仿制药 + 创新药推动转型 ; 首次覆盖评为买入 ( 摘要 )

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1 2016 年 12 月 14 日 投资决策买入恒瑞医药 ( SS) 潜在回报 : 17% 仿制药 + 创新药推动转型 ; 首次覆盖评为买入 ( 摘要 ) 证券研究报告 建议理由我们认为恒瑞医药正在转型成为国内创新领军企业, 其海外业务日渐扩张且长期前景稳健, 得益于以下因素 :1) 仿制药 + 创新药 的业务模式可满足多样化的临床需求 ;2) 创新药 / 生物药研发实力和丰富的在研药品可受益于中国医药行业业务模式更加注重临床疗效的结构性转变 ;3) 优于同业的净资产回报率 / 投资现金回报率 (2015 年是 A 股医药同业的两倍 ) 和盈利增长的可持续性 ;4) 资本结构有望优化 我们首次覆盖恒瑞医药并评为买入,12 个月目标价为人民币 元 ( 潜在上行空间 17%) 投资摘要 低 高 增长回报 * 估值倍数波动性 百分位 20th 40th 60th 80th 100th 江苏恒瑞医药 ( SS) 亚太医药行业平均水平 * 回报 - 资本回报率投资摘要指标的全面描述请参见本报告的信息披露部分 推动因素我们估算 年盈利年均复合增速为 22%( 而我们覆盖的企业均值为 15%, 万得行业均值为 10%) 我们预计 年间公司盈利增长和利润率提升的主要驱动因素为 :1) 创新药加速增长, 尤其是阿帕替尼 ( 毛利率在 90% 以上, 而 2016 年公司总体毛利率为 86.8%);2) 麻醉药 ( 年均复合增速 22%) 和造影剂 ( 年均复合增速 29.5%) 等板块逐渐发力 ;3) 更有优势的定价推动高利润率 ( 毛利率在 95% 以上 ) 的海外销售扩张 此外, 我们认为如果生产申请的重新上报和国家食药监局的评审顺利, 则恒瑞的 19K (PEG-G-CSF) 和瑞格列汀 ( 用于治疗糖尿病 ) 有望提振 2018 年盈利 估值我们的 12 个月目标价为人民币 元, 其中采用 :1) 2020 年退出市盈率 16.5 倍 ( 全球同业 2017 年预期市盈率 );2) 年每股盈利年均复合增速 19.3%;3) 以 8.1% 的资本成本将 2020 年估值贴现回 2017 年 ;4) A 股估值溢价 78%(22 家市值在人民币 100 亿元以上的 A 股医药同业市盈率均值为 29.5 倍, 而港股同业均值为 16.6 倍 ) 主要风险 1) 研发风险, 包括国家食药监局政策变动和主要研发项目失败 ; 2) 仿制药价格下降 ;3) 无法达到美国 / 欧盟的 cgmp 标准或许会对海外业务造成冲击 * 全文翻译随后提供 主要数据 当前 股价 (Rmb) 个月目标价格 (Rmb) 市值 (Rmb mn / US$ mn) 109,682.6 / 15,861.1 外资持股比例 (%) -- 12/15 12/16E 12/17E 12/18E 每股盈利 (Rmb) 每股盈利增长 (%) 每股摊薄盈利 (Rmb) 每股基本盈利 (Rmb) 市盈率 (X) 市净率 (X) EV/EBITDA(X) 股息收益率 (%) 净资产回报率 (%) CROCI(%) 股价走势图 Dec-15 Mar-16 Jun-16 Sep-16 江苏恒瑞医药 ( 左轴 ) 沪深 300 指数 ( 右轴 ) 4,200 4,000 3,800 3,600 3,400 3,200 3,000 2,800 所属投资名单亚太买入名单 行业评级 : 中性 陈子易执业证书编号 : S (21) ziyi.chen@ghsl.cn 北京高华证券有限责任公司 余皪执业证书编号 : S (21) li.yu@ghsl.cn 北京高华证券有限责任公司 股价表现 (%) 3 个月 6 个月 12 个月 绝对 相对于沪深 300 指数 资料来源 : 公司数据 高盛研究预测 FactSet( 股价为 12/13/2016 收盘价 ) 北京高华证券有限责任公司及其关联机构与其研究报告所分析的企业存在业务关系, 并且继续寻求发展这些关系 因此, 投资者应当考虑到本公司可能存在可能影响本报告客观性的利益冲突, 不应视本报告为作出投资决策的唯一因素 有关分析师的申明和其他重要信息, 见信息披露附录, 或请与您的投资代表联系 北京高华证券有限责任公司 投资研究

2 恒瑞医药 : 财务数据概要 损益表 (Rmb mn) 12/15 12/16E 12/17E 12/18E 资产负债表 (Rmb mn) 12/15 12/16E 12/17E 12/18E 主营业务收入 9, , , ,097.2 现金及等价物 5, , , ,409.6 主营业务成本 (1,371.7) (1,488.9) (1,767.8) (2,075.6) 应收账款 3, , , ,548.7 销售 一般及管理费用 (4,632.4) (5,626.3) (6,761.3) (8,032.5) 存货 研发费用 (891.7) (1,215.3) (1,449.8) (1,706.3) 其它流动资产 其它营业收入 /( 支出 ) (9.7) (3.6) 流动资产 9, , , ,367.2 EBITDA 2, , , ,708.2 固定资产净额 1, , , ,864.0 折旧和摊销 (222.4) (280.8) (352.1) (425.5) 无形资产净额 EBIT 2, , , ,282.8 长期投资 利息收入 其它长期资产 财务费用 资产合计 11, , , ,145.1 联营公司 其它 应付账款 税前利润 2, , , ,566.9 短期贷款 所得税 (338.0) (402.4) (493.1) (593.7) 其它流动负债 少数股东损益 (52.4) (40.4) (33.0) (39.7) 流动负债 1, , , ,577.2 长期贷款 优先股股息前净利润 2, , , ,933.5 其它长期负债 优先股息 长期负债 非经常性项目前净利润 2, , , ,933.5 负债合计 1, , , ,678.3 税后非经常性损益 净利润 2, , , ,933.5 优先股 普通股权益 9, , , ,927.2 每股基本盈利 ( 非经常性项目前 )(Rmb) 少数股东权益 每股基本盈利 ( 非经常性项目后 )(Rmb) 每股摊薄盈利 ( 非经常性项目后 )(Rmb) 负债及股东权益合计 11, , , ,145.1 每股股息 (Rmb) 股息支付率 (%) 每股净资产 (Rmb) 自由现金流收益率 (%) 增长率和利润率 (%) 12/15 12/16E 12/17E 12/18E 比率 12/15 12/16E 12/17E 12/18E 主营业务收入增长率 CROCI(%) EBITDA 增长率 净资产回报率 (%) EBIT 增长率 总资产回报率 (%) 净利润增长率 平均运用资本回报率 (%) 每股盈利增长 存货周转天数 毛利率 应收账款周转天数 EBITDA 利润率 应付账款周转天数 EBIT 利润率 净负债 / 股东权益 (%) (49.5) (51.3) (55.7) (58.6) EBIT 利息保障倍数 (X) NM NM NM NM 现金流量表 (Rmb mn) 12/15 12/16E 12/17E 12/18E 估值 12/15 12/16E 12/17E 12/18E 优先股股息前净利润 2, , , ,933.5 折旧及摊销 基本市盈率 (X) 少数股东权益 市净率 (X) 运营资本增减 (232.6) (113.2) (368.3) (632.7) EV/EBITDA(X) 其它 63.5 (431.7) 企业价值 / 总投资现金 (X) 经营活动产生的现金流 2, , , ,766.0 股息收益率 (%) 资本开支 (394.1) (787.7) (813.0) (885.3) 收购 剥离 其它 (76.2) (7.9) 投资活动产生的现金流 (470.2) (795.0) (813.0) (885.3) 支付股息的现金 ( 普通股和优先股 ) (150.5) (195.6) (238.7) (294.0) 借款增减 0.0 (10.0) 普通股发行 ( 回购 ) 其它 筹资活动产生的现金流 (123.0) (175.6) (238.7) (294.0) 总现金流 1, , , ,586.7 注 : 最后一个实际年度数据可能包括已公布和预测数据 资料来源 : 公司数据 高盛研究预测 对此报告有贡献的人员 陈子易 ziyi.chen@ghsl.cn 余皪 li.yu@ghsl.cn 全球投资研究 2

