Guiding for 30% net profit growth in 2018 Management guided for revenue growth of 20% and net profit growth of 30% in2018. On insulin glargine, production approval is expected in 4Q18while reachingRMB300-400m sales in 2019is likely. For insulin needles, the company is aimingat over 30% growth. Management continues to expect margin expansion, drivenby improving product mix and SG&A ratio. Insulin glargine to reach RMB300-400m sales in 2019 Management believes insulin glargine is likely to reach RMB300-400m sales in2019, and over RMB2bn sales in 2020. Market penetration of insulin glarginewill be driven by existing sales team. According to management, the coveragenetwork for 40R already reached 1000hospitals in 2017, on track to exceed2018target of 2000hospitals. Similarly for insulin glargine, coverage can reach1000hospitals by YE20, likely growing comparable with Ganli within 3-4yearsof launch. Though hospitals usually work with only 2suppliers for each drug,management expects maximum of 20-30% hospitals to be affected with regardsto promoting insulin glargine. Margins and other key updates Management expects continued margin expansion given higher gross marginsof third generation insulin products, though substantial volume growth maytake time. In addition, the company plans to utilize existing sales team forpromoting insulin glargine, leading to lower SG&A ratio going forward. Sales perrepresentative ranged widely at RMB3-10m in 2017, and the company would becautious in incremental hiring in 2018given expansion of the team in 2017.

Maintaining FY17 guidance. Management continues to guide RMB73bn revenue for 2017, on track to reachthe RMB100bn target by 2019. Net profit / core net profit excluding extraordinaryitems in 2017 likely have reached RMB1.3-1.4bn / RMB1.0bn, respectively. Majordrivers include expanding network coverage, increasing product offerings, andbetter DS penetration. Going forward, the company expects to reach core netprofit of RMB1.3bn in 2018, while RMB1.4bn might be possible. Updates on DS / IDS and coverage. Indirect sales (IDS) now accounts for 42% of total sales, down 2% from 44% inOctober 2017. Medical institutions, drug stores, non-drug channels account for29%, 22%, 6-7% of total revenue, respectively. Medical institution sales grew atabove 30% rate for 2016-2017, while drug store sales grew at 31-32% in 2017 vs. 15-16% in 2016 due to two-invoice. On coverage expansion, the company's corestrategy is to acquire local distributors. During 9m17, Jointown acquired over 40distributors, though 80 more are needed to reach target coverage at the nationallevel. On average, each acquired distributor was valued at RMB20-30m with overRMB200-300m revenue and net profit of RMB4-5m, while Jointown typicallyacquires up to 60% of interest only. In addition, each acquired asset undergoesa 3-year transition period, where operational and financial IT systems need tointegrate with Jointown's, though financial statements are not consolidated yet. The practice would add some but not much profit growth to Jointown, as mostacquired assets were already clients, though volume typically will rise once ina cooperative relationship. As of now, Hubei / Henan / Beijing / Guangdongare Jointown's largest markets, with 2017 sales of RMB10bn/8-9bn/7bn/6bnrespectively. Margins and other key takeaways. On margins, sales to medical institutions typically lead to 7-8% GM, where tier2 and above are 9%, and below tier 2 have 7%. Chain drug stores typically have5-6% GM, and independent ones have a bit over 7%. Overall GM for Jointownis about 8% at present. The company is seeing worsening receivable days, onaverage about 10 days longer in 2017 compared to same period in 2016. For 2017,the major nonrecurring items were proceeds from land sales of a distributioncenter in Wuhan, estimated at RMB400m pre-tax and RMB360m after-tax.

