Completed 06 Sep 2016 06:29 PM HKT

Disseminated 07 Sep 2016 09:27 PM HKT

Asia Pacific Equity Research
07 September 2016

Neutral
Previous: Not Rated
Sinopharm 1099.HK, 1099 HK
Price: HK$40.55
Largest pharma distributor continue to expand; Neutral
Price Target: HK$44.00
on rich valuation

We assume coverage of Sinopharm (1099.HK) with a Neutral rating China

and Dec-17 PT of HK$44.0 from a Not Rated designation (OW rating and Healthcare
$44 price target prior to NR designation). As the largest Chinese Isabella Y. Zhao, CFA
AC

pharmaceutical distributor with the highest market cap, ample liquidity (852) 2800-8534
and a proven track record, we believe Sinopharm will continue to outgrow isabella.zhao@jpmorgan.com
the industry average with its increasing market consolidation, margin Joanne Cheung
(852) 2800-8596
expansion from improving operational leverage and further upside from
joanne.cy.cheung@jpmorgan.com
new initiatives. Yet, Sinopharm has outperformed the MSCI healthcare J.P. Morgan Securities (Asia Pacific) Limited
index by 30% YTD, trading at 19x 2017E, vs its 17% EPS CAGR in 2015-
2018E; we believe its growth potential is largely priced in. We advise Price Performance
45
investors to wait for a better entry point. 40

 Dominant market share with sustainable above-industry growth: HK$

35
30
Sinopharm led the pharmaceutical distribution industry with the largest 25
market share of 18.4% in 2015 (source China Association of 20

Pharmaceutical Commerce), up from merely 4.4% in 2003. It has Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

1099.HK share price (HK$)

consistently delivered above-industry average growth by 3-5%, thanks MSCICNX-HLTH (rebased)

its increasing economies of scale and continuous operational Abs

YTD
34.3%
1m
4.6%
3m
8.3%
12m
51.3%
improvement. Rel 28.8% -1.8% -1.5% 35.5%

 Beneficiary of faster industry consolidation: We believe recent

government policies to streamline the supply chain by stricter GSP and
two invoice systems will eliminate smaller distributors, which will likely
foster faster market share for Sinopharm ahead.
 Multiple catalysts ahead: We see further potential upside from recent
initiatives such as: 1) e-commerce with O2O platform; 2) financial
leasing 3) retail pharmacies expansion; and 4) management incentive on
going SOE reform. All offer long-term earnings growth potential, in our
view.
 Risks: 1) unexpected industry slowdown; 2) margin contraction on harsh
price cuts from government; 3) higher finance cost.

Sinopharm (Reuters: 1099.HK, Bloomberg: 1099 HK)

Rmb in mn, year-end Dec FY13A FY14A FY15A FY16E FY17E Company Data
Revenue (Rmb mn) 166,866 200,131 227,069 257,447 291,236 Shares O/S (mn) 2,850
Net Profit (Rmb mn) 2,250 2,875 3,761 4,755 5,232 Market Cap (Rmb mn) 99,555
EPS (Rmb) 0.89 1.11 1.36 1.67 1.84 Market Cap ($ mn) 14,902
DPS (Rmb) 0.25 0.26 0.31 0.38 0.42 Price (HK$) 40.55
Revenue growth (%) 22.2% 19.9% 13.5% 13.4% 13.1% Date Of Price 05 Sep 16
EPS growth (%) 8.2% 24.7% 22.2% 22.7% 10.0% Free Float(%)
ROCE 11.8% 11.6% 12.2% 13.5% 14.3% 3M - Avg daily vol (mn) 3.87
ROE 11.5% 11.7% 13.1% 14.9% 14.6% 3M - Avg daily val (HK$ mn) 147.24
P/E (x) 39.2 31.4 25.7 20.9 19.0 3M - Avg daily val ($ mn) 19.0
P/BV (x) 4.0 3.3 3.2 3.0 2.6 MSCICNX-HLTH 146.86
EV/EBITDA (x) 16.6 13.5 11.2 10.4 9.3 Exchange Rate 7.76
Dividend Yield 0.7% 0.7% 0.9% 1.1% 1.2% Price Target End Date 31-Dec-17
Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 27 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.

www.jpmorganmarkets.com
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Key catalysts for the stock price:
• Major announcement of M&A seen as
good for future cash flow
• Tenders drive industry-wide sales growth
• Steps to absorb two A-share listed major
subsidiaries
Upside risks to our view:
• Healthcare H share re-rating & sector rotation
• Improving operational cash flow on faster cash
collection from hospitals
• Lower than expected financing cost on reducing
interest rate on borrowing
Downside risks to our view:
• A slower pace of acquisition of new distributors
• Margin contraction from EDL implementation
• Further deterioration of hospital payment term
• Rising interest rate driving up finance cost

Key financial metrics FY15A FY16E FY17E FY18E Valuation and price target basis
Revenues (LC '000) 227,069,433 257,447,354 291,236,380 328,028,626 Our Dec-17 price target of HK$44 is based on DCF. The nature of
Revenue growth (%) 13.5% 13.4% 13.1% 12.6% the industry leads us to apply a terminal growth rate of 4%
EBITDA (LC '000) 9,903,443 11,573,451 12,944,187 14,617,453
EBITDA margin (%) 4.4% 4.5% 4.4% 4.5%
Tax rate (%) 23.1% 23.1% 23.1% 23.1%
Net profit (LC '000) 3,760,649 4,754,586 5,232,021 5,937,214
EPS (LC) 1.359 1.668 1.836 2.083
EPS growth (%) 22.2% 22.7% 10.0% 13.5% Sales mix (2016e)

Other business
DPS (LC) 0.31 0.38 0.42 0.48
operations
BVPS (LC) 10.86 11.83 13.25 14.86
2%
Operating cash flow (LC '000) 13,560,446 (295,795) 7,096,347 5,619,536 Retail
Free cash flow (LC '000) 12,544,633 (1,386,693) 5,862,273 4,229,560 pharmacy
Interest cover (x) 4.6 5.8 5.9 5.9 4%
Net margin (%) 1.7% 1.8% 1.8% 1.8%
Sales/assets (X) 1.6 1.7 1.8 1.8
Debt/equity (%) 324.8% 321.7% 289.6% 298.1%
Net debt/equity (%) 13.1% 27.0% 19.0% 17.2% Pharmaceutica
l distribution
ROE (%) 9.8% 10.9% 10.6% 10.6%
94%
Key model assumptions FY16E FY17E FY18E FY19E
Overall distribution growth 15.0% 14.5% 10.0% 10.0%
GM assumption 8.23% 8.17% 8.18% 8.15%
Sales growth from acquisitions 4.3% 3.1% 3.5% 4.0%
Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates.

Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates

Sensitivity to FY17E FY18E FY17E FY18E EPS (LC) FY16E FY17E
1% chg in sales volume growth 0.6% 0.7% 0.7% 0.8% JPMe old 1.68 2.26
10bp chg in distribution GM 2.7% 3.0% 2.7% 3.0% JPMe new 1.67 1.84
1% increase in interest rate 0.0% 5.0% 0.0% 4.5% % chg (0.01) (0.19)
AR days change by 1 day 0.0% 0.5% 0.0% 0.5% Consensus 1.64 1.86
Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates.

