Deutsche Bank
Markets Research
Rating
Company
Buy
Sihuan
Pharmaceutical
Asia
Date
4 August 2015
Forecast Change
China
Health Care
Health Care
Reuters
0460.HK
Bloomberg
460 HK
ADR Ticker
SHPHY
ISIN
US82674Q1058
Price at 4 Aug 2015 (HKD)
Exchange Ticker
HSI
0460
4.41
Price target - 12mth (HKD)
6.00
52-week range (HKD)
6.44 - 4.25
HANG SENG INDEX
More work required for trading
resumption
2014 results announced; shares remain suspended
Sihuan reported revenue/EPS of RMB3.1bn/0.161 for full-year 2014,
representing YoY growth of 7%/30% respectively. EPS missed consensus by
4%. We believe the business fundamentals remain intact. The company
suggested that pricing pressure for its exclusive products is manageable;
however, the tender is delayed. The stock will remain suspended until all four
conditions laid down by the HKEX are met. Retain Buy on strong growth
outlook.
Investors focused on timeline for trading resumption
We have received numerous investor inquiries in the past several months
focusing on: 1) when will trading resume, 2) when will the auditor issue an
unqualified opinion, and 3) the soundness of Sihuan’s business. As outsiders,
we rely on publicly available information, third-party data and historic events to
arrive at our best estimates. We believe it might take three to four months for
forensic experts to complete a round of review and meet the first condition of
the HKEX under a blue sky scenario. We also expect an unqualified opinion as
early as 2016. Additionally, hospital drug sales data and regulatory data
indicate Sihuan is one of the largest drug companies by end user drug sales
and has one of the best pipelines in the industry.
Core businesses remain strong
We believe growth momentum of flagship products continues in 2015. For
Oudimei, hospital data suggest 8% YoY growth for 2Q15 QTD May vs. 16% for
1Q15 and 24% in 2014. We remind investors that our data only tracks one
dosage format while Sihuan primarily markets two; as such the actual growth
should be modestly higher. Yuanzhijiu achieved 54% YoY growth for 2Q15
QTD May vs. 70% for 1Q15 and 57% in 2014. We believe growth is driven by
the compelling economics of this drug with contract sales agents. Kelinao
exhibited 1% YoY growth for 2Q15 QTD May vs. 5% for 1Q15 and 16% in
2014. We attribute growth deceleration to a higher base. For Yeduojia, growth
was 13% for 2Q15 QTD May vs. 14% for 1Q15 and 16% in 2014.
Reducing price target of HKD6.0 from HKD6.5; risks
We decrease our price target to HKD6.0 from HKD6.5, based on 24x 2015E
EPS of HKD0.251, as we lower our EPS estimate by 5%. We believe a multiple
of 24 is justified, as the company’s HK-listed peers are trading at 19x, with
19% EPS growth in 2015 (vs. the 24% we model for Sihuan). Key risks include
delayed drug tenders, price erosion, supply constraints as well as prolonged
forensic investigation.
24,411
Jack Hu, Ph.D
Linc Yiu
Research Analyst
(+852) 2203 6208
jack.hu@db.com
Research Associate
(+852) 2203 6248
linc.yiu@db.com
Key changes
Price target
6.50 to 6.00 ↓
-7.7%
Non-GAAP
2015E EPS
(RMB)
0.21 to 0.20 ↓
-5.1%
Source: Deutsche Bank
Price/price relative
7.0
6.0
5.0
4.0
3.0
2.0
8/13
2/14
8/14
2/15
Sihuan Pharmaceutica
HANG SENG INDEX (Rebased)
Performance (%)
1m
3m
12m
Absolute
0.0
0.0
-9.8
-6.3
-13.2
-0.8
HANG SENG INDEX