Solid growth to continue with multiple catalysts ahead. The two key take-aways include 1) Hengrui already filed PD1 application in 4Q17. We believe the indications are cHL and esophageal cancer, which is earlier thanstreet consensus. This led to stock rally on Tuesday. Additionally the companyexpects approval in 2018; 2) Hengrui expects growth acceleration in 2018. Webelieve this might be a combination of delayed booking of export profit andother unspecified elements. For 2017, Hengrui reiterated 18-20% domestic salesgrowth and 20% exports growth. As for the products breakdown, traditionaloncology/ anesthetics/ contrast agents should reach 10-15%, 20% and over 30%growth respectively in 2017. In addition, lower pricing erosion could be witnessedin FY18 compared with FY17, as secondary negotiations and tenders are largelyconcluded. Apatinib growth likely to accelerate in 2018; 4Q17 hiccup. The company indicated that apatinib sales was below expectation in 2017,due to slowdown in 4Q17 stemming from NRDL settlement/ implementationdelays and budget controls. Hengrui remains optimistic on 2018 outlook drivenby reimbursement coverage. Despite the 36% nominal ASP cut of apatinib,management believes the upside could very well outweigh pricing erosion. Assuch, management welcomes negotiations for NRDL/ PRDL rolling inclusionfor key innovative products. In addition, indication expansion studies for livercancer and NSCLC are both progressing to final stages, with approval expectedin 2H18-2019. Updates on pipeline and other key takeaways. Four blockbusters are likely to be approved including nab-paclitaxel, 19K,pyrotinib and PD-1. Hengrui commented on bigger addressable market forpyrotinib vs. apatinib, on the back of longer treatment duration, without offeringany color on pricing strategy. On nab-paclitaxel, Hengrui and CSPC are both onpriority review list, with the possibility of obtaining approvals simultaneously. Asfor R&D spending, the ratio is likely to remain at current level, as expense increasewill synchronize with sales growth. On management incentive, the companyimplemented 3 rounds in 2014/16/17, with near-term plan of another round, using3m reserved shares.

Pyrotinib data much better than T-DM1and lapatinib The PFS benefit (HR=0.374) surprised us despite previous qualitative commentsfrom Hengrui management. We believe it is highly likely Pyrotinib would be thegolden standard in 2L Herceptin relapsed HER2positive BC in China. To us,this is the second meaningful oncology clinical study from China ever, as trialdesign followed a reasonable treatment paradigm that is NOT full of Chinesecharacteristics. After data release at SABCS, we have higher conviction thatpyrotinib will be approved by CFDA based on P2data. Among trastuzumab relapsed patients, HR was 0.374while mPFS hasnot been reached in PC arm, vs. 7.1m in LC arm. The baseline PFS dataseemed to be in line with historic data (6.4m from EMILIA, 7m from S Gori2016). The yet-to-be-reached mPFS should be more than 21m, accordingto the data release. EMILIA study showed a PFS benefit of 9.6m for T-DM1vs. 6.4m for LC,with a HR of 0.65. Our surprise came from a gap of 21m vs. 9.6m. If thesedata could be repeated in a P3study, pyrotinib would become a goldenstandard in 2L BC. Previous studies indicated that TTP (from 1L Herceptin treatment) couldbe a predictive marker for PFS/OS benefit second-line HER2inhibitors.In this study, prior treatment of trastuzumab is associated with a longermPFS (7.1m vs. 5.6m for trastuzumab naive) for LC arms; data were alsoconsistent in PC arms. In our view, this should raise a serious questionfor Chinese regulators regarding the relevance of clinical data from thosestudies, specifically designed for Chinese patients today, who did notfollow NCCN treatment guidelines. The additional questions include whether pyrotinib could be used in1L BC, or adjuvant setting, or used off-label in GC. For the first twoquestions, we believe further data are required. That being said, for GCsetting, despite the failure of T-DM1(GATSBY study, 2L GC) and lapatinib(EGF110656, 1L GC), we gained reasonable confidence that pyrotinibmight work based on impressive P2data.