Comparative metrics
CMP Mkt Cap P/E (x) EV/EBITDA (x) P/BV (x) YTD
LC $Mn FY16E FY17E FY16E FY16E FY15E FY16E Stock perf.
SINOPHARM-H (NC) 39.75 14,180 20.9 18.3 10.2 9.0 13.8 29.6
CHINA MEHECO C-A (NC) 18.85 2,857 24.5 19.7 15.8 12.6 3.2 6.9 14.8
CHINA NATIONAL ACCORD (NC) 68.90 3,515 29.2 23.1 21.5 14.6 3.3 23.0
CHINA NATIONAL MEDICINE (NC) 3.85 2,200 13.9 11.9 8.8 7.7 1.2 3.0 (26.5)
CHONGQING ZHIF-A (NC) 17.24 4,129 221.0 82.1 118.8 64.1 12.6 1.7 (4.8)
JOINTOWN PHARM-A (NC) 19.94 4,916 39.1 31.5 26.2 21.7 3.2 6.3 2.5
TONGRENTANGCM (NC) 10.14 1,094 19.3 17.0 12.4 11.0 3.9 3.1 4.2
SHANGHAI PHARM-H (NC) 21.35 8,079 15.5 14.0 11.8 10.7 12.9 29.9
Source: Bloomberg; Price as of 09/02/2016

2
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Table of Contents
Investment Summary ...............................................................4
Investment Positives................................................................8
Investment Risks ....................................................................13
Valuation .................................................................................14
Financial Analysis ..................................................................15
Company Overview ................................................................18
SWOT Analysis .......................................................................20
Company Shareholding Structure ........................................21
Company History....................................................................22
Key Management Profiles......................................................23
Investment Thesis, Valuation and Risks ..............................24

3
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Sinopharm was established in 2003
and is the largest pharmaceutical
distributor in China with an
approximately 18.4% market share.
The company was listed on the
Hong Kong Stock Exchange in Sept.
2009. Sinopharm's major chunk of
revenue comes from pharmaceutical
distribution, but it has also started
operating its own flagship retail
pharmacies and it also involved in
production and sale of
pharmaceutical and related
products. The largest shareholder is
Fosun Investment, which is also a
major pharmaceutical manufacturer
based in Shanghai.
Revenue breakdown by business
segment (2015)
Retail
pharm
acy
4%
Pharm
aceutic
al
distrib
ution
94%
Source: Company data
Investment Summary
Sinopharm Pharm primarily generates revenue through pharmaceutical distribution.
It’s the largest pharmaceutical distributor in China with approximately an 18.4%
market share and it has grown significantly from 18.4%, 18.1% in 2015 and 2014. It
has maintained its market leading position for over 5 years and we believe its market
share will reach 25% by 2020. Also, as the distribution industry develops and
becomes more similar to the developed world economies where Top 5 players enjoy
60-80% market share as opposed to 40% in China, the market leaders should have
significant upside as the industry grows and Chinese government implements more
stringent regulatory policies which will eventually phase out the smaller players.
Looking forward, Sinopharm aims to transform itself into an integrated wholesale
pharmaceutical distributor. Over the years Sinopharm’s growth has outpaced the
industry growth by 3-5% and we expect this margin advantage to continue over the
next years. We see continuous margin expansion with 1) its fast expansion of retail
pharmacies business as retail pharmacies carries higher GM (40%) and NM (10%)
vs. Sinopharm distribution GM (8%) and NM (2%); 2) improving operational
leverage; 3) lowering financial cost. Furthermore, we see further upside from new
initiatives, including e-commerce pharmaceutical sales, which currently generate
Other
busine sales of over Rmb500mn, and financial leasing business.
ss
operati
ons
2%

Figure 1: Sinopharm – Revenue and growth rate 2012-2018E Figure 2: Sinopharm – EBIT over revenue 2012-2018E
Revenue YoY EBIT EBIT Margin

350,000 40% 16,000 4.3%

4.2%
4.1% 4.2%
300,000 35% 14,000
4.1%
34% 30% 12,000 4.1%
250,000 4.0%
4.0% 3.9%
25% 10,000
200,000 3.9% 3.8%
20% 8,000
22% 328,029 13,637 3.7%
150,000 20% 257,447
291,236 6,000 12,002 3.6%
15% 3.7% 10,657
227,069 9,169 3.5%
100,000 200,131 4,000 3.6% 7,862
166,866 13% 13% 13% 13% 10% 6,102 3.4%
136,502 2,000 4,869
50,000 5% 3.3%
0 3.2%
0 0% 2012 2013 2014 2015 2016E 2017E 2018E
2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15
Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15

4
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

1H16 Results Takeaways

 Strong 1H16 results: Sinopharm reported strong 1H16 results with sales
growing 15% and net profit surging 29% YoY on other gains of Rmb427mn;
Excluding other gains, net profit grew 17% YoY, above industry growth of 10%.
More positively, AR days improved to 100 days vs 115 days in 2015 and
financial cost decreased by 13% YoY at 0.79% of sales, down from 1.04% in
1H15. However, operating cash flow was down to Rmb1.6bn from Rmb1.8bn in
1H15 on longer collection period from hospitals.
 New regulations on pharmaceutical sector are positive to the sector as whole
and large players like Sinopharm. The roll out of new regulations on the sector,
i.e. VAT’s replacement of business tax, Two-invoicing system and new GSP
standards, are beneficial to the sector as a whole especially large players like
Sinopharm. Given that VAT is expected to be cheaper than the business tax,
management expects tax expenses to be lower in future. For new GSP standards,
although a few small affiliate distributors have failed the GSP assessment, the
negative impact is minimal and it should be offset by the benefit from
improvement of overall service quality in the sector. For the two-invoicing
system, which is expected to be implemented by 2017, it will standardize the
process of drug distribution across the nation and therefore drive away inefficient,
small players, which is also positive to the sector. Despite stricter regulations,
management expects Sinopharm to continue grow at 2-3% faster than the
industry average in 2016.
 Eye on M&A of retail businesses supported by stable OCF and low cost
debts. Management is eying retail business acquisition especially in retail
channels such as 1) direct-to-pharmacy (DTP), 2) in-hospital drug stores and
3) near-hospital drug store. It will also help the company's competitiveness as
small, social distributors are not capable to do so.
 Share incentive scheme will incentivize managements towards long term
growth of the company. In Aug-2016, Sinopharm announced a share incentive
scheme that will take effect for 10 years once adopted. The key of the scheme
mentioned by management is that the granting of shares is based its ROE and net
profit growth compared to industry. According to the announcement, the key
performance assessment targets are as follow:
 2016: ROE>11.5% & Net profit grew at a CAGR of >12% based on 2015;
 2017: ROE>12.7% & Net profit grew at a CAGR of>12% based on 2015;
 2018: ROE>12.7% & Net profit grew at a CAGR of>12% based on 2015;
 2019: ROE>12.8% & Net profit grew at a CAGR of>12% based on 2015.
 Sinopharm will continue to expand its innovative business such as
pharmaceutical e-commerce, financial leasing, agent business, third-party
logistics, medical equipment, etc. According to the management, the company
has invested cRmb1bn in its financial leasing business.

