100m each and a blockbuster soft capsule product for cardiovascular disease. Shu Xue Ning injections recorded revenue of Rmb201m in FY09, representing a 4-year CAGR of 100% from FY05-09. Sales of Shen Mai injections reached Rmb236m in FY09, for a 5-year CAGR of 6%, while Wufu Xin Nao Qing soft capsules posted Rmb210m in FY09, a 5-year CAGR of 6%. The company currently has 12 products in the R&D stage for the treatment of cardiovascular disease. According to MENET, a research institute under the State Food and Drug Administration, sales of cardiovascular Chinese medicine grew at a 3-year CAGR of 22% to Rmb35b in 2009, above the 19% for all cardiovascular medicines, and representing 35% of total sales of cardiovascular drugs. In our view the consolidation of the Chinese medicine injection market since the "Ci Wu Jia" scandal (Ci Wu Jia Chinese medicine injection made by Wan Da Shan Pharmaceutical in Heilongjiang Province led 3 people die) in 2008 will benefit Shineway. Its sales of Chinese medicine injections rebounded quickly in 2H09, up 47% hoh and 51% yoy in 1H10. According to news reports, 160 of 308 Chinese medicine injection manufacturers ceased production in 2010. Receding competition will no doubt further strengthen the market share of the leading players. Shineway has an annual extraction capacity of 10,000 tonnes, and a production capacity of 2b injection vials, 3.5b soft capsules and 1.9b granule bags. It should have expanded its capacity to 3.2b injection vials and 3.4b bags, and doubled extraction to 20,000 tonnes, by end-FY11. The company has net cash of Rmb2.3b on hand, supporting its expansion on internal resources. Meanwhile, we expect the dividend payout ratio to be kept stable at around 25%.

Company Background Shineway is China's largest Chinese medicine injection and soft capsule manufacturer (by sales volume and production capacity). Currently, the company has 45 medicines in regular production; 26 are covered by the National Insurance Drug List. Shineway was listed on the Hong Kong stock exchange in December 2004. Price Chart

Relative performance

Relative to HSI Index (%)

Source: Bloomberg

1M -6

3M +15

12M +142

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Company Report

China Shineway Pharmaceutical

We estimate that sales will post a 29% yoy increase to Rmb2,103m in FY10 and 23% yoy to Rmb2,594m in FY11 while underlying net profit (excluding exchange gain/loss) will jump 34% yoy to Rmb858m in FY10 and 24% yoy to Rmb1,065m in FY11. Based on an undemanding 21x FY11 P/E, which represents a 30% discount to its Shanghai and Shenzhen-listed counterparts, we derive our target price of $30.80. We have taken into account the risks pertaining to the company's operations, including: 1) the government's uncertain medicine price adjustment policies; and 2) the difficulty in gaining approval from the SFDA for the new Chinese medicine injection products.

Hong Kong/China Equity

Key product information

Medicine Cardiovascular disease Shen Mai injection Shu Xue Ning injection Huang Qi injection Wu Fu Xin Nao Qing soft capsule Anti-viral Qing Kai Ling injection Pediatric Qing Fei Hua Tan granule Qing kai Ling soft capsule Digestive disease Huo Xiang Zheng Qi soft capsule 1H10 sales (Rmb m) 112 114 21 86 304 66 19 72 Change Market share EDL/NIDL yoy (%) (%) listed +20 +24 +9 -12 +87 +26 -6 +29 35 90 70 EDL NIDL B EDL EDL NIDL B

Source: Company data, Taifook Research

12-month forward P/E

12-month forward P/B

Source: Bloomberg, Company data, Taifook Research

Source: Bloomberg, Company data, Taifook Research

Company Report

www.taifook.com

Taifook Research is available electronically on bloomberg, taifook.com, securities.com and Thomson Reuters