3 Table of contents PM Summary: Transforming into an innovation leader; Buy 4 A domestic pharma leader focusing on oncology and anesthesia 7 Financials: Robust earnings growth with strong cash position 14 Valuation: Discounted long-term P/E-based TP of Rmb Key risks 24 Comprehensive FTM generic portfolio for stable cash generation 26 Apatinib leads commercialization of novel drugs 28 At inflection point for novel drug R&D 37 Disclosure Appendix 51 The prices in the report are as of the market close of December 9, 2016, unless stated otherwise. Gao Hua Securities acknowledges the role of Richard Yeh, Ambarish Jajodia and Victoria Yang of Goldman Sachs in the preparation of this product. Exhibit 1: China pharma sector valuation summary: Initiate on Hengrui with Buy and a 12-m TP of Rmb54.83 A-share coverage Ticker Company name Ratings Current Price 1066.HK Weigao Neutral % 14.8x 15.1x 18.3x -15% 15.5x CNY % % Note: Current price as of market close of Dec 9, 2016 Source: Goldman Sachs Global Investment Research 12-M Target Price Potential Upside / (Downside) 2017 Target P/E 2017 P/E Long Term Avg* Adj Factor 2020 Exit P/E Pharmaceuticals Rmb Rmb % Implied 2017 '17E-'20E 2020E SS Hengrui Buy % 39.3x 34.0x 16.5x 0% 16.5x CNY % % SS Tasly Buy % 25.5x 22.8x 16.5x -15% 14.0x CNY % % SS Fosun (A) Buy % 18.3x 17.2x 16.5x -10% 14.8x CNY % % SS Huahai Neutral % 30.5x 30.9x 16.5x 0% 16.5x CNY % % SS Humanwell Neutral % 24.6x 25.4x 16.5x -20% 13.2x CNY % % SZ NHWA Sell % 26.5x 29.6x 16.5x -10% 14.8x CNY % % MedTech SZ Yuyue Neutral % 33.0x 31.1x 16.5x -5% 15.6x CNY % % H-share coverage Ticker Company name Ratings Current Price 12-M Target Price Potential Up / Down 2017 Target P/E 2017 P/E Long Term Avg* Adj Factor 2020 Exit P/E Pharmaceuticals HKD HKD % Implied 2017 '17E-'20E 2020E 1177.HK Sino Biopharm Buy % 21.5x 17.9x 16.5x 0% 16.5x HKD % % 2186.HK Luye Buy % 17.8x 14.3x 16.5x 0% 16.5x CNY % % 1093.HK CSPC Buy % 20.6x 19.3x 16.5x -5% 15.6x HKD % % 3320.HK CR Pharma Buy % 19.0x 14.7x 16.5x -10% 14.8x CNY % % 2196.HK Fosun (H) Neutral % 15.7x 15.8x 16.5x -10% 14.8x CNY % % 2607.HK Shanghai Pharma Neutral % 14.7x 12.0x 16.5x -15% 14.0x CNY % % 1530.HK 3SBio Inc. Neutral % 22.8x 18.7x 16.5x 0% 16.5x CNY % % 0867.HK China Medical System Neutral % 17.5x 16.3x 16.5x -5% 15.6x CNY % % 0874.HK Baiyunshan Sell % 14.9x 18.3x 16.5x -15% 14.0x CNY % % Distributors 1099.HK Sinopharm Neutral % 18.5x 16.6x 15.3x 0% 15.3x CNY % % MedTech Rept. Curren cy Rept. CYY EPS (CNY) EPS (HKD) EPS CAGR EPS CAGR EPS EPS (HKD) Cost of Equity Cost of Equity 全球投资研究 3

4 PM Summary: Transforming into an innovation leader; Buy We initiate coverage of Hengrui with a Buy rating and 12-m target price of Rmb54.83, based on our exit 2020E P/E-based valuation, implying 17% potential upside and 39.3X 2017E earnings. The TP-implied P/E multiple is at the high-end of the forward P/E range of 16X-53X for A-share pharma peers (Exhibit 29), reflecting our view of Hengrui as one of China s leading companies in the pharma sector that could benefit from the disease demographic shift and the ongoing structural change in the industry, which is driving innovation and quality upgrade. A hybrid model: Synergy between generics portfolio and innovative drugs Early mover advantage in coping with change in returns for drug R&D ROE/ROA/ROIC more than doubled vs. A-share peers in 2015 Strong cash position and low leverage are not fully factored into Hengrui s stock price We believe Hengrui is one the best quality names within the A-share/HK-listed pharma sector, and one of the strong defensive stocks that could deliver consistent long-term returns amid policy uncertainty in healthcare reform and pharma sector structural changes: A hybrid generics + innovation model With the initial success in novel drugs (e.g., apatinib and in-depth pipeline) and overseas expansion (e.g., US ANDA), we believe Hengrui is transforming from a generics-focused domestic pharma manufacturer to an emerging global competitor with a hybrid generics + innovation business, which may be perceived to be similar to Novartis model (the second-largest R&D-driven global pharma company by revenue in 2015 with Sandoz, the generics unit, as the second-largest generics manufacturer). We believe the hybrid model plays a key role in strengthening Hengrui s leadership in the Chinese pharma market over the long term, as it could: 1) help meet the increasing diversified clinical demand, which is one of the focuses of the ongoing healthcare reform in China; and 2) create synergy between generics and novel drugs in marketing/branding/clinical practices, particularly in cancer treatment with growing use of combination therapies. To excel in a tougher market with innovative drugs/biologics R&D Since 2H15, CFDA has been attempting to significantly raise the industry standard for R&D in China. In the coming years, we expect overall returns on R&D to decline with higher costs and risks. In a tough environment, we expect Hengrui to stand out as a leading domestic innovator, given that: 1) the returns on novel drug R&D in the sector could potentially exceed that from generics, particularly with potential better medical insurance coverage for innovative drugs; and 2) Hengrui s experience in commercializing novel drugs (i.e., imrecoxib and apatinib) could potentially drive better returns on novel drugs vs. peers. More so, Hengrui is also wellpositioned in capturing the emerging trend of biologics/biosimilars in China. Higher return built on effective R&D/marketing Hengrui is among the top-ranked A- share pharma stocks that generated healthy returns (ROE/ROA/ROIC of 24.3%/24.2%/ 23.7%) in 2015, significantly higher than A-share chemical drug/biologics players (total 98) average of 10.6%/8.9%/9.6%. We believe the better returns were driven by: 1) a leading position in one of the most demanding therapeutic areas, e.g. oncology; 2) effective R&D with established platform and seasoned R&D team; and 3) one of the strongest sales forces in the industry, particularly in oncology. Strong cash position with flexibility to increase financial leverage Hengrui s business is currently running at low leverage: 1) a total debt of Rmb10mn as of 3Q16, or debt to capital ratio of <1% (vs. A-share peers of 21.3% by 2015); and 2) gearing ratio (liability to asset) of 10% (vs. A-share peers of 32.3%). With the regulatory environment and sector growth paradigm evolving, we believe Hengrui is better positioned vs. peers with a strong cash position and the flexibility to increase financial leverage for potential: 1) higher R&D costs; and 2) M&As/license-in agreements to supplement organic growth and overseas expansion. Excluding cash on hand (Rmb6.2bn by 3Q16), the enterprise value implied by the current price is Rmb106bn (32.5X 2017E earnings vs. P/E of 34.4X). 全球投资研究 4