5
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Premium for simplicity and track record Yet Fully Priced in Growth Potential
We believe that Sinopharm trades at a significant premium to most healthcare
companies in China due to the simplicity and stability of its business. Sinopharm has
shown for the past years that it can grow faster than the overall market, consistently
increasing market share and maintaining a relatively stable gross margin. Yet,
Sinopharm has appreciated by 20% YTD in 2016 vs MSCI China Healthcare index
down by 6% YTD, we see a few reasons for this upswing: 1) increasing investor risk
aversion with preference for large and liquid stocks; 2) the continued strong above
industry average growth. The MSCI China Healthcare Index is trading at its lower
forward P/E level, re-rating is possible. Yet, Trading at 19x 2017 P/E vs. 17% EPS
CAGR in 2015-2018E, we believe its growth potential is largely priced in.

Figure 3: MSCI China Healthcare Index still trades at low forward PE –rerating is possible
SinoPharm (1099 HK) MSCI China Helathcare Index

60

55

50

45

40

35

30

25

20

15

10
1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16

Source: Bloomberg

Figure 4: Sinopharm Price chart -Sinopharm is trading at historical high price

Price (1099.HK) Mean +1 STD -1 STD +2 STD -2 STD

44
+2 STD, 37.57
39

34 +1 STD, 32.07

29 Mean, 26.58

24 -1 STD, 21.08

19 -2 STD, 15.59

14
1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16

Source: Bloomberg

6
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Figure 5: Sinopharm Forward P/E chart

Forward PE 1099.HK) Mean +1 STD

-1 STD +2 STD -2 STD

60

50 +2 STD, 45.12

40 +1 STD, 34.9

30 Mean, 24.64

20
-1 STD, 14.46

10 -2 STD, 4.24

0
1-Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 1-Jan-14 1-Jan-15 1-Jan-16

7
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Investment Positives
Dominant industry leader
Sinopharm is the largest pharmaceutical distributor with a dominant market leadership
(18.4% market share in 2015), far exceeding CR Pharma’s 10% and Shanghai
Pharma’s 8.6%. It has a truly nationwide pharmaceutical distribution network with total
241 logistics outlets covering 31 provinces, municipalities across China.

Table 1: Distribution network comparison table 2015

Gross Main No. of Retail

Company Ticker 2015 Revenue (Million) Growth (%)
Margin Distribution Area Outlets

Distribution 213,994 12.50% Country wide

Sinopharm 1099 8.20% 3080
Retail 8,715 47.70% Country wide

Distribution 104,683 8.90% 6.70% Country wide

CR Pharma Priv ate North and Eastern 702

Retail 3,104 20.10% 20.10%
China

North, East,
Shanghai Distribution 93,717 14.30% 6.10%
601607 South China 1769
Pharm
Retail 4,795 42.00% 16.00% East China

Jointown Distribution 47,748 20.40% 6.10% Country wide

Pharma 600998 East, Central, 869

Retail 984 32.9 17.90%
(32.9%) North China

Source: China Pharmaceutical Commerce, JP Morgan

Continuous market share gains with increasing industry consolidation

According to the China Association of Pharmaceutical Commerce, Sinopharm
increased its market share in the pharmaceutical distribution market to 18.4% in
2015, up from merely 4.4% in 2003. The top 5 players accounted for over 40% in
terms of revenue in 2015. We expect the leading players to have more than a 50%
market share in China by 2020, still well below the normal 60-80% market share that
the top three distributors have in more developed markets. More importantly, we
believe recent government policies such as the new GSP (Good Standard Practice)
regulations, un-announced inspections of pharmaceuticals and medical devices, “two
invoices” system for distributors will force out smaller players from the industry,
thus offering Sinopharm ample room to further gain market by acquiring smaller &
local players. According to management, Sinopharm will focus on the acquisition of
retail businesses, i.e. direct-to-pharmacy, in-hospital drug stores, etc.

We expect Sinopharm will be able to raise its market share to 25% by 2020.

8
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Figure 6: Highest market share gain in distribution market

2013-2015
2013 2014 2015
CAGR
Sinopharm (国药控股) 17.30% 18.10% 18.40% 3.10%
CR Pharm (华润医药) 9.60% 10.20% 10.00% 1.90%
Shanghai Pharm (上海医药) 8.10% 8.30% 8.60% 2.60%
Jointow n Pharm (九州通) 3.50% 3.70% 4.00% 7.60%
Nanjing Pharm (南京医药) 1.90% 2.00% 2.00% 1.70%
Huadong Pharm (华东医药) 1.70% 1.70% 1.80% 0.70%
Renmin Tongtai (人民同泰) 0.30% 0.20% 0.70% 48.40%
Yingte Pharm (英特集团) 1.30% 1.30% 1.30% -1.20%
Ruikang Pharm (瑞康医药) 0.60% 0.70% 0.80% 13.40%
Haiw ang Biotech (海王生物) 0.80% 0.90% 0.90% 4.20%
Source: China Association of Pharmaceutical Commerce, JP Morgan

Sustainable average industry growth

Historically, Sinopharm has maintained stable, above-industry average growth rates
3-5% faster than the overall drug distribution industry. In 1H16, the sales growth was
13.4%, above the industry sales growth of 10%, distribution industry sales growth of
12%. We expect the pharmaceutical distribution industry to continue to expand at
10%-12% in the next few years, we believe Sinopharm to achieve sales growth that
is 3% faster than the overall drug distribution industry organically with its scale &
continuous market share gains.

Figure 7: Sinopharm, above industry growth, 2011-2015

Industry Growth Sinopharm Growth

60%

50%
48%
40%
33%
30%
23% 23%
20% 19% 20%
17% 15% 14% 13%
10% 10%

0%
2011 2012 2013 2014 2015 1H16

Source: Company data, China Commerce, JP Morgan

Optimal revenue structure with higher growth/margin of retail pharmacies

Sinopharm acquired the two subsidiaries from Fosun Pharma’s retail pharmacies and
the transaction is expected to complete in September 2016. Sinopharm aims to build
an integrated whole-retail distribution model by expanding its retail pharmacies. We
believe the public hospital reform and the separation of medical service and drugs
sales will bring significant opportunities for retail pharmacies business.
As of 2015, Sinopharm owes 3,080 retail pharmacies (under the "Guoda’ brand name,
of which 2,218 were directly operated and 952 were operated by franchisees), up from
947 in 2009. Revenue of retail pharmacies accounted for 6% of totals or Rmb9bn. As
1H16, Sinopharm owns 3,268 retail pharmacies (under the "Guoda’ brand name, of
which 2,309 were directly operated and 959 were operated by franchisees).

9
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Sinopharm aims to expand its retail network to 10,000 stores with targeted revenue
of Rmb40bn in 2020. Especially, Sinopharm will focus on strengthening connection
with hospitals in order to establish in-hospital drug stores, which is not available for
other small or social distributors.