Solid growth from insulin franchise; reiterating Buy Tonghua Dongbao (THDB) reported sales/core profit of RMB671m/239m in 3Q17,vs. our estimates of RMB673m/214m, respectively. These represent YoY growthof 14%/31% in 3Q17, vs. 33%/32% in 1H17for revenue and core profit. Givensteady performance of insulin franchise, the overall revenue growth was slowerdue to higher base in 3Q16, where the company had one-time revenue from realestate business and transfer of assets. We note robust profit growth was alsodriven by margin expansion and continued efficiency improvement. Importantly,insulin glargine filed for production in October, with estimated launch in 2H18and meaningful contribution in 2020. Smooth ramp-up of insulin franchise; insulin glargine launch expected in 2H18 According to the company, insulin products achieved sales of RMB537m in 3Q17vs. RMB447m in 3Q16, representing 20% YoY growth. Insulin needles and teststrips registered growth of over 30% and a bit under 20% respectively in 3Q17, vs.30%/20% in 2Q17. Management expects Gansulin 40R to reach RMB100m salesin 2017and 30R to maintain 15% full-year growth. For third-generation insulin,THDB filed production approval for insulin glargine on October 10, expectinglaunch in 2H18and meaningful contribution in 2020. The company is on trackwith insulin aspart and has selected hospitals to conduct clinical trials for 30R.Additionally, insulin detemir received IND approval on October 20. Managementsuggested that insulin aspart 30R would be the next focus after the launch ofinsulin glargine, as currently the two take up 90% of insulin market in China. Expecting stable margins ahead GM/OPM stood at 75.7%/43.9% in 3Q17vs. 72.8%/40.0% in 3Q16. Managementattributed the hike to slower recognition of expense items from 1H17.Improvement in OPM was mainly driven by 198bps of savings on sellingexpenses. Management guided for stable margins ahead, with 1-2% ASP cutsfrom provincial tenders. Raising price target to RMB25.4from RMB23.7; risks Our PT is based on 45x 2018E EPS (vs. 42x previously), due to sector re-ratingand regulatory progress of third-generation insulin products. The A-share peersare trading at 36x (vs. 28x previously) with 24% growth in 2018E (vs. 21% forTHDB). In our view, the premium is justified by sustainable growth of the insulinfranchise, ramp-up of CDMP and a compelling risk profile. Key risks: larger-thanexpectedASP erosion, growth slowdown and product launch delays.

Growth acceleration continued in 3Q Aier reported revenue/core profit of RMB1.8bn/292m in 3Q17, representing YoYgrowth of 54%/45% respectively, vs. 35%/34% in 1H17, and vs. 26%/19% forrevenue/core profit in 2016. The company commented that organic growth ofrevenue and core profit was 28%/38% in 3Q17, vs. 31%/ 27% in 2Q17, andvs. 24%/ 22% in 1Q17. Management attributes the robust revenue growthto consolidation of newly-acquired subsidiaries (including Clinica Baviera) andorganic growth of existing hospitals. We expect further growth acceleration,driven by contribution from new assets and solid existing business. We reiterateBuy on high earnings sustainability and visibility. Strong growth momentum for the three major segments Sales growth of excimer surgery, cataract surgery, and optometry was estimatedto be 50%, 57%, and 37% in 3Q17, vs. 42%, 33%, and 30% in 1H17, and vs. 36%,22%, and 37% in 2016, respectively. We believe the strong results were owing tothe growing need for ophthalmic services in China. On M&A, the Clinica Bavieradeal closed in August 2017and is expected to add another leg of growth in 4Q17. Margin improved in 3Q17 GM/OPM registered 50.6% and 25.4%, respectively, in 3Q17, vs. 48.5% and22.1% in 3Q16. We attribute the margin expansion to the ramp-up of newhospitals, economies of scale, and lower admin costs. We also highlight thatfinance costs advanced 1324% YoY in 3Q17, resulting from a large amountof borrowings for acquisitions. We believe the momentum in operating marginimprovement will continue with the contribution from new assets. Increasing price target to RMB32.4from RMB28.7; risks Our target price is based on 26x EV/EBITDA of 2018E EBITDA, vs. the 25x weused previously, due to sector re-rating. We believe 26x is justified, as its Asialistedpeers are trading at 19x with 6% EBITDA growth in 2019E (vs. the 25% wemodel for Aier). Key risks include delays in geographical expansion, execution riskrelated to newly-acquired business, and slower ASP/ volume growth.