5 E earnings CAGR of 22% with novel drugs/overseas sales to drive margin expansion Solid earnings outlook with improving pricing power for margin expansion We expect medical cost control to remain a key macro trend in the Chinese pharma market over the medium term; thus pricing power is an increasingly critical competitive edge for leading pharma companies to maintain earnings growth. We expect Hengrui s pricing power to strengthen in the coming years, with growing contribution from novel drugs (little price competition) and overseas sales (price less regulated). More so, our analysis of its core firstto-market generic portfolio (13 key drugs, 60%+ of sales) suggests that the risk of price cuts is manageable as most of the drugs have less than three competitors in the market. We estimate E earnings CAGR of 22% (vs. coverage average of 15% and industry average of 10%), with a track record of strong earnings delivery ( CAGR of 27.7%, consistent 20%+ earnings growth in past 10 quarters). Exhibit 2: Overview of Hengrui Medicine ( SS) Key financials/trends Key drivers Core products Key pipeline products Potential catalysts Company basics - Sales: Rmb11.3bn in 2016E ( E CAGR +20.0%) - Earnings: Rmb2.65bn in 2016E ( E CAGR +21.9%), dvidend payout: 9% - Margin expansion: GM 87.1% in 2018E vs 85.3% in 2015; Net margin: 24.4% in 2018E vs. 23.3% in R&D spending: About 10% of sales as of Strong cash position: Cash of Rmb6.2bn by 3Q16 - Low gearing: Rmb10mn by 3Q16, gearing 10% (vs. 32.3% peers) - Capex: Management guidance Rmb mn in Ramp-up of Apatinib (novel drug) - Further overseas expansion (generics in US/EU/Japan) - Emerging anesthesia / contrast agent categories Three key categories: Oncology (41% of sales in 2015), anesthesia (27%), and contrast agents (11%) - Oncology: Apatinib, docetaxel, irinotecan, oxaliplatin, T.G.O., letrozole, pegaspargase, capecitabine - Anesthesia: Dexmedetomidine, sevflurane, cisatracurium - Contrast agents: Loversal, Iodixanol One of the most in-depth novel drug pipelines in China: 20+ novel molecules at clinical trial stage - NDA resubmission: 19K (PEG-GCSF), retagliptin (DPP-4i anti-diabetic) - Phase III: Famitinib (colorectal cancer), Pyrotinib (HER2+ breast cancer / lung cancer) - Phase I-II: PD-L1 mab and 15+ candidates (incl. those obtained CFDA approval for clincal trial) - IND filed: SHR-1309 (anti-her2 mab) - Strong commitment to biologics: 10+ candidates at preclinical / clincal stages - New NRDL inclusion (potentially: imrecoxib) - Company expects approvals in 2017/2018: 19K (chemo-induced neutropenia) and retagliptin (DPP-4i anti-diabetic) - Indication expansion & new clinical data for cadidates in Phase III clincal trials: # Apatinib: Lung cancer (NSCLC) and liver cancer (HCC) # Faminitib on colorectal cancer (est. 2H17) # Pyrotinib on HER2+ NSCLC/breat cancer (est. YE17/1H18) - Founded: 1970, IPO in 2000, MBO in Headquarters: Lianyungang, Jiangsu province - Chairman: Mr. Sun Piaoyang Source: Company data 全球投资研究 5

6 Valuation We derive our 12-month TP of Rmb54.83, based on discounted exit P/E valuation methodology, which is consistent with our coverage: a 2020E exit P/E of 16.5X (global peers 2017 trading P/E); an EPS CAGR of 19.3% over 2017E-2020E; a cost of capital of 8.1% to discount the 2020 valuation to 2017; and an A-share valuation premium of 78% (average 29.5X for 22 A-share pharma peers with market cap over Rmb10bn, vs. average 16.6X for HK peers). The TP implies 39.3X 2017E P/E, higher vs. 27.5X TP-implied average 2017E P/E for comparable pharma stocks under our coverage (Nhwa, Huahai, and Humanwell). We believe the valuation premium is justified on notably stronger earnings growth outlook (2017E-2020E CAGR of 19% vs. 9% for the three peers). Key risks Failure or delay in major R&D projects, e.g., failure to obtain approval for 19K and Retagliptin, two near-term pipeline drugs targeting regulatory approval in the next couple of years; failing to meet the clinical endpoint for Famitinib/Pyrotinib, and Apatinib s indication expansion trials; Price cuts on generic portfolio, particularly the key sales contributors, e.g., docetaxel and oxaliplatin; Failure to comply with US/EU cgmp may hurt overseas business; CFDA policy changes that may lead to change in R&D strategy and practice. Exhibit 3: Key drugs have dominant market position Competitive position of Hengrui s core products Number of players (*: 1= Hengrui as exclusive player) Oxaliplatin Source: PDB database Docetaxel Products with less than 3 domestic competitors and over 30% of market share Cisatracurium Oncology Anesthesia Contrast agents Dexmedetomidine Irinotecan TGO 5 Iodixanol Capecitabine Apatinib Ioversol Letrozole Sevoflurane 0 0% 20% 40% 60% 80% 100% Market share (2015) Pegaspargase Exhibit 4: Over 75% of novel drug INDs filed after 2011 Clinical trial applications filed by Hengrui from % of novel drug IND was filed in Source: DXY Insight database, CDE 1 1 Apatinib IND Generics Modified generics / biologics* Novel molecules *: New isomer, formulation, administration route, indications, salt/alkaline and compound formulation 全球投资研究 6