Notably, the gross margin for retail pharmacies is around 40% and net profit margin
is around 10%, higher than Sinopharm’s 8% and 2%, respectively. We believe the
accelerated growth of retail pharmacies implies potential margin upside.

Figure 8: Sino-Pharm-Higher Gross Margin compare to its competitors

2013 2014 2015

9%
8.2%
8%
8.0% 8.2% 7.1%
6.8%
7% 7.6%
6.1%
6% 6.7% 6.6% 6.7%
6.1% 6.0%
5%

4%

3%

2%

1%

0%
Sinopharm Jointown Pharm CR Pharm Shanghai Pharm

Source: Company data

Figure 9: Sinopharm- Revenue growth of pharma retail business

Retail YoY growth

10,000 90%
77.5% 8,715
9,000 80%
8,000 70%
7,000
5,902 60%
6,000 47.7%
4,833 4,873 50%
5,000 35.1%
4,114
40%
4,000 3,045 22.1% 30%
3,000 17.5% 19.0%
1,715 20%
2,000
1,000 10%
0 0%
2010 2011 2012 2013 2014 2015 1H16

Source: Company data

10
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Figure 10: Sinopham-retail pharmacies revenue growth CAGR/number of stores CAGR

Direct Operation Total retail outlets Retail Growth

3500 3268 90%

3080
80%
3000
77.5% 70%
2500 2309
2096 2128 60%
1917
2000 1773 1795 1747 50%
1554 1632
1529
1500 47.7% 40%

30%
1000 35.1%
20%
500 22.1%
17.5% 19.0% 10%

0 0%
2011 2012 2013 2014 2015 1H16

Source: Company data

SOE background with distinct advantages

We think Sinopharm’s SOE background offers distinct advantages
 Relative higher bargaining power with hospitals
 Easy access/secure local tender for pharmaceutics’ procurement
 Lower financing cost – Sinopharm can borrow at a much lower rate; its one year
note interest rate is around 3%, much lower than the base rate of 4.35%. The
average financing cost is 5.2%. As in 1H16, Sinopharm has issued very short
term notes and corporate bonds with an average interest rate of 2.5-3%.
According to management, there is still room for further financing cost reduction,
which is positive to Sinopharm’s future M&A activities and development of new
businesses.
 Potential incentive plan for senior management with SOE reform: as one of the
first few SOE companies to implement SOE mixed ownership reform, Sinopham
submitted its application to the state council and may get approval soon..
Notably, Sinopharma released a share incentive schemes to incentivize key
management's performance towards company’s long-term growth. The scheme
will be effective for 10 years. It generally grants the participants with company
shares based on reported 1) ROE and 2) net profit growth. The plan will increase
management incentives, implying higher incentives and better performance
ahead, in our view

11
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

New initiatives with long term grow potentials

Sinopharm has expanded into some new businesses recently, and although the scale
of these businesses is relatively small now they offer potential top/bottom-line
growth in the long term, in our view.

1. E-commerce- Sinopharm is transferring its traditional businesses into e

commerce/online platform. e.g it established its B2C platform, "Sinopharm
Online Co.” with the transaction amounted over Rmb 2,200million up to 1H16.
Also, it set up "Sinopharm Direct Sales", "Sinopharm Group Overseas Flagship
Stores". We believe with Sinopharm's large distribution network and logistics
capability, its E-ecommerce business can rapidly ramp up further utilizing its
integrated business platform. Furthermore, it launched its B2B platform to try to
use ecommerce to optimize the resource and efficiency, interlink distribution,
logistics, hospitals and suppliers and social welfare fund into the B2B platform.
2. Financial leasing-Sinopharm began its financial leasing for its smaller
distributors with invested capital of Rmb2 billion in early 2015. Now the business
has rapidly grown to Rmb1bn as of May 2016. This business enjoys higher gross
margin of 80% and net profit margin of 10%, vs. Sinopharm's traditional business
GM’s 8% and net profit margin of 2%. Leverage ratio of 5 times. Notably, the
Company will continue to increase the scale of its financial leasing business. In
1H16, the Company has invested cRmb1bn.
3. Electronic supply chain business: Sinopharm also launched online supply chain
with the business scale of over Rmb1.5 billion.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Investment Risks
Regulatory controls over pharmaceutical products
The pharmaceutical industry is one of the most regulated in China as the industry is
not well understood by the general public and can be prone to abuses that could lead
to significant financial waste and in serious cases, loss of life. A major overhaul in
recent years has made drug development and approval more costly and time
consuming. This could lead to a lower rate of introduction of new products but a
higher likelihood of success of approved products. There is also a trend to regulate
volume and profits from the sale of drugs by hospitals to patients. Sinopharm is
indirectly impacted by many of the new rules and regulations in the ongoing
healthcare reforms and this is a risk to the company’s operations, in our view.

More price cuts from government

The Chinese government has been open about its desire to cut overall drug costs by
at least 10-20% with the implementation of the Essential Drug List (EDL). We
believe further price cuts are inevitable. Although Sinopharm is the largest drug
distributor and holds more bargaining power than others, this power is still quite
modest, because a drug manufacturer can readily find another distributor. Given the
government’s tight hold on drug pricing, profit margins may easily be subject to
government pricing pressure.

Large working capital requirements/with longer account receivable days

Excluding cash, inventories and receivables make up over 70% of Sinopharm’ s
assets. The management of working capital is a critical success factor for
Sinopharm. We expect sales to grow by nearly 30% a year and that requires a
significant amount of working capital. Over the next few years, we expect a majority
of the operating cash flows of the company would be needed to fund a rising level of
working capital. Although we have not seen significant provisions for inventories
and receivables in the past, such high balances do add an element of risk for
provisions in the future.

Sinopharm distributes most of its products to large Class III (or Tier 1 hospitals),
which are public hospitals reliant on government subsidies. Thus, many of them
usually delay the payment, resulting in longer A/R days. Sinopharm is adjusting their
revenue mix/review payment for its customers to improve account receivable
balance, e.g. account receivable balance decreased by 2.2% YoY in 2015. We expect
Sinopharm to continue to factor some account receivable to meet working capital
needs in the future. This may impact its overall profitability.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Valuation
Our Dec-17 price target of HK$44.0 is based on a DCF valuation which assumes a
market premium of 6.0% and a risk-free rate of 4.2% (yield on ten-year government
notes in China). We assume a beta of 0.80 based on regression analysis performed by
Bloomberg. Typically, pharmaceutical distribution is a stable business and leading
US distributors have a similarly low beta of 0.8. Accordingly, we assume a WACC
of 10.3%. We estimate free cash flow for Sinopharm until 2020 and assume a
terminal growth rate of 4.0%.