Source: Deutsche Bank
Forecasts And Ratios
Year End Dec 31
Sales (CNYm)
DB EPS FD(CNY)
DB EPS growth (%)
PER (x)
2013A
2014A
2015E
2016E
2017E
2,586.4
0.12
44.8
15.4
3,084.2
0.16
29.2
24.6
3,744.3
0.20
24.4
17.6
4,517.2
0.24
22.0
14.4
5,445.4
0.29
20.4
12.0
Source: Deutsche Bank estimates, company data
1
DB EPS is fully diluted and excludes non-recurring items
2
Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses
the year end close
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
4 August 2015
Health Care
Sihuan Pharmaceutical
Fiscal year end 31-Dec
Model updated:04 August 2015
Running the numbers
2012
2013
2014
2015E
2016E
2017E
0.09
0.09
0.04
0.7
0.12
0.12
0.05
0.8
0.16
0.16
0.03
0.9
0.20
0.20
0.03
1.1
0.24
0.24
0.00
1.3
0.29
0.29
0.00
1.5
10,350
11,881
8,830
10,350
19,925
16,297
10,363
41,070
36,979
10,363
36,607
30,904
10,363
36,607
29,296
10,363
36,607
26,817
P/E (DB) (x)
P/E (Reported) (x)
P/BV (x)
13.3
13.1
1.96
15.4
15.5
3.70
24.6
24.6
4.60
17.6
17.6
3.32
14.4
14.4
2.78
12.0
12.0
2.33
FCF Yield (%)
Dividend Yield (%)
2.1
3.9
2.0
2.6
2.5
0.7
4.9
0.9
5.1
0.0
7.6
0.0
EV/Sales (x)
EV/EBITDA (x)
EV/EBIT (x)
2.9
7.5
8.4
6.3
9.9
10.9
12.0
17.1
18.7
8.3
12.0
13.0
6.5
9.3
10.0
4.9
7.1
7.6
3,043
2,289
1,179
40
92
1,048
124
-6
0
0
1,166
244
17
0
904
2,586
1,455
1,640
43
100
1,497
112
-7
0
0
1,603
311
7
0
1,285
3,084
2,111
2,158
91
88
1,979
99
-5
0
0
2,073
389
14
0
1,671
3,744
2,853
2,579
106
89
2,384
150
25
0
0
2,560
474
7
0
2,079
4,517
3,495
3,140
125
89
2,927
165
29
0
0
3,121
577
7
0
2,537
5,445
4,233
3,779
147
89
3,543
180
34
0
0
3,757
695
7
0
3,055
-13
892
7
1,292
0
1,671
0
2,079
0
2,537
0
3,055
1,046
-793
253
0
-662
767
-1,967
-1,609
483
1,574
-1,166
408
0
-523
-523
664
26
143
1,761
-738
1,023
42
-244
-183
-921
-283
-149
2,125
-321
1,804
0
-335
0
150
1,619
19
2,246
-387
1,859
0
-409
0
165
1,615
-317
3,265
-466
2,799
0
-492
0
180
2,487
181
1,544
924
3,942
1,616
1,433
9,459
6
2,266
2,272
7,084
103
7,187
-1,538
1,594
1,442
3,253
2,156
1,654
10,097
6
2,154
2,160
7,821
115
7,937
-1,588
1,318
1,704
3,537
2,891
1,874
11,323
4
1,913
1,917
9,292
114
9,406
-1,314
2,937
1,919
3,473
2,891
1,883
13,102
4
1,942
1,945
11,036
121
11,157
-2,933
4,552
2,181
3,413
2,891
2,445
15,481
4
2,186
2,190
13,163
128
13,292
-4,548
7,039
2,499
3,359
2,891
2,578
18,366
4
2,501
2,504
15,726
136
15,861
-7,035
35.7
7.4
38.8
34.4
50.9
12.9
27.0
6.2
-21.4
nm
-15.0
44.8
63.4
57.9
40.7
17.2
45.2
8.2
-20.0
nm
19.2
29.2
70.0
64.2
16.1
19.5
24.4
4.2
-14.0
nm
21.4
24.4
68.9
63.7
16.1
20.5
8.6
1.6
-26.3
nm
20.6
22.0
69.5
64.8
0.0
21.0
8.6
1.8
-34.2
nm
20.5
20.4
69.4
65.1
0.0
21.2
8.6
2.0
-44.4
nm
Financial Summary
DB EPS (CNY)
Reported EPS (CNY)
DPS (CNY)
BVPS (CNY)
Asia
China
Health Care
Sihuan Pharmaceutical
Reuters: 0460.HK
Bloomberg: 460 HK
Weighted average shares (m)
Average market cap (CNYm)
Enterprise value (CNYm)
Valuation Metrics
Buy
Price (4 Aug 15)
HKD 4.41
Target Price
HKD 6.00
52 Week range
HKD 4.25 - 6.44
Market Cap (m)
HKDm 45,699
USDm 5,895
Income Statement (CNYm)
Company Profile
Sihuan Pharmaceutical Holdings Group Ltd. is engaged in
the R&D and production of cardio-cerebral vascular (CCV)
drugs in China. The company's products additionally
address needs in the areas of anti-infective, metabolism,
cardiovascular system, oncology and nervous system.