7 A domestic pharma leader focusing on oncology and anesthesia Hengrui is one of the leading domestic pharmaceutical companies in China, with 2015 sales of Rmb9.3bn and net profit of Rmb2.2bn. Three major therapeutic categories, i.e., oncology (including domestic and ex-china sales), anesthetics/analgesics used in surgeries, and contrast agents contributed about 80% of the drug sales in 2015; further, its portfolio (150+ approved drugs) also covers cardiovascular, anti-infection and other therapeutic areas. In each of the three key categories, Hengrui is the largest competitor among domestic peers, and holds No.1 (anesthetics) or No.2 (oncology and contrast agents) positions, in terms of 2015 market share, when including MNCs into the competitive landscape. Exhibit 5: 68% of sales from oncology and anesthetics Breakdown of Hengrui s 2015 sales by therapeutic category Exhibit 6: Hengrui is among the top 2 in key therapeutic areas Top 3 competitors in oncology, anesthesia and contrast agents (2015 market share) Antiinfection Cardiovascular Contrast agents 3% 3% 11% Others 14% 38% Oncology - domestic Oncology Surgical analgesic Roche Hengrui Luye Hengrui AstraZeneca Fresenius Kabi 7.1% 5.3% 14.1% 14.5% 23.8% 22.1% 27% Anesthesia 3% Oncology -ex-china Contrast agents GE Healthcare Hengrui Bracco 19.2% 16.6% 14.7% Source: Company data Source: PDB database Most of Hengrui s products are prescription drugs, thus hospitals are the key sales channels for the company, with pharmacies (particularly those jointly set up by hospitals and retail pharmacy leaders) as a supplementary route for higher priced drugs or new drugs that have not gone through tenders. For Apatinib, the novel anti-cancer drug, a patient assistance program has been initiated by the company to provide free doses to lower-income population to improve the affordability and accessibility of the novel therapy. Exhibit 7: Sales channels for Hengrui s prescription drug portfolio PAP* Hengrui Tender Hospitals Patients Key route of drug sales Pharmacies Supplementary routes: 1) PAP (patient assistance program): only available for apatinib; 2) pharmacies: mostly pharmacies jointly set up by hospitals and retail pharmacies Source: Company data, Goldman Sachs Global Investment Research 全球投资研究 7

8 From domestic generics to innovation/globalization Hengrui Medicine or its predecessor Lianyungang Pharmaceutical Factory was founded in 1970 as a state-owned enterprise (SOE). It went public and listed on the Shanghai Stock Exchange in In 2003, the local government transferred the stake to Hengrui s management via a management buyout. As a domestic leader in generics, Hengrui Medicine launched its first oncology drug in 1984 and one of the company s top-selling drugs docetaxel (generic version of Sanofi s Taxotere) in 2002, which was its first drug that exceeded annual sales of Rmb1bn. We note that Sanofi filed a lawsuit against Hengrui for patent infringement in 2003, but Sanofi s China patent on Taxotere was invalidated in 2008 (the global patent on Taxotere expired in 2010). As a pioneer in drug innovation in China, Hengrui launched its first novel drug (category 1.1 drug) imrecoxib in 2011 for treating rheumatoid arthritis, and second one apatinib in 2014, which we think is likely to be the key sales driver for Hengrui in the coming years. Hengrui s overseas expansion started with API export, then moved to ANDAs (formulated generics) in the US (first in 2011), US clinical trials for novel molecules (2010 for Retagliptin), and overseas license-out (PD-1 mab to Incyte in 2015). Exhibit 8: Brief history of Hengrui and milestone events Tapping into regulated overseas market: 4 APIs passed US FDA inspection 1997 Name changed to "Jiangsu Hengrui Medicine, Co.Ltd 2002 Docetaxel (generic Taxotere, Hengrui's largest drug in '15 in terms of sales) approved by CFDA (fomer SFDA) 2005 Set up US subsidiary Start of first US trial for novel molecule (Retagliptin Phase1) 2011 First novel drug (Imrecoxib) approved by CFDA First US ANDA (irinotecan HCl for injection) approved by US FDA 2015 First overseas license out: PD-1 mab (SHR1210) to Incyte for max. payment of US$795mn Hengrui (former Lianyungang Pharma Factory) was founded First oncology drug launched (Etoposide) A-share IPO Set up Shanghai R&D center MBO: Gov't. exited, Chairman Sun Piaoyang became largest shareholder Sanofi initiated lawsuit against Hengrui for Taxotere manufacturing process patent infringement Sanofi's China patent on Taxotere ( ) was invalidated (SIPO) Apatinib approved by CFDA as 3rd-line therapy for gastric cancer Collaborated with Sandoz for US marketing of cyclophosphamide. Source: Company data 全球投资研究 8

9 Apatinib, dexmedetomidine to drive 20%+ earnings growth We expect Hengrui s sales to register 20% CAGR over E to reach Rmb16.1bn in 2018E and net profit to Rmb3.9bn (22% CAGR), which is much higher vs. industry earnings CAGR average of c. 10% and large cap A/H pharma earnings growth of 15.6% (Bloomberg/Wind consensus). Among Hengrui s comprehensive drug portfolio (150+ CFDA approved), we expect 13 key products to account for 65% of total sales in 2016E, with overseas sales (80%+ from overseas sales of oncology drugs) contributing another 5.5%. In particular, we believe Apatinib - the novel anti-cancer drug launched in and dexmedetomidine - the sedative medicine launched in could be key sales drivers over E contributing c. 30% of the incremental sales over the three years. Exhibit 9: Apatinib a key sales driver from Breakdown of Hengrui s 3-year sales growth (from E) by key drugs Rmb, Mn 866 Top 3 sales growth drivers gx. Generic version 1, T.G.O. Irinotecan gx. Capmtosar 203 Capecitabine gx. Xeloda Overseas oncology Docetaxel gx. Taxotere 368 Other oncology drugs Cisatracurium gx. Nimbex Sevoflurane gx. Ultane Dexmedetomidine gx. Precedex Iodixanol gx. Visipaque Ioversol gx. Optiray 16,097 9,316 Apatinib novel 2015 sales Oncology (Dometic + overseas) Anesthesia Contrast agents Other drugs 2018e sales Source: Company data, Goldman Sachs Global Investment Research with potential upside from in-depth pipeline of novel drugs Hengrui has built one of the most in-depth pipelines of novel drugs in China, with two candidates pending NDA resubmission (PEG-G-CSF and Retagliptin) and 18 candidates at different phases of clinical trials and one under CFDA review for approval for clinical trials. In addition, eight key projects are at the late stage of pre-clinical studies, aiming IND (investigational new drug) application in the coming years. It is worth noting that in our estimates, we expect Apatinib, the novel targeted therapy approved by CFDA in late 2014 for third-line treatment of gastric cancer patients, to generate sales of Rmb664m in 2016E, Rmb1bn in 2017E and Rmb1.3bn in 2018E, assuming 40%-50% off-label prescription for liver cancer, lung cancer and other cancers, for which, Phase II/III trials are ongoing. The indication expansion, if approved, could also generate above-expectation sales, though likely only beyond 全球投资研究 9