Table 2: Sinopharma-Base case DCF analysis

Rmb in mn, year-end Dec 2010 2011A 2012A 2013A 2015A 2016E 2017E 2018E 2019E 2020E
Cash flow estimates
Sales 69,233,669 ######### ###### 166,866,146 227,069,433 257,447,354 291,236,380 328,028,626 378,617,746 437,814,414
EBIT 2,408,815 3,636,216 ###### 6,101,920 9,169,204 10,656,527 12,002,366 13,636,543 15,823,105 18,695,086
NOPAT 1,838,649 2,793,257 ###### 4,727,430 7,049,199 8,192,638 9,227,307 10,483,647 12,164,655 14,372,608
Capex , net (1,429,332) (996,818) ###### (1,128,276) (1,015,813) (1,090,898) (1,234,074) (1,389,976) (1,604,341) (1,855,179)
Depreciation 230,927 323,257 ###### 488,067 734,239 916,925 941,820 980,910 1,206,353 1,266,760
Change in w orking capital (1,036,939) (2,327,014) ###### (1,078,107) 4,991,566 (10,248,692) (3,645,606) (6,474,432) (7,384,524) (8,917,786)
Free operating CF (FoCF) (396,695) (207,318) ###### 3,009,114 11,759,191 (2,230,027) 5,289,447 3,600,148 4,382,143 4,866,403

DCF Parameters Assum ptions

Liabilities as a % of EV 50% Terminal grow th 4.0%
WACC 10.3% Risk-free rate 4.2%
Market risk 6.0%
Enterprise NPV 65,514,998 Beta 0.80
+ Net cash (debt), current (8,893,035) Cost of debt 6.2%
- Minorities (Market v alue) (13,434,471)
+/- Other items 0 Implied ex it P/E multiple (x ) 15.2
= Equity value 43,187,492
/ Number of shares 1,192,811
= Equity value per share (HK$) 44 Rmb Rmb 36
Source: Company, JP Morgan Estimates

Table 3: Sinopharm- Sensitivity Analysis on WACC and Terminal Growth Rate

Terminal growth rate
43.8 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%
8.0% 56.6 64.0 73.0 84.3 98.9 118.2
8.5% 49.6 55.7 63.0 71.9 83.1 97.5
WACC 9.0% 43.6 48.7 54.8 62.0 70.8 81.9
9.5% 38.6 42.9 47.9 53.9 61.0 69.8
10.3% 32.1 35.6 39.5 44.1 49.5 55.8
10.8% 28.5 31.5 34.9 38.8 43.3 48.6
11.3% 25.4 28.0 30.9 34.3 38.1 42.6

Source: JP Morgan Estimates

14
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Financial Analysis
Revenue and cost analysis
Sinopharm increased sales by 14% in 2015 as compared with 2014. In 1H16, its sales
rose 13% y/y to Rmb126bn. We expect sales growth of 13%, 13% and 13% for 2016
-2018. The growth will be most in the retail pharmacy (20% in FY16 and 30% and
35% in the years after) as the company expands its retail coverage.

Figure 11: Sales revenue and growth rate

Revenue YoY

350,000 40%

300,000 35%
34% 30%
250,000
25%
200,000
22% 20%
257,447 328,029
150,000 20% 291,236
15%
227,069
100,000 200,131 13% 13%
166,866 13% 13% 10%
136,502
50,000 5%

0 0%
2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates Company data.

Gross margin improved gradually from 8.0% in 2012 to 8.2% in 2015. In 1H16, its
gross margin further improved to 8.6%. We expect cost of sales to remain quite
stable for all of the business lines with the exception of the relatively new industrial
synthetic products business. However, we expect slightly gross margin contraction to
8.23%, 8.17% and 8.18% in 2016-2018e on tender price pressure.

Figure 12: Gross Margin

Gross Profit Gross margin

30,000 8.2% 8.2% 8.3%

8.2%
8.2%
25,000 8.2% 8.2%

8.2%
20,000
8.1%
15,000 8.0%
8.0%
26,837 8.1%
23,794
10,000 21,180
18,618 8.0%
16,328
13,379
5,000 10,988
8.0%

0 7.9%
2012 2013 2014 2015 2016E 2017E 2018E

Source: J.P. Morgan estimates Company data.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Figure 13: Cost of sales and as % of total sales

Cost of Sales % of sales

92.0%
350,000 92.0%
92.0%
300,000 92.0%
91.8%
250,000 91.9%
91.8%
200,000 91.8% 91.8% 91.9%
91.8%
150,000 301,191 91.8%
267,442
236,267
100,000 208,452 91.8%
183,803
153,488
125,514
50,000 91.7%

0 91.7%
2012 2013 2014 2015 2016E 2017E 2018E

Source: J.P. Morgan estimates, Company data

SGA is relatively fixed in SGA as a proportion of sales remained relatively stable at 4.3% in 2015 and 2014. In
this business 1H16, SGA accounted for 4.0% of sales. We expect it to further decrease to 4.2% in
2016 and then stabilize at 4.1% in 2017 and 2018. The SGA expenses increase is
attributable to the group’s enlarged operation scale, its business development and its
expansion of distribution networks through new setups and acquisitions of companies
and businesses. The decrease in the percentage as sales is expected to continue as
Sinopharm implements cost control measures and enjoys economies of scale.

Figure 14: SG&A as % of total revenue, 2012-2018E

Rmb mn

SG&A SG&A % of Sales

16,000 4.7%
14,000 4.6%
4.6%
12,000 4.5%
4.5%
4.4%
10,000
4.3%
8,000 4.3% 4.2% 4.1% 4.1%
4.3% 4.2%
6,000
9,692 10,767 4.1%
4,000 8,670 12,035 13,445
7,566 4.0%
6,338
2,000 3.9%
0 3.8%
2012 2013 2014 2015 2016E 2017E 2018E

Source: J.P. Morgan estimates, Company data

Operating margin increased from 3.9% in 2014 to 4.0% in 2015. As of 1H16,

operating margin was 4.1% similar to 1H15. We expect the margins to further
increase to 4.14% in 2016, 4.12% in 2017 and 4.16% in 2018. The main reason for
improvement in operating margins is increased efficiency, economies of scale and
increase in distribution network and hence revenues without significant increment in
costs.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Figure 15: EBIT and EBIT margin trend 2012-2018E

Rmb mn

EBIT EBIT Margin

16,000 4.2% 4.3%

4.1% 4.2%
14,000
4.1%
12,000 4.1% 4.0%
4.0% 3.9%
10,000
3.9% 3.8%
8,000
13,637 3.7%
6,000 12,002 3.6%
3.7% 10,657
9,169 3.5%
4,000 3.6% 7,862
6,102 3.4%
2,000 4,869
3.3%
0 3.2%
2012 2013 2014 2015 2016E 2017E 2018E

Source: J.P. Morgan estimates, Company data

Figure 16: GPM, EBITDA margin and Net Profit margin change
GPM EBITDA Margin Net Profit Margin

9% 8.0% 8.0% 8.2% 8.2% 8.2% 8.2% 8.2%

8%
7%
6%
5% 4.0% 3.9% 4.0% 4.1% 4.1% 4.2%
3.7%
4%
3% 1.8%
1.7% 1.8% 1.8%
1.5% 1.3% 1.4%
2%
1%
0%
2012 2013 2014 2015 2016E 2017E 2018E

Source: J.P. Morgan estimates, Company data

Balance sheet and cash flow

Sinopharm generated operating cash flow of Rmb13,560mn in 2015, which is a
significant increase from Rmb 5,560mn in 2014. It also has a strong balance sheet
with total assets of Rmb138,267mn, up from Rmb128,655mn in 2014. The
company's cash and equivalents increased to Rmb19,919mn in 2015, an increase of
30.7% from 2014. In 1H16, total assets amounted to Rmb152,539mn, an increase of
10.3% from 2015.