RMB100bn sales target in 2019; 3key drivers Management is targeting RMB100bn sales in 2019, suggesting CAGR16-19E of18%. Major drivers include geographical expansion, increasing product offeringand deeper penetration of hospital channels. First, the company expanded itslogistics network coverage to 30provinces in China, noting 5distribution centersin construction and typically smaller base for newer regions. Second, productsinitiated over recent years continue to ramp up, while the company developsnew offerings in high-margin segments such as medical devices and nutritionsupplements. Lastly, as the company started its direct sales business in 2009,there is plenty of room for sales channel expansion. Going forward, managementreaffirms 2H17to outperform 1H17per historical trends, and that over RMB73bnsales can be achieved in FY17. Dynamics of DS and IDS under two invoice implementation Indirect sales (IDS) remains high at 44% of total sales as of now, down 1% from45% in 2016. However, management also expects IDS to stay at 35% by 2019,as a two invoice policy is unlikely to be strictly implemented in rural areas, drugstores and device/consumables. For 1H17, robust growth was attributed partiallyto JT's ability to take market share due to the following two changes under thetwo invoices: 1) JT was able to get more contracts directly from manufacturers,bypassing JT's previous upstream distributors as those distributors exited the IDSbusiness; 2) JT was able to assume more contracts directly from more drug stores,as JT's previous downstream distributors exited market. Approximately RMB10bn additional working capital required On liquidity, the working capital to revenue ratio currently stands at 6:1, and isexpected to go up with higher hospital concentration. As there is a RMB40bnrevenue gap between the 2019target and revenue in 2016, management budgetsRMB10bn in capital requirements and plans to tackle liquidity pressure by raisingRMB3.6bn equity, while additional debt can go up to RMB7.2bn. Cost of debt willlikely be around 4-5%.

Solid growth delivered in 2Q17. Hengrui registered sales/core profit of RMB3.2bn/766m in 2Q17, representingYoY growth of 22%/21%. This suggests mild acceleration from 19%/17% growthachieved in 1Q17. Export growth was below 20% in 2Q17, according to themanagement. We highlight the near-term catalysts for Hengrui: 1) export growthacceleration in 2H17/2018, driven by new products launches in the US; 2) weexpect apatinib to add another leg of growth following NRDL implementation,starting from 3Q17 and 3) three potential blockbuster launches in 2019, including19K, pyrotinib and nab-paclitaxel. We reiterate Buy on rich pipeline and earningsgrowth visibility. Domestic growth in line with expectation; ASP erosion. Growth in the oncology/anesthetics/contrast agents segments stood atsub-20%/20%+/30%+ in 1H17 vs. 36%/19%/30% in 2016. We attribute the solidperformance to fast ramp-up of contrast agents Ioversol/Iodixanol, while cancerdrugs recorded growth moderation due to tender ASP pressure and law of largenumbers. Management indicated that price renegotiation at the hospital levelaffected 1H17 results. On margins and pipeline progress. GM came in at 86.4% in 2Q17, down from 87.7% in 2Q16, primarily due to ASPpressure in drug tenders. Nevertheless, OPM expansion was recorded despitethe GM contraction, from 26.6% in 2Q16 to 27.6% in 2Q17. Managementattributed the margin expansion to lower selling and promotion expenses andadmin cost savings. R&D expenditure was 12.3% in 2Q17 vs. 9.3% in 2Q16,as more late-stage trials were initiated. Management indicated that near-termpipeline priorities are pyrotinib and camrelizumab. The majority of its potentialblockbusters are in the phase 3 stage, including pyrotinib P3 for mBC, apatinibP3 for NSCLC/LC and camrelizumab for EC/LC. Raising target price to RMB60.5 from RMB58.5; risks. Our RMB60.5 target price is based on 43x 2018E EPS vs. the 42x we usedpreviously. We believe the multiple is justified, as its A-share peers are trading at29x 2018E EPS, with 14% growth in 2019 (vs. the 27% we model for Hengrui). We believe the premium is justified, given the superior pipeline, upside potentialfrom exports and potential earnings growth acceleration driven by blockbusterlaunches. Key risks include product launch delays and price cuts.