10 Exhibit 10: Hengrui has built a solid innovative drug pipeline with 20+ novel molecules at post-ind stage Summary of Hengrui s pipeline of novel chemical / biological drug candidates (preclinical, IND, clinical trial and NDA stages), as of November 2016 Mechanism of action / R&D Progress Drug candidates Form Target Potential indications Preclin IND Ph 1 Ph 2 Ph 3 NDA B PEG-G-CSF (19K) Injections Bone marrow stimulation CIN To refile Retagliptin (SP2086) Tablets DPP-4 inhibitor Type II diabetes To refile + metf ormin CRC 3rd-line + docetaxel NSCLC 3rd/4th-line c-kit / VEGFR2 / PDGFR / Famitinib (SHR1020) Capsules GIST 2nd-line VEGFR3 GEP-NETs 1st/2nd-line RCC 1st/2nd-line, vs. sunitinib NPC 3rd+ line HER2+ m breast cancer + cap vs. placebo HER2+ NSCLC 3rd+ line B Pyrotinib (SHR1258) Source: DXY Insight database, CDE, Clinicaltrial.gov, Company data. HER2+ m breast cancer HER2+ m breast cancer HER2+ m breast cancer HER2+ gastric cancer + cap. vs. lapatinib + cap. + capecitabine mono / combo + docetaxel HER2+ solid tumors US Ph 1 Henagliflozin (SHR3824) Tablets SGLT-2 inhibitor Type II diabetes Remimazolam (HR7056) Injections GABA(A) receptor agonist Sedation / anesthesia vs. propofol Hetrombopag Olamine Injections c-mpl (TpoR) receptor agonist Chronic ITP SHR-1210 (Camrelizumab) Tablets Injections Irreversible EGFR / HER2 inhibitor PD-1 mab Solid tumor AU liver cancer Solid tumor / melanoma B SHR1314 Injections IL17 mab Psoriasis Huanmidegib (SHR1539) Tablets Hedgehog pathw ay Cancers (likely BCC) SHR3680 Tablets 2nd-gen AR antagonist mcprc Ph1/2, Australia mcprc Ph1a SHR3162 Tablets PARP inhibitor Solid tumors Australia SHR6390 Tablets Selective CDK4/6 inhibitor Solid tumor Advanced melanoma SHR7390 Tablets Selective MEK1/2 inhibitor MM, CRC, NSCLC Fuglifam Tablets GRP40 agonist Type II diabetes SHR0302 Tablets JAK inhibitor RA / Psoriasis SHR4640 Tablets URAT 1 inhibitor Gout HAO472 Injections AML1-ETO oncoprotein t(8;21) AML M6G Injections μ-opioid receptor agonist Analgesic B SHR-A1201 (T-DM1) Injections HER2 ADC HER2+ breast cancer CTA obtained in Aug 2016 B SHR-1309 Injections Anti-HER2 mab Cancers CDE technical review done B SHR-A1403 Injections cmet ADC Liver / gastric / NSCLC B SHR-1316 Injections PD-L1 mab Cancers B SHR-1501 Injections IL-15 mab Cancers SHR1459 Oral BTK inhibitor Cancers SHR9146 Injections IDO pathw ay Cancers B INS068 Injections Basel insulin Diabetes B SHR0814 Injections Relaxin Heart failure B SHR-1209 Injections PCSK9 Hypercholesterolemia Disease glossaries: AM L : acute myeloid leukemia; BCC : base cell cancer; CIN : chemo-induced neutropenia CPRC : castration-resistant prostate cancer; CRC : colorectal cancer; GEP-NETs: gastroenteropancreatic neuroendocrine tumor GIST : gastrointestinal stromal tumor; ITP : idiopathic thrombocytopenic purpura; MM : multiple myeloma; m- : metastatic NPC: nasopharyngeal carcinoma; NSCLC : non-small cell lung cancer; RA : rheumatoid arthritis; RCC : renal cell carcinoma B Biologics 全球投资研究 10

11 Our estimates are based on the existing product portfolio and have not factored in potential major new product launches, given the uncertainties in the timing of product approval amid the policy changes at CFDA. However, our estimates in 2017E/2018E could be boosted from two potential new products: 19K (PEG-G-CSF, long-acting white cell boosting agent for patients receiving cancer chemotherapy), and Retagliptin (DPP-4 inhibitor, a novel 2nd/3rd-line oral anti-diabetic drug), for both the new drug registration application (which had been withdrawn earlier) and resubmission that is likely in late-2016 / early 2017, according to the management. Moreover, Faminitib and Pyrotinib are two candidates at phase III trial for cancer treatment. Exhibit 11: Four key drug candidates in late-stage of drug development (as of November 2016) PEG-G-CSF (19K) Retagliptin Faminitib Pyrotinib Dosage form Injections Tablets Capsules Tablets R&D stage - China NDA (to re-file) NDA (to re-file) Ph III (CRC, NSCLC combo) Ph II (GIST, GEP-NETs, Ph II (NSCLC) Ph I (Breast mono/combo) RCC, NPC) US trial? X, Ph I X, Ph I Key event catalysts NDA resubmission: 2H16 NDA resubmission: 2H16 2H17 (est.): Ph III data on colorectal cancer YE17/1H18 (est.): Ph II data on HER2+ NSCLC Therapeutic Oncology Diabetes Oncology Oncology Targets Bone marrow DPP-4 c-kit / VEGFR2 / PDGFR / VEGFR3 Irreversible EGFR / HER2 inhibitor "First-in-class" PEG-G-CSF (Neulasta) Marketing: Amgen Sitagliptin (Januvia) Marketing: Merck/MSD Sunitinib (Sutent) Marketing: Pfizer Lapatinib (Tykerb) Marketing: GSK Position in treatment Adjuvant 2nd/3rd-line (DPP-4i) 2nd-line (Sunitinib) 2nd-line for HER2+ breast cancer (Lapatinib) Market potential Patient base Chemotherapy-induced neutropenia: K China sales benchmarks (2015) Competition Existing competitors (CFDA approved) G-CSF: ~Rmb3-4bn (PEG-G- CSF as 4% of total GCSF market in China, vs. 75% in the U.S.) Neulasta global sales: US$4.8bn - CSPC - Jinyouli: launched in early 2013; - Qilu - Xinruibai: launched in October 2015 Type II diabetes: over 100mn Total DPP-4 inhibitor sales: Rmb mn; Januvia as bestseller, ~Rmb mn (Global: US$3.87bn) 5 DPP-4 inhibitors marketed, all from MNCs: 1) Sitagliptin (42% market share in '15, Merck); 2) Saxagliptin (32%, BMS); 3) Vildagliptin (20%, Novartis); 4) Linagliptin (5%, BI); 5) Alogliptin (1%, Takeda). CRC: ~370K; NSCLC: ~700K; GIST: 15-20K; RCC: ~70K; NPC: 30-40K Sutent: ~Rmb m (Global US$1.12bn) Sutent was approved by CFDA in 2007, marketed by Pfizer HER2+ NSCLC: ~15-30K HER2+ breast cancer: 70-80K Lapatinib: ~Rmb10-20m (Global US$289m) Tykerb was approved by CFDA in 2012, marketed by GSK; Giorif (afatinib, also an EGFR/HER2 inhibitor) was approved in Feb-2016, marketed by Boehringer Ingelheim Potential competitors Competitive edge / strategy / market opportunities 5+ domestic players are developing PEG-G-CSF, clinical trial or IND stage Leading position in oncology market with well-established channel and relation with oncology KOLs vs. peers 10+ DPP-4 inhibitors at different development stages from over 20 MNCs/domestic players - Potential first domestic DPP-4 inhibitor - Pricing and combo with firstline therapy (e.g. metformin) would be the key Generics: 5 sponsors by mid- 2016, all approved for clinical trial in 2015 Targeting CRC / NSCLC as primary indications, different from Sutent and its generics (approved for RCC, GIST and pancreatic NET) 5 approved for clinical trial for Lapatinib generics; 11 for Afatinib generics. Neratinib is on clinical trials Ph1 data (ASCO 2015, n=36, mg q.d.): ORR 47.2%, Grade 3+ AE 8.3% (vs. lapatinib 1250mg q.d.: 23.7%; neratinib mg q.d.: 32%, 6.9%) Source: Company data, CFDA, ASCO 2015, China Cancer Report 2015, Clinicaltrial.gov, FDA, Goldman Sachs Global Investment Research. 全球投资研究 11