More importantly, gearing ratio (ND/E) were 39% as of 1H16, we expect continuous
decreasing interest expense and growing cash flow going forward.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Company Overview
Sinopharm Group, founded in 2003, is China’s largest pharmaceutical distributor
with unrivaled nationwide reach. The company had market share of 18.4% in 2015 in
the pharmaceutical distribution business, far exceeding the competitors CR Pharma
(5.9%) and Shanghai Pharma (5.7%). Sinopharm runs its business through more
than 70 subsidiaries, 13310 nationally ranked hospitals including 1,847 largest class-
three hospitals with the highest rankings, 104,508 small healthcare end-customers,
and 68,264 retail pharmacies outlets throughout China. Normally small healthcare
end customers include primary healthcare services institutions and others. As the
company grows, it may conduct more sales to hospitals directly.

The group posted revenue of RMB 227,069 million for the year 2015 witnessing a Y-
O-Y growth of 13.5%, which exceeded the industry average, which slowed down to
9.0% in 2015. In 1H16, the group recorded revenue of Rmb126million, witnessing
Y-O-Y growth of 13.4%. The company operates in the following business segments:
Pharmaceutical distribution, Retail pharmacy and others.

Sinopharm sources over 20,000 types of products from over 3,300 domestic and
international suppliers. Thirty of the top 50 international suppliers and 95% of the
domestic suppliers are currently supplying Sinopharm. Sinopharm is one of the only
three licensed nationwide aesthetics providers in China. The Group has, through a
series of acquisitions, transformed itself into a leader in not only China but global
pharmaceutical industry and it plans to continue its efforts to further consolidate.

Business Segments
Pharmaceutical Distribution
Pharmaceutical distribution is the group’s principal business. It provides distribution,
logistics and other value added services to domestic and foreign manufacturers and
suppliers of pharmaceutical products, medical equipment and other healthcare
products. It also supplies to downstream customers including hospitals, other
distributors, retail drug stores and primary healthcare services institutions.

In 2015, Revenue from distribution business was RMB 213,994 million, an Y-O-Y
increase of 13%, and accounts for 94.13% of the groups revenue (down from 94.87%
in 2014). In 1H16, revenue from this segment was RMB118,673mn, an increase of
8.1% over the same period last year.

The group differentiates itself with its counterparts by its strengths of geographic
coverage, the breadth of its product portfolio and the comprehensive supply chain
services provided to its customers and suppliers.

As of 1H16, the distribution network covers 31 provinces, municipalities and

autonomous regions across China. Sinopharm has 4 logistics hubs, 39 provincial
logistics centers, 177 municipal level logistics outlets and 22 retail logistics outlets,
with a sum of 242 logistics outlets. It also sets up “Sinopharm Online Co. Ltd” to
grab the opportunities in pharmaceutical e-commerce and the business progresses
smoothly with transaction value exceeding RMB 2,200 million.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Retail pharmacy
The Retail segment manages a network of drug stores in major Chinese cities via
direct operation and franchises to sell pharmaceutical and healthcare products to end-
customers. The group operates a total of 68,264 in 2015 (61,761 in 2014).

Revenue from retail business was RMB 8,715 million, an Y-O-Y increase of 48%,
and accounts for 3.81% of the overall revenue (up from 2.93% in 2014). In 1H16,
revenue from retail business was RMB4,873 million, an Y-O-Y increase of 19%,
which accounted for 3.87% of the overall revenue.. Sinopharm also owns 15 retail
medical service flagship stores.

Other services
Other services include production and sale of pharmaceutical products, chemical
reagents and laboratory supplies. It also actively engaged in innovation of
pharmaceutical, medical services and other health-related industries to explore the
synergistic development of its diversified business. This segment accounted for
2.06% of the group’s revenue i.e. RMB 4,361 million in 2015 and RMB 2,341
million in 1H16.

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 Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com
SWOT Analysis
Strengths
 It is the largest pharmaceutical distributor in China
 Owned by the largest state owned pharmaceutical
group, CNPGC and Shanghai Fosun Pharmaceuticals,
a major private drug maker. This enhances credibility
and stature of Sinopharm and can lead to greater
access to hospitals
 The company has the largest supply chain network
covering 31 provinces and 241 logistics centers. Also,
it owns the largest number of retail drug stores in major
cities in China
 The country’s largest portfolio to meet demand from
customers and widest network coverage to satisfy the
need of manufacturers to grow business nationwide
Opportunities
 E-commerce will pose as a new growth driver for
traditional pharma firms with strong platforms and
resources
 Public hospital reform will lead to separation of
treatment and drug sales, which in turn will bring
enormous opportunities for drug retail business
 China Sinopharm International Corporation will provide
opportunities to expand the trade globally
 Heightened interest in expanding drugstore business
should lead to higher margins and cash flow in the
longer term
 Numerous M&A opportunities in distribution industry
with many small distributors that may be available at
reasonable valuations
Source: J.P. Morgan
20
Weaknesses
 The nature of the business results in very low net margins
(1.66% in 2015)
 Limited presence in other Asian or Global markets
 Healthcare expenditure as a % of GDP is low as compared
to other developed markets
 A large chunk of revenue comes from hospitals (62%). So
any reform in hospital policies can damage revenue
 The company is dependent on a number of key suppliers,
all of whom may opt to use smaller distributors if they offer
better terms
Threats
 Huge competition from Chinese pharmaceutical retailers
as a number of these local players are now listed
 Global established players entering the market will further
increase pressure
 Pharmaceutical sales is a highly regulated industry with
government imposed caps on drug prices
 Though sector growth is more than Chinese GDP growth
rate, it has slowed in recent years
 Implementation risk of moving from developed Tier I cities
to smaller cities and towns is quite significant
 Rising interest rates will drive up finance costs
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Company Shareholding Structure

Sinopharm Group Co. Ltd

The National Council

China National
Sinopharm Industrial for Social Security
poharmaceutical
Investment Co. Ltd. Fund and Public
Group Coorporation
(56.79%) Shareholders
(0.1%)
(43.11%)

China National Shanghai Fosun

poharmaceutical Pharmaceutical
Group Coorporation (Group) Co. Ltd
(51%) (49%)

Shareholder % equity interest

JP Morgan Chase & CO. 19.99%
Oppenheimer Funds Inc 11%
Blackrock 5.73%
Citigroup Inc. 5.62%
Matthews International Capital 4.9%
Franklin Resources 3.58%
Capital Research and Management 3.53%
Mirae Asset Global Investment 3.41%
Vanguard Group Inc. 2.65%
Bessemer Group Inc 2.41%
Source: Company data

21
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Company History

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Key Management Profiles

Mr. Wei Yulin, aged 59, executive Director, Chairman (Legal Representative) and
Secretary of Party Committee, joined the Group in January 2003. He served
subsequently as the deputy general manager, chief operating officer, managing
deputy general manager and president of the Company until November 2013. Mr.
Wei has been an executive Director since December 2008, the secretary of Party
Committee since December 2009, and the Chairman since November 2013. Mr. Wei
has around 39 years of working experience, over 23 years of which is management
experience in the pharmaceutical and healthcare products industry.