Price Performance
7.0
6.0
5.0
Sales revenue
Gross profit
EBITDA
Depreciation
Amortisation
EBIT
Net interest income(expense)
Associates/affiliates
Exceptionals/extraordinaries
Other pre-tax income/(expense)
Profit before tax
Income tax expense
Minorities
Other post-tax income/(expense)
Net profit
DB adjustments (including dilution)
DB Net profit
4.0
3.0
Cash Flow (CNYm)
2.0
Aug 13Nov 13Feb 14May 14Aug 14Nov 14Feb 15May 15
Cash flow from operations
Net Capex
Free cash flow
Equity raised/(bought back)
Dividends paid
Net inc/(dec) in borrowings
Other investing/financing cash flows
Net cash flow
Change in working capital
Sihuan Pharmaceutical
HANG SENG INDEX (Rebased)
Margin Trends
80
70
60
50
40
30
Balance Sheet (CNYm)
12
13
14
15E
EBITDA Margin
16E
17E
EBIT Margin
Growth & Profitability
40
30
20
10
0
-10
-20
25
20
15
10
5
Cash and other liquid assets
Tangible fixed assets
Goodwill/intangible assets
Associates/investments
Other assets
Total assets
Interest bearing debt
Other liabilities
Total liabilities
Shareholders' equity
Minorities
Total shareholders' equity
Net debt
0
12
13
14
15E
16E
Sales growth (LHS)
Key Company Metrics
17E
ROE (RHS)
Solvency
0
-10
-20
-30
-40
-50
12
13
14
Net debt/equity (LHS)
15E
16E
17E
Sales growth (%)
DB EPS growth (%)
EBITDA Margin (%)
EBIT Margin (%)
Payout ratio (%)
ROE (%)
Capex/sales (%)
Capex/depreciation (x)
Net debt/equity (%)
Net interest cover (x)
Source: Company data, Deutsche Bank estimates
Net interest cover (RHS)
Jack Hu, Ph.D
+852 2203 6208
Page 2
jack.hu@db.com
Deutsche Bank AG/Hong Kong
4 August 2015
Health Care
Sihuan Pharmaceutical
More work required for
trading resumption
Most frequently asked questions
We believe investors are mostly concerned on when the stock will resume
trading. The press release stated four resumption conditions and the company
believes it has met conditions 3 and 4, while majority of the work for condition
2 is complete. At present, the company has already engaged a third-party
forensic expert.
We estimate the process might take 3-4 months in a blue sky scenario, as we
believe it might take 2-3 months for the forensic specialists to complete the
review and 2-3 weeks to complete the communication process with HKEX,
particularly to fulfill the requirement of condition one stated below. In a bearcase scenario, if the review fails to fulfill the HKEX requirement, another round
of review from the same specialist or a different external forensic firm will
result in process repetition, which may lead to another 2-3 month delay.
According to a press release, HKEX has imposed four conditions on the
company to resume trading.
1.
Engage an independent forensic specialist acceptable to the stock
exchange to conduct a forensic investigation on the allegations, to
disclose the findings, to take any remedial action to address the
findings, including the identified issues, and if necessary, to conduct
further investigations with an appropriate scope to address the
allegations.
Deutsche Bank view: We estimate this will take 2-3 months based on
historic examples. We have learned from past events that all delays
were due to companies’ reluctance to release certain data when
forensic accountants took over. However, in this case we believe
management is fully aware of the situation and is prepared to
collaborate.
2.
Demonstrate that the company has put in place adequate financial
reporting procedures and internal controls to meet its obligations
under the listing rules.
Deutsche Bank view: We believe this could be a relatively easy
condition to be met. The company needs to demonstrate the relevant
personnel, their responsibilities, as well as a clear internal control
system are all in place. Sihuan indicated that this is ongoing.
3.
Publish all outstanding financial results and address any audit
qualifications.
4.
Inform the market of all material information.
Deutsche Bank AG/Hong Kong
Page 3
4 August 2015
Health Care
Sihuan Pharmaceutical
The second most frequent asked question is when the auditor will sign off an
unqualified opinion for company financials. As a background reminder, an
unqualified opinion is issued when the auditor believes the financial
statements are sound. However, if the auditor has concerns on the financial
statements, the following three types of opinion could be issued:

Qualified opinion (except-for opinion): This will be issued when a
certain exception in the statements is misstated while the rest of the
statements is fairly presented. There are two situations: 1) single
deviation – this occurs when some parts of the statements do not
comply with the accounting standards; 2) limitation of scope – this
occurs when the auditor cannot audit some parts of the statements;

Adverse opinion: This will be issued when the auditor thinks the
financial statements of a company are considered to be misstated and
do not conform with the accounting standards;

Disclaimer of opinion: This occurs in four situations: 1) there is a
conflict of interest between the auditor and the company, or the
auditor is not independent; 2) the auditor is unable to obtain sufficient
evidence for the limitation of scope; 3) there is a substantial problem
of going concern; or 4) there are significant uncertainties in the
business of the company.