12 Leading innovator to benefit from changing regulatory environment 2015/2016 marked the milestone years for the pharma R&D in China, as CFDA s measures to revamp the drug approval procedure (e.g., inspection on clinical trial data) and raising the bar for generics (i.e., mandatory bioequivalent studies) indicated that the sector would undergo major structural changes, shifting from a channel/marketing driven model to a more patient-oriented model based on: 1) innovation; 2) high quality; and 3) clinical benefits. We believe Hengrui is ahead of peers in leading the go innovative trend in China, with: Consistent strong commitment to R&D (R&D spending at 9%-10% of sales each year from , vs. about 3% industry average), particularly an early mover in the novel drug development; A risk-reward balanced follow-on R&D strategy for new molecule discovery; An R&D team with talent that combines drug development experience from MNCs and local expertise; Long-term partnership with leading academies in China with growing collaboration with leading global research institutions; The most in-depth novel drug pipelines in China, with 20+ novel chemical/biological molecules and biosimilars at clinical stages. Exhibit 12: Growing application for novel drugs INDs for chemical drugs / therapeutic biologics in H16 Exhibit 13: Hengrui is among the top R&D spenders in China Comparing R&D as % of sales: A/H listed Chinese pharma 3,500 16% 2015 R&D Spending as % of sales 3,000 14% 12% 2,500 10% 2,000 8% 1,500 6% 1,000 4% 500 2% - 0% H16 Generics NMEs NMEs as % of IND *: There could be more than one INDs for one single molecule Hengrui Hisun Pharma Fosun Pharma Salubris Sino Biopharm Tasly Huahai Luye Kelun Joincare Livzon Pharma Shanghai Pharma CSPC Humanwell Baiyunshan 1.7% 9.6% 9.4% 9.3% 9.1% 8.9% 7.9% 7.8% 6.6% 6.4% 5.7% 5.7% 5.2% 4.2% 4.0% Source: DXY insight database (CDE data) Source: Company data, Bloomberg, Wind Initial success in globalization paves way for new opportunities Hengrui is one of the early movers in China tapping into the overseas regulated markets (i.e., US, EU, and Japan), and the globalization business model has evolved along the way, starting with API exports, then moving to: 1) generics in US/EU/Japan; 2) global clinical trials for novel molecules in overseas markets, e.g. Ph1 for Retagliptin, Pyrotinib and anti-pd-1 monoclonal antibody (mab), and 3) licensing out an anti-pd-1 molecule (SHR-1210) s overseas rights to Incyte. Hengrui might not be the first one in testing those different models, but is gaining leadership vs. peers, in terms of: 全球投资研究 12

13 Commercial success of cyclophosphamide, a generic oncology drug that gained over 50% of market share in the U.S. from Baxter by October 2016; Superior formulation technology vs. domestic peers (e.g., Hengrui s ANDAs include three injectables vs. most of the peers ANDA obtained only for lower-barrier oral dose forms); and Significant deal size in licensee out (SHR-1210: potential US$795mn in total, including upfront and potential milestone payments). Exhibit 14: Hengrui s globalization strategy is diversified vs. peers Mapping of overseas expansion strategy of domestic early movers in globalization, as of November 2016 Commoditized API Specialty / tailored API Generics non-injectable Generics injectable Drug delivery system Novel drug R&D License -out Hengrui Minor 2 US ANDA 3 US ANDA Pyrotinib Ph1 PD-1 Luye Microspheres Ansofaxin Ph1 CSPC Vc, caffeine 4 US ANDA Liposomes Complex generics Humanwell (Puracap) 3 US ANDA Huahai CCV 15 US ANDA Porton Intermediate CMO partner for Gilead (Sovaldi) Unilabs Antibiotics Source: Company data, Goldman Sachs Global Investment Research. 全球投资研究 13

14 Financials: Robust earnings growth with strong cash position Our key findings from the analysis of Hengrui s financials since 2010 include: Consistent revenue/earnings growth: 20%+ revenue/recurring earnings growth from M16, except 14% yoy in sales and 17% in earnings in 2013, when the company s core portfolio was negatively affected by notable price cuts without major new products to offset the impact. High quality earnings: R&D investment is fully expensed (vs. A-share peers average 87%); net non-operating income was only Rmb3mn in 2015 (vs. profit before tax of Rmb2,562mn). Strong cash position: Cash position stood at Rmb6.2bn by end-3q16 (56.5% of current assets). Operating cash flow was consistent with earnings. We believe the strong cash position could support Hengrui s future investment on potential: 1) new infrastructure in both domestic and overseas market; and 2) M&As. Capex likely to be higher in 2016 vs. previous years: With the construction of new facilities in Shanghai and Suzhou, management guided to Rmb mn capex in 2016 (vs. annually Rmb mn in the past five years and GS estimate of Rmb788mn). Apatinib and overseas ANDA key growth drivers in Hengrui s sales grew +20.3% in the first three quarters in 2016 and we forecast sales of Rmb11.3bn (+20.8% yoy) in full year 2016E, Rmb13.6bn (+20.4% yoy) in 2017E and Rmb16.1bn (+18.8% yoy) in 2018E. We expect oncology drugs to remain as the key therapeutic category for Hengrui over the next three years (40%+ of sales from 2016E-2018E), while smaller categories, i.e., anesthesia and contrast agents likely continue to emerge. We expect the ramp-up of Apatinib and overseas sales will remain as the key drivers over the next three years, and potential new product launches (e.g. 19K and Retagliptin, for which management plans to re-submit the application for production permit) could pose upside risks to our sales estimates. Exhibit 15: Oncology to remain a key focus Hengrui sales forecasts by therapeutic area E Exhibit 16: Apatinib and overseas sales to drive growth Hengrui sales forecasts domestic generics vs. new drivers Rmb bn % 25% Rmb bn % 25% 12 20% 12 20% % % 6 10% 6 10% 4 2 5% 4 2 5% - 0% - 0% e 2017e 2018e e 2017e 2018e Oncology Contrast agents Growth y/y Anesthesia Others Oncology y/y Domestic generics Overseas sales Growth ex. Apa+export Apatinib Growth y/y Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). 全球投资研究 14