Mr. Li Zhiming, aged 53, executive Director, President and Deputy Secretary of
Party Committee. Mr. Li joined the Company in May 2010 as the vice President, and
has served as the President and executive Director since November 2013 and January
2014, respectively. He has more than 34 years of working experience, over 30 years
of which is management experience in the pharmaceutical and healthcare products
industry.

Mr. Li Guangfu, aged 59, was a deputy general manager of the Company from
January 2003 to July 2003 and has been a vice president of the Company since
September 2010. He has over 41 years of working experience, over 31 years of
which is management experience in the pharmaceutical and healthcare products
industry. Mr. Li is a deputy chief pharmacist and a practicing pharmacist.

Mr. Lu Jun, aged 57, has been a vice president of the Company since 29 June 2004
joined the Group in January 2003. He served as the assistant to the general manager
of the Company, the general manager of medicine retail business department and the
head of the investment department of the Company concurrently from April 2003 to
June 2004. Mr. Lu has over 40 years of working experience, over 17 years of which
is management experience in the pharmaceutical and healthcare products industry.

Mr. Liu Yong, aged 47, Vice President and Chief Legal Advisor of the company
joined the Group in January 2003. He was the general manager and secretary of Party
Committee of Sinopharm Holding Shenyang Co., Ltd. from January 2003 to
November 2009. He has over 23 years of working experience, over 20 years of which
is management experience in the pharmaceutical and healthcare products industry.

Mr. Cai Zhongxi, aged 51, has been a vice President since May 2010. He has over
32 years of working experience, over 24 years of which is management experience in
the pharmaceutical and healthcare products industry. Mr. Cai was a doctor of 302
Military Hospital of China, the manager for eastern China at the distribution and
trading department of Shenzhen Southern Pharmaceuticals (999), the operating
director of Zhejiang Asia-Pacific Pharmaceutical Plant, and the marketing manager
of APC Hong Kong from August 1989 to July 1995.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Investment Thesis, Valuation and Risks

Sinopharm (Neutral; Price Target: HK$44.00)
Investment Thesis
Sinopharm was established in 2003 and is the largest pharmaceutical distributor in
China, with an ~18% market share. Products are sold directly to hospitals or through
local third-party distributors. Sinopharm also has small drug retailing and
manufacturing operations. Sinopharm has established a distribution network in all
provinces of China and should stand to benefit from higher GSP [Good Supply
Standard ] standards and expected industry consolidation. In the near term, we see
potential for economies of scale and leveraging. In the long run, we believe it may
become a logistics company providing solutions to hospitals and other distributors..

Valuation
Our Dec-17 price target of HK$44.0 is based on a DCF valuation which assumes a
market premium of 6.0% and a risk-free rate of 4.2% (yield on ten-year government
notes in China). We assume a beta of 0.80 based on regression analysis performed by
Bloomberg. Typically, pharmaceutical distribution is a stable business and leading
US distributors have a similarly low beta of 0.8. Accordingly, we assume a WACC
of 10.3%. We estimate free cash flow for Sinopharm until 2020 and assume a
terminal growth rate of 4.0%.

Risks to Rating and Price Target

Key downside risks to our rating and PT include a slower pace of acquisition of new
distributors and a faster pick-up in sales volume arising from the implementation of the
Essential Drug List, resulting in low points taken by Sinopharm because of low
profitability to manufacturers as it requires profit-sharing with distributors. In addition,
we see risks from: 1) an unexpected industry-wide slowdown; 2) acquisitions
becoming prohibitively expensive; and 3) finance costs staying high for longer than
expected.

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Sinopharm: Summary of Financials

Income Statement Cash flow statement
Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E
Revenues 200,131 227,069 257,447 291,236 328,029 EBIT 7,862 9,169 10,657 12,002 13,637
% change Y/Y 19.9% 13.5% 13.4% 13.1% 12.6% Depr. & amortization 835 1,005 917 942 981
Gross Profit 16,328 18,618 21,180 23,794 26,837 Change in working capital (2,033) 4,992 (10,249) (3,646) (6,474)
% change Y/Y 22.0% 14.0% 13.8% 12.3% 12.8% Taxes (1,393) (1,771) (2,166) (2,383) (2,705)
EBITDA 8,697 10,175 11,573 12,944 14,617 Cash flow from operations 5,561 13,560 (296) 7,096 5,620
% change Y/Y 28.3% 17.0% 13.7% 11.8% 12.9%
EBIT 7,862 9,169 10,657 12,002 13,637 Capex (1,451) (1,016) (1,091) (1,234) (1,390)
% change Y/Y 28.8% 16.6% 16.2% 12.6% 13.6% Net Interest (2,129) (1,987) (1,897) (1,956) (2,221)
EBIT Margin 3.9% 4.0% 4.1% 4.1% 4.2% Other (1,711) (336) 109 250 250
Net Interest (2,129) (1,987) (1,897) (1,956) (2,221) Free cash flow 5,765 14,140 139 7,434 6,004
Earnings before tax 5,935 7,410 9,368 10,309 11,698
% change Y/Y 28.4% 24.9% 26.4% 10.0% 13.5% Equity raised/(repaid) 4,391 0 0 0 0
Tax (1,383) (1,713) (2,166) (2,383) (2,705) Debt raised/(repaid) (1,183) (3,874) 0 0 0
as % of EBT 23.3% 23.1% 23.1% 23.1% 23.1% Other (2,518) (2,596) (2,540) (2,741) (3,006)
Net income (reported) 2,875 3,761 4,755 5,232 5,937 Dividends paid (668) (858) (1,085) (1,193) (1,354)
% change Y/Y 27.8% 30.8% 26.4% 10.0% 13.5% Beginning cash 14,002 15,232 19,919 14,881 16,925
Shares outstanding 2,585 2,767 2,850 2,850 2,850 Ending cash 15,232 19,919 14,881 16,925 16,910
EPS (reported) 1.11 1.36 1.67 1.84 2.08 DPS 0.26 0.31 0.38 0.42 0.48
% change Y/Y 24.7% 22.2% 22.7% 10.0% 13.5%
Balance sheet Ratio Analysis
Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E
Cash and cash equivalents 15,232 19,919 14,881 16,925 16,910 Gross margin 8.2% 8.2% 8.2% 8.2% 8.2%
Accounts receivable 66,098 64,624 82,086 83,879 103,053 EBITDA margin 4.3% 4.5% 4.5% 4.4% 4.5%
Inventories 20,309 22,349 26,001 28,728 32,907 Operating margin 3.9% 4.0% 4.1% 4.1% 4.2%
Others 8,633 9,859 9,859 9,859 9,859 Net margin 1.4% 1.7% 1.8% 1.8% 1.8%
Current assets 110,272 116,750 132,827 139,390 162,728
Sales per share growth 17.1% 6.0% 10.1% 13.1% 12.6%
LT investments Sales growth 19.9% 13.5% 13.4% 13.1% 12.6%
Net fixed assets 7,102 7,641 7,849 8,174 8,617 Net profit growth 27.8% 30.8% 26.4% 10.0% 13.5%
Total Assets 128,656 138,267 154,715 161,786 185,769 EPS growth 24.7% 22.2% 22.7% 10.0% 13.5%
Liabilities Interest coverage (x) 4.1 5.1 6.1 6.6 6.6
Short-term loans 25,233 28,204 28,204 28,204 28,204
Payables 54,724 59,038 69,904 70,778 87,657
Others 6,063 7,440 7,440 7,440 7,440 Net debt to equity 39.2% 21.9% 30.1% 22.7% 20.0%
Total current liabilities 86,020 94,682 105,548 106,423 123,301 Working Capital to Sales 0.1 0.1 0.1 0.1 0.1
Long-term debt 4,223 608 608 608 608 Sales/assets 1.7 1.7 1.8 1.8 1.9
Other liabilities 975 1,075 1,075 1,075 1,075 Assets/equity 4.8 4.6 4.6 4.4 4.3
Total Liabilities 92,366 97,611 108,477 109,352 126,230 ROE 11.7% 13.1% 14.9% 14.6% 14.8%
Shareholders' equity 27,382 30,052 33,722 37,760 42,343 ROCE 11.6% 12.2% 13.5% 14.3% 15.2%
BVPS 10.59 10.86 11.83 13.25 14.86
Source: Company reports and J.P. Morgan estimates.