The auditor has issued a disclaimer of opinions for Sihuan’s 2014 annual
results. While the auditor did not express an opinion on the consolidated
financial statements, it listed the two concerns as basis, the adjustment of exmanufacturing prices and the treatment of expenses, as well as off-book
transactions conducted through personal accounts.
We anticipate an unqualified opinion as early as 2016, as we construe the
auditor may take another year to observe two issues mentioned in the
disclaimer, including adjustment of ex-manufacturing price as well as
consolidation of MRAs.
For the first issue, as the company indicated that it had already shifted all
pricing to an ex-manufacturing price system which was decreased from the
prior year. As such, this issue has been resolved. For the second one, the
company made it clear that all personal accounts that were associated with
this investigation were closed. In the future, no personal accounts would be
used for corporate activities.
Another frequently asked question is about the soundness of the company. As
outsiders, we rely on third-party data that are publicly available to verify all
company-reported data as best as we could. We summarize the following facts
and believe it is reasonable to conclude that Sihuan is one of the largest drug
manufacturers in China with one of the best pipelines.

Page 4
Third party data indicated that out of the best-selling drugs in China in
2014, which we defined by generating more than RMB250m sales in
2014 in our database, five products are from Sino Biopharm, six are
from Sihuan Pharma, two are from Fosun Pharma, and two are from
CSPC. It is clear to us that Sihuan is one of the largest drug companies
in China by end-user drug sales.
Deutsche Bank AG/Hong Kong
4 August 2015
Health Care
Sihuan Pharmaceutical

Regulatory data indicated that 286 class 1 chemical drugs and 51
innovative biological compounds were filed for approval in China
during 2001-2014. Sihuan has eight class 1.1 drugs filed, SBP has six.
Figure 1: Income statement
Incom e Statem ent (RMB m )
CCV (RMB m)
Anti-infectives (RMB m)
Other drugs (RMB m)
Other segment (RMB m)
Revenue
2008
401
46
61
1
510
2009
561
56
85
8
709
2010
838
86
111
2
1,037
2011
2,020
87
125
10
2,242
2012
2,804
60
156
23
3,043
2013
2,359
41
175
12
2,586
2014
2,817
40
198
29
3,084
2015E
3,432
89
210
13
3,744
2016E
4,102
175
224
16
4,517
2017E
4,889
296
241
19
5,445
Cost of sales
Gross profit
(134)
376
(192)
517
(292)
745
(528)
1,714
(753)
2,289
(1,131)
1,455
(973)
2,111
(997)
2,747
(1,147)
3,370
(1,360)
4,086
16
(24)
(39)
(45)
(8)
276
301
6
19
(42)
(49)
(65)
(14)
373
415
6
51
(17)
(57)
(97)
(18)
613
630
0
116
(8)
(632)
(167)
(34)
990
998
4
260
13
(1,312)
(172)
(34)
1,048
1,035
29
486
(7)
(139)
(243)
(84)
1,497
1,504
81
417
(150)
(331)
(149)
1,979
1,979
19
351
(187)
(357)
(189)
2,384
2,384
23
407
(226)
(409)
(237)
2,927
2,927
27
490
(272)
(480)
(307)
3,543
3,543
EBITDA - GAAP
EBITDA - non-GAAP
Finance income, net
Share of profit from an associated company
Profit before taxation - GAAP
Taxation
Tax rate
Net profit - GAAP
Non-controlling interests
Net incom e attributable to Equity holders - GAAP
Net incom e attributable to Equity holders - non-GAAP
303
327
0
10
287
(54)
18.7%
233
4
237
257
402
444
6
2
381
(67)
17.7%
314
13
326
358
648
665
22
635
(128)
20.2%
507
15
522
535
1,084
1,091
55
1,045
(245)
23.4%
800
24
824
830
1,140
1,128
124
(6)
1,166
(244)
20.9%
922
(17)
904
894
1,640
1,647
112
(7)
1,603
(311)
19.4%
1,292
(7)
1,285
1,291
2,158
2,158
99
(5)
2,073
(389)
18.7%
1,685
(14)
1,671
1,671
2,579
2,579
150
25
2,560
(474)
18.5%
2,086
(7)
2,079
2,079
3,140
3,140
165
29
3,121
(577)
18.5%
2,544
(7)
2,537
2,537
3,779
3,779
180
34
3,757
(695)
18.5%
3,062
(7)
3,055
3,055
Com m on shares
EPS: Basic (RMB) - GAAP
EPS: Diluted (RMB) - GAAP
0.032
0.032
0.087
0.087
0.130
0.130
0.159
0.159
0.087
0.087
0.124
0.124
0.161
0.161
0.201
0.201
0.245
0.245
0.295
0.295
EPS: Basic (RMB) - non-GAAP
EPS: Diluted (RMB) - non-GAAP
0.034
0.034
0.095
0.095
0.133