15 2016E-2018E earnings CAGR of 22% with stable dividend payout Hengrui has delivered consistently solid earnings in the past years, with the launch of highermargin Apatinib and start of US sales of cyclophosphamide driving notably higher earnings growth in 2015 (45% yoy recurring vs. 15%-25% from ). The earnings growth was 22.7% in the first three quarters of 2016, and we forecast net profit of Rmb2.65bn (+22% yoy) for full year 2016E, Rmb3.3bn (+23.2% yoy) in 2017E and Rmb3.9bn (+20.4% yoy) in 2018E, with net margin improving from 23.6% in 2016E to 24.4% in 2018E, factoring in the growing contribution from novel drugs and overseas sales. Exhibit 17: We expect 2016E-2018E earnings CAGR of 22% Hengrui s earnings forecast E Exhibit 18: Consistent dividend payout Hengrui s cash dividend forecasts over E Rmb bn Higher margin Apatinib and cyclophosphamide (ANDA) drove higher earnings growth 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Rmb mn % 12% 10% 8% 6% 4% 2% 0% e 2017e 2018e e 2017e 2018e Net profit Growth y/y Growth (recurring) Cash dividend Payout ratio Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). Emerging novel drugs and overseas sales drove GM expansion The gross margin of Hengrui improved from 82.4% in 2014 to 85.3% in 2015 and 86.8% in the first three quarters of We expect the gross margin to further improve slightly in the coming years, though relatively more modest in magnitude vs. that in 2015/2016, with: 1) further ramp-up of Apatinib and overseas oncology (3%/4% of gross profit in 2015 vs. 9%/5% in 2018E); and 2) improving gross margin of anesthesia and contrast agents, with the ramp-up of new products with less competition, both of which could offset the impact of price erosion in domestic generics portfolio. 全球投资研究 15

16 Exhibit 19: Gross profit from apatinib and overseas oncology sales to increase Breakdown of gross profit by major drugs / categories Exhibit 20: Expect slight gross margin expansion for Hengrui in the coming years Gross margin trend of Hengrui in e 14% 13% 3% 2% 2% 3% 8% 11% 28% 30% 36% 28% 5% 4% 3% 9% e Other drugs Anti-inflammation Cardiovascular Contrast agents Anesthesia Domestic oncology Overseas oncology Apatinib 90% 85% 80% 75% 70% 65% Launch of Apatinib in China and launch of cyclophosphamide in U.S. 87% 87% 87% 85% 84% 84% 83% 81% 82% GM of key categories Category GM Category GM Overseas oncology 94.1% Other drugs 85.3% Apatinib 90.0% Cardiovascular 84.2% Anesthesia 89.7% Anti-inflammation 81.9% Oncology generics 88.3% Contrast agents 61.8% e 2017e 2018e Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). Stable SG&A with consistent strong commitment to R&D Hengrui has leveraged its well-established oncology sales force for marketing apatinib. While the company is building a dedicated team for novel drug promotion, which could be different vs. that for generics, we expect the overall SG&A as % of sales to remain stable, given large sales of the generics base. We expect the R&D expenses to remain at c. 10% of total sales, with total spending on R&D at Rmb1.22bn in 2016E, Rmb1.45bn in 2017E and Rmb1.71bn in 2018E. Further, we note that the total R&D investment in Hengrui has been fully expensed and reflected in the P&L (vs. average 14% and maximum 80% capitalized at A-share peers). Exhibit 21: SG&A and R&D as % of sales to stay stable SG&A and operating margin trend of Hengrui in E 45% 40% 35% 30% 25% 20% 15% 10% 5% Ramp-up of apatinib and US ANDA drove margin expansion Selling expenses Operating margin Net margin R&D as % of sales Admin (ex. R&D) as % of sales 0% e 2017e 2018e Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). 全球投资研究 16

17 Strong cash position built on robust operating cash flow Hengrui maintained a steady operating cash flow, which was in-line with the earnings growth. The free cash flow may be lower in 2016E due to higher capex for facilities in Shanghai and Jiangsu (management guidance of Rmb mn in 2016, vs. Rmb670mn in first nine months and GS estimates of Rmb788mn). We expect the free cash flow to remain robust in the coming years with stable operating cash flow. Exhibit 22: Operating cash flow to stay robust Hengrui cash flow forecasts in E Exhibit 23: Strong cash position with low debt level Hengrui cash/net cash forecasts in E Rmb bn Rmb bn Due to higher payables (mainly payables related to construction in progress) 12% 10% 8% 6% 4% 2% - - 0% (0.5) e 2017e 2018e e 2017e 2018e Operating cash flow Free cash flow Cash position Net cash Liability / asset ratio Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). Source: Company data ( ), Goldman Sachs Global Investment Research (2016E-2018E). Hengrui is operating with notably low gearing, with the total debt level at maximum Rmb20mn in the past 8 years, given: 1) the sufficient cash generated by its core business; and 2) management s lack of interest in major domestic M&As in the past. With the cash position at Rmb5.1bn by end-2015, we see Hengrui remains well positioned to support the implementation of its globalization strategy (M&As in the overseas market and investment on channels) and penetration in the new R&D territories (e.g., new facilities for biologics R&D and manufacturing). The debt level is likely to stay low in 2017E/2018E. 全球投资研究 17