25
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

JPM Q-Profile
Sinopharm Group Co., Ltd. Class H (CHINA / Health Care)
As Of: 02-Sep-2016 Quant_Strategy@jpmorgan.com
Local Share Price Current: 39.95 12 Mth Forward EPS Current: 1.82
45.00 2.00

40.00 1.80
1.60
35.00
1.40
30.00
1.20
25.00
1.00
20.00
0.80
15.00
0.60
10.00
0.40
5.00
0.20
0.00
0.00
Aug/01

May/02

Feb/03

Nov/03

Aug/04

May/05

Feb/06

Nov/06

Aug/07

May/08

Feb/09

Nov/09

Aug/10

May/11

Feb/12

Nov/12

Aug/13

May/14

Feb/15

Nov/15

Aug/16

Aug/01
Apr/02
Dec/02
Aug/03
Apr/04
Dec/04
Aug/05
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
Apr/16
PE (1Yr Forward) Current: 18.9x P/E Relative to China Index Current: 1.71
60.0x
3.50

50.0x 3.00

2.50
40.0x
2.00
30.0x
1.50
20.0x
1.00

10.0x 0.50

0.0x 0.00
Aug/01
Apr/02
Dec/02
Aug/03
Apr/04
Dec/04
Aug/05
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
Apr/16
Aug/01
Apr/02
Dec/02
Aug/03
Apr/04
Dec/04
Aug/05
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
Apr/16

Earnings Yield (& Local Bond Yield) Current: 5.28% Dividend Yield (Trailing) Current: 1.27
8% 2.0
12Mth fwd EY China BY Proxy
1.8
7%
1.6
6%
1.4
5% 1.2
4% 1.0

3% 0.8
0.6
2%
0.4
1%
0.2
0% 0.0
Aug/01
Apr/02
Dec/02
Aug/03
Apr/04
Dec/04
Aug/05
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
Apr/16

Aug/01
Apr/02
Dec/02
Aug/03
Apr/04
Dec/04
Aug/05
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
Apr/16
ROE (Trailing) Current: 14.70 Price/Book (Value) Current: 3.0x
35.00
16.0x P/B Trailing P/B Forward
30.00 14.0x
12.0x
25.00
10.0x
20.00
8.0x
15.00 6.0x

10.00 4.0x
2.0x
5.00
0.0x
0.00
-2.0x
Aug/01
Apr/02
Dec/02
Aug/03
Apr/04
Dec/04
Aug/05
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
Apr/16

Aug/01
Apr/02
Dec/02
Aug/03
Apr/04
Dec/04
Aug/05
Apr/06
Dec/06
Aug/07
Apr/08
Dec/08
Aug/09
Apr/10
Dec/10
Aug/11
Apr/12
Dec/12
Aug/13
Apr/14
Dec/14
Aug/15
Apr/16

Summary
Sinopharm Group Co., Ltd. Class H 14053.68 As Of: 02-Sep-16
CHINA 17.96958 TICKER 1099 HK Local Price: 39.95
Health Care Health Care Providers & Servic EPS: 1.82
Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg
12mth Forward PE 18.92x
P/BV (Trailing) 3.04x 1.90 14.97 2.70 3.42 7.96 -1.11 -38% 393% -11% 13%
Dividend Yield (Trailing) 1.27 0.00 1.78 1.09 0.97 1.96 -0.02 -100% 40% -14% -24%
ROE (Trailing) 14.70 10.25 29.75 12.01 15.37 27.72 3.02 -30% 102% -18% 5%
Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, JPMorgan Quantitative & Derivative Strategy

26
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures

 Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in
securities issued by Sinopharm.
 Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of
Sinopharm.
 Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Sinopharm.
 Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
entity(ies) as clients, and the services provided were non-investment-banking, securities-related: Sinopharm.
 Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and
the services provided were non-securities-related: Sinopharm.
 Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Sinopharm.
 Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of Sinopharm.
 MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information
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Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
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Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
0406 or e-mail research.disclosure.inquiries@jpmorgan.com.

27
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

Sinopharm (1099.HK, 1099 HK) Price Chart

Date Rating Share Price Price Target

(HK$) (HK$)
UW HK$20
OW HK$35
65 18-Nov-09 OW 25.05 36.00
08-Apr-10 UW 36.45 30.00
UW HK$25
OW HK$32 OW HK$31 OW HK$44
21-Jun-10 UW 29.95 25.00
52
21-Jul-10 UW 28.95 20.00
OW HK$36
UW HK$30 N HK$27 OW HK$30 NR OW HK$25 OW HK$30
OW HK$36
NR
24-Jan-11 N 27.15 27.00
Price(HK$) 39 14-Feb-11 OW 26.30 32.00
28-Mar-11 OW 27.35 35.00
26 15-Oct-11 OW 20.60 30.00
03-Oct-12 NR 25.65 --
13 10-Dec-12 OW 25.05 31.00
30-Oct-13 OW 21.35 25.00
25-Aug-14 OW 26.65 30.00
0
24-Mar-15 OW 29.50 36.00
Sep Mar Sep Mar Sep
09 11 12 14 15 28-Apr-15 OW 38.05 44.00
14-Aug-15 NR 28.55 --
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Oct 03, 2012 - Dec 10, 2012.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
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affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,

28
Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

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Isabella Y. Zhao, CFA Asia Pacific Equity Research
(852) 2800-8534 07 September 2016
isabella.zhao@jpmorgan.com

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