Company Report

China Shineway Pharmaceutical

Hong Kong/China Equity

P/L Summary
Year-end 31-Dec Turnover Injections Soft Capsules Granules Others Total turnover Operating profit Net exchange gain/loss and investment income Profit before taxation Taxation Net profit EBITDA EV/EBITDA 2008 2009 2010F 2011F 2012F Rmb m Rmb m Rmb m Rmb m Rmb m 724 335 195 22 1,275 575 (99) 476 (78) 398 611 37.0 932 390 280 32 1,633 713 171 884 (117) 767 758 29.8 1,250 474 342 37 2,103 966 41 1,006 (156) 851 1,010 22.4 1,553 579 410 52 2,594 1,213 40 1,253 (188) 1,065 1,281 17.7 1,897 706 492 73 3,168 1,506 40 1,546 (232) 1,314 1,598 14.2

Financial Summary
Financial Year Key financial data: Non-Current assets (Rmb m) Current assets (Rmb m) Current liabilities (Rmb m) Net current assets/(liabilities) (Rmb m) Shareholders' funds (Rmb m) Total equity (Rmb m) Net cash/(debt) (Rmb m) EPS (Rmb) DPS (Rmb) Key ratios: Current ratio (x) Return on equity (%) Operating margin (%) Net margin (%) EBITDA margin (%) Effective tax rate (%) Dividend payout (%) Net profit growth (%) EPS growth (%)
Disclaimer
Issued by Tai Fook Research Limited (TFRL) licensed corporation to carry on Type 4 (advising on securities) regulated activity for the purpose of the Securities and Futures Ordinance (Cap. 571), approved for distribution by: Tai Fook Securities Company Limited (TFSCL) and/or Tai Fook Investment Services Limited (TFIS) (both are licensed corporations to carry on Type 1 (dealing in securities) regulated activity) in Hong Kong. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable and in good faith but no representation or warranty, express or implied, is made by TFRL, TFSCL, TFIS or any other members of the Tai Fook Securities Group (TFSG) from which this document may be received, as to their accuracy, completeness or correctness. All opinions expressed herein are subject to change without notice. This document is for information purpose only. Descriptions of any companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed expressly or impliedly as, an offer to buy or sell securities. TFRL, TFSCL, TFIS and/or TFSG, their directors and/or employees and/or their associates may have a long or short position in any of the securities mentioned in this document at any time. TFSG may also provide financial and business advisory, corporate financing or other related services to the companies mentioned in the documents and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the said securities from time to time in the open market or otherwise, in each case either as principal or agent. This document may not be reproduced, distributed or published for any purpose without prior consent of TFRL.

2005 307 1,538 215 1,323 1,630 1,630 1,348 0.40 0.22 7.2 20.3 41.2 39.9 44.3 1.6 54.9 27.1 (5.3)

2006 298 1,710 238 1,472 1,769 1,769 1,584 0.40 0.22 7.2 18.8 40.7 39.6 44.2 14.0 54.6 0.5 0.6

2007 364 2,044 339 1,705 2,069 2,069 1,678 0.59 0.38 6.0 23.7 42.0 48.4 45.2 14.8 64.1 47.3 47.3

2008 413 2,014 290 1,724 2,137 2,137 1,586 0.48 0.25 7.0 18.6 45.1 31.2 47.9 16.4 51.9 (18.8) (18.8)

2009 494 2,263 318 1,945 2,439 2,439 2,071 0.93 0.37 7.1 31.5 43.6 47.0 46.4 13.2 39.9 92.7 92.7

Notes: (1) "$" refers to HK dollars throughout this report unless otherwise stated. (2) Share prices and indices are as of 2 Nov 2010 (HSI: 23,671)

Recommendation Policy BUY if current price is more than 10% below AFV. HOLD if current price within +/-10% from AFV. SELL if current price is more than 10% above AFV.
AFV (Assessed Fair Value) is arrived at based on various appropriate valuations, including P/E, Yield, NAV, DCF, EV/EBITDA, and management quality, etc, with regard to prevailing interest rates and comparative valuations.

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