18 Balance sheet Gearing: We estimate gearing ratio (liabilities/asset ratio) at 9.6% in 2016E, 9.0% in 2017E and 7.9% in 2018E with no debt. Total debt levels were <Rmb20mn in the past five years and the average total liability to total asset ratio in the past five years was 8.9% (vs 20%-30% for A-share pharma peers). Returns: We estimate ROE of 23.8% /23.6% / 23.0%, ROA of 20.6% / 20.7% / 20.4%. In addition, our analysis suggests that Hengrui s cash return on capital invested (CROCI) was 25%+ in the past three years, and we expect CROCI at 26.5%/31.5%/31.2% over 2016E-2018E. Exhibit 24: Hengrui Balance sheet Rmb Mn, Dec-31 as Fiscal Year-end H16 2H16E 2016E 2017E 2018E Assets Cash and equivalents 2,169 3,449 5,133 5,792 6,591 6,591 8,823 11,410 Net receivables 2,421 2,840 3,277 3,279 3,506 3,506 3,919 4,549 Inventory/stocks Other current assets Current assets 5,412 7,200 9,378 10,274 11,343 11,343 14,091 17,367 Net PP&E/Fixed assets 1,302 1,366 1,424 1,568 1,935 1,935 2,400 2,864 Net intantigibles Total investments Other long-term assets Non-current assets 1,808 1,887 2,118 2,459 2,857 2,857 3,318 3,778 Total assets 7,220 9,087 11,497 12,733 14,200 14,200 17,409 21,145 Liabilities Accounts payable Short-term debt and current portion of long-term deb Other current liabilities Current liabilities ,053 1,119 1,257 1,257 1,460 1,577 Long-term debt Other non-current liabilities Total non-current liabilities Total liabilities ,139 1,234 1,358 1,358 1,561 1,678 Shareholders' Equities Preferred shares Treasury stock - (136) (88) (81) (46) (46) (46) (46) Common stock (includes par value, capital surplus, a 2,339 2,796 3,366 3,772 3,366 3,366 3,366 3,366 Retained earnings 4,019 5,141 6,655 7,382 9,069 9,069 12,041 15,621 Other common equity (1) (2) (2) (7) (13) (13) (13) (13) Total common equity 6,357 7,798 9,931 11,066 12,375 12,375 15,348 18,927 Minority interest (balance sheet) Total shareholders funds/equity 6,656 8,154 10,358 11,499 12,842 12,842 15,848 19,467 Total liabilities and equity 7,220 9,087 11,497 12,733 14,200 14,200 17,409 21,145 Source: Company data, Goldman Sachs Global Investment Research 全球投资研究 18

19 Income statement Growth: We estimate sales growth of +20.8%/+20.4%/+18.8% yoy and earnings growth of +22.1%/+23.2%/+20.4% yoy over 2016E-2018E factoring in the growing contribution from novel drugs and overseas sales. Margin outlook: With the launch of apatinib (a high margin novel drug) and ramp-up of overseas sales, which benefited from the collaboration with Sandoz in marketing cyclophosphamide (generic anti-cancer drug) in the US, the gross margin, operating margin, and net margin kept improving since 2H14, and the trend is likely to continue in the coming quarters, in our view. We expect gross margin and net margin to improve from 2016E to 2018E: 1) gross margin of 86.8%/87.0%/87.1%; and 2) net margin of 23.6%/24.1%/24.4%. Exhibit 25: Hengrui P&L Rmb Mn, Dec-31 as Fiscal Year-end H16 2H16E 2016E 2017E 2018E Total sales/revenues 6,203 7,452 9,316 5,279 5,974 11,253 13,550 16,097 yoy % 14.1% 20.1% 25.0% 20.4% 21.2% 20.8% 20.4% 18.8% Total COGS (1,158) (1,313) (1,372) (705) (784) (1,489) (1,768) (2,076) Gross profit 5,045 6,139 7,944 4,575 5,189 9,764 11,782 14,022 yoy % 10.5% 21.7% 29.4% 23.6% 22.3% 22.9% 20.7% 19.0% Gross margin % 81.3% 82.4% 85.3% 86.7% 86.9% 86.8% 87.0% 87.1% Sales tax and add-on (106) (133) (156) (90) (102) (191) (230) (274) Add-on (%) 1.7% 1.8% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% Selling expenses (2,355) (2,844) (3,525) (1,961) (2,382) (4,344) (5,257) (6,262) S % 38.0% 38.2% 37.8% 37.2% 39.9% 38.6% 38.8% 38.9% R&D expenses (563) (652) (892) (489) (727) (1,215) (1,450) (1,706) R&D % 9.1% 8.7% 9.6% 9.3% 12.2% 10.8% 10.7% 10.6% Non-R&D admin expenses (592) (812) (952) (567) (525) (1,092) (1,274) (1,497) Other % 9.6% 10.9% 10.2% 10.7% 8.8% 9.7% 9.4% 9.3% Admin expenses (1,156) (1,464) (1,843) (1,055) (1,252) (2,307) (2,723) (3,203) A % 18.6% 19.6% 19.8% 20.0% 21.0% 20.5% 20.1% 19.9% SG&A (3,617) (4,440) (5,524) (3,106) (3,735) (6,842) (8,211) (9,739) SG&A % 58.3% 59.6% 59.3% 58.8% 62.5% 60.8% 60.6% 60.5% Other income & expenses (2) (7) (10) (8) 4 (4) - - Operating profit 1,426 1,692 2,411 1,461 1,458 2,918 3,571 4,283 yoy % 11.1% 18.6% 42.5% 18.5% 23.8% 21.1% 22.4% 19.9% Operating margin 23.0% 22.7% 25.9% 27.7% 24.4% 25.9% 26.4% 26.6% Depreciation (168) (209) (218) (126) (151) (276) (348) (421) Amortization (3) (4) (4) (2) (2) (4) (4) (4) EBITDA 1,597 1,905 2,633 1,589 1,610 3,199 3,923 4,708 yoy % 12.8% 19.3% 38.2% 18.7% 24.4% 21.5% 22.6% 20.0% EBITDA margin 25.7% 25.6% 28.3% 30.1% 27.0% 28.4% 29.0% 29.2% Net interest income/expense Other non-operating income/expense (4) Non-operating income/(loss) Profit before tax (PBT) 1,479 1,800 2,562 1,537 1,558 3,095 3,793 4,567 yoy % 9.8% 21.7% 42.4% 19.6% 22.0% 20.8% 22.5% 20.4% Income taxes (186) (227) (338) (217) (186) (402) (493) (594) Tax rate 12.6% 12.6% 13.2% 14.1% 11.9% 13.0% 13.0% 13.0% Total net profit 1,292 1,573 2,224 1,321 1,372 2,693 3,300 3,973 Minority interest (54) (57) (52) (6) (34) (40) (33) (40) as % of total net profit 4.2% 3.6% 2.4% 0.5% 2.5% 1.5% 1.0% 1.0% NPAT 1,238 1,516 2,172 1,314 1,338 2,652 3,267 3,933 yoy % 14.9% 22.4% 43.3% 23.8% 20.5% 22.1% 23.2% 20.4% Net margin 20.0% 20.3% 23.3% 24.9% 22.4% 23.6% 24.1% 24.4% EPS - basic EPS - fully diluted yoy % 14.9% 22.1% 43.2% 23.1% 20.4% 22.1% 23.2% 20.2% Cash dividends declared (122) (151) (196) (239) (294) (354) Cash dividend payout 9.9% 9.9% 9.0% 9.0% 9.0% 9.0% Weighted avg. adj. shares OS (mn) - adjusted 2,334 2,341 2,337 2,352 2,340 2,340 2,340 2,348 Fully diluted shares OS (mn) - adjusted 2,334 2,341 2,342 2,358 2,344 2,344 2,344 2,348 Period end shares outstanding (mn) 1,360 1,505 1,956 2,348 2,348 2,348 2,348 2,348 Bonus issue 1.1x 1.1x 1.3x 1.2x Source: Company data, Goldman Sachs Global Investment Research 全球投资研究 19