0.133
0.160
0.160
0.087
0.086
0.125
0.125
0.161
0.161
0.201
0.201
0.245
0.245
0.295
0.295
Other income/(loss)
Government grants
Non-recurring income/(expenses)
Distribution costs
Administrative expenses
Research and development costs
EBIT - GAAP
EBIT - non-GAAP
Source: Deutsche Bank, Company data
Deutsche Bank AG/Hong Kong
Page 5
4 August 2015
Health Care
Sihuan Pharmaceutical
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Company
Ticker
Recent price*
Disclosure
Sihuan Pharmaceutical
0460.HK
4.41 (HKD) 3 Aug 15
NA
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other
information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the
primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=0460.HK
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the
subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive
any compensation for providing a specific recommendation or view in this report. Jack Hu
Historical recommendations and target price: Sihuan Pharmaceutical (0460.HK)
(as of 8/3/2015)
12.00
Previous Recommendations
5
10.00
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Rating
6
4
2
Security Price
8.00
6.00
3
9
1
Current Recommendations
10
8
7
11
4.00
*New Recommendation Structure
as of September 9,2002
2.00
0.00
Aug 13
Buy
Hold
Sell
Not Rated
Suspended Rating
Nov 13
Feb 14
May 14
Aug 14
Date
Nov 14
Feb 15
May 15
1.
29/08/2013:
Buy, Target Price Change HKD7.50
7.
12/06/2014:
Buy, Target Price Change HKD5.80
2.
05/01/2014:
Buy, Target Price Change HKD8.10
8.
13/06/2014:
Buy, Target Price Change HKD6.60
3.
19/01/2014:
Buy, Target Price Change HKD8.80
9.
10/09/2014:
Buy, Target Price Change HKD7.40
4.
18/02/2014:
Buy, Target Price Change HKD9.70
10. 18/01/2015:
Buy, Target Price Change HKD7.00
5.
12/03/2014:
Buy, Target Price Change HKD10.70
11. 19/07/2015:
Buy, Target Price Change HKD6.50
6.
25/05/2014:
Buy, Target Price Change HKD11.60
Page 6
Deutsche Bank AG/Hong Kong
4 August 2015
Health Care
Sihuan Pharmaceutical
Equity rating key
Buy: Based on a current 12- month view of total
share-holder return (TSR = percentage change in
share price from current price to projected target price
plus pro-jected dividend yield ) , we recommend that
investors buy the stock.
Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the
stock
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not
recommend either a Buy or Sell.
Notes:
1. Newly issued research recommendations and
target prices always supersede previously published
research.
2. Ratings definitions prior to 27 January, 2007 were:
Equity rating dispersion and banking relationships
450
400
350
300
250
200
150
100
50
0
52 %
38 %
24 %
Buy
19 %
Hold
Companies Covered
11 %
13 %
Sell
Cos. w/ Banking Relationship
Asia-Pacific Universe
Buy: Expected total return (including dividends)
of 10% or more over a 12-month period
Hold:
Expected
total
return
(including
dividends) between -10% and 10% over a 12month period
Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
Regulatory Disclosures
1.Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2.Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
Deutsche Bank AG/Hong Kong
Page 7
4 August 2015
Health Care
Sihuan Pharmaceutical
Additional Information
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Page 8
Deutsche Bank AG/Hong Kong
4 August 2015
Health Care
Sihuan Pharmaceutical
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Page 9
4 August 2015
Health Care
Sihuan Pharmaceutical
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Copyright © 2015 Deutsche Bank AG
Page 10
Deutsche Bank AG/Hong Kong
David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee
Raj Hindocha
Global Chief Operating Officer
Research
Marcel Cassard
Global Head
FICC Research & Global Macro Economics
Steve Pollard
Global Head
Equity Research
Michael Spencer
Regional Head
Asia Pacific Research
Ralf Hoffmann
Regional Head
Deutsche Bank Research, Germany
Andreas Neubauer
Regional Head
Equity Research, Germany
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