Growth acceleration led by consolidation, margin expansion underway Aier reported revenue/core profit of RMB1.4bn/214m in 2Q17, representing YoYgrowth of 39%/41% respectively, vs. 31%/25% for revenue/core profit growthrecorded in 1Q17. Excluding the contribution from 9new hospitals and AWHealthcare, organic growth would be 31%/ 27% in 2Q17, vs. 24%/ 22% in 1Q17.We attribute the robust results to rapid ramp-up of the profitability of the newhospitals following asset injection, as well as solid performance from excimer andcataract segments. We expect higher contribution from new assets, with marginimprovements driven by transition from low-end to high-end services. Growth momentum continued in all three major segments Excimer surgery, cataract surgery, and optometry achieved YoY growth of46%/38%/29% in 2Q17, compared with 36%, 26%, and 32% in 1Q17, respectively.Management attribute the growth recovery of cataract business to deeperpenetration from promotional efforts. On the acquisition front, the companyis likely to take a pause but rather focus on integration of acquired assets.Management highlighted that acquisition of Clinica Baviera is completed, andexpect the consolidation to add another leg of growth to 2H17. Margin expansion achieved in 2Q17 Gross margin and operating margin stood at 49.4% and 21.7% respectively, in2Q17, compared with 47.7% and 19.5% in 2Q16. We attribute the GM increaseto improved service mix as customers switch to high-ASP excimer surgeries. The220bps OPM improvement was driven by smooth ramp-up of new hospitals andlower admin expenses. We highlight newly acquired hospitals achieved 15% netmargin in 2Q17vs. 7% in 1Q17. Maintaining price target of RMB28.7; risks Our PT is based on 25x EV/EBITDA of 2018E EBITDA. We believe 25x is justifiedas its Asia-listed peers are trading at 18x with 6.5% EBITDA growth in 2019E (vs.27% we model for Aier). Key risks include delays in geographical expansion andslower ASP/volume growth.

Another blockbuster launch highly likely; with peak sales of RMB2-2.8bn byDBe. As of today, public database indicated that Hengrui had filed for new drugapplication (NDA, marketing and manufacturing approval) for pyrotinib. In ourrecently published deep dive report for Hengrui pipeline, we estimated peak salesopportunity of RMB2-2.8bn for this compound. We spoke with managementrecently, and anticipate that the indications oncologists would use in practicewould include mBC and mGC (gastric), while there is a reasonable likelihoodfor adjuvant therapy, just like neratinib. We remind investors that Herceptin hada run rate of RMB2.2bn by YE16, with PRDL coverage in 15provinces. WhileHerceptin price had 53% price cuts in China recently, we still believe high endof our estimates (RMB2.8bn) for pyrotinib is achievable as P2data might becomparable to that of neratinib, but much better than lapatinib.. Phase I data reported at SABCS 2015; phase 2data to be reported at SABCS2017.Pyrotinib is a novel small molecule irreversible pan-ErbB receptor TKI (tyrosinekinase inhibitor), similar to neratinib. ORR of 53% and DCR of 81% were reportedfrom a phase I dose finding study with 382L or above mBC patients in China. PFSwas 35-40weeks. The MTD was 480mg while grade III diarrhea was observed,similar to AE profile of neratinib. While the company has not articulated details ofphase 2study, we believe the NDA was based on a phase? study (CTR20150279)with 128patients that compared pyrotinib/capecitabine vs. lapatinib/capecitabinein 2L her2+ mBC. We noticed that there is an ongoing phase 3study with exactlythe same design. As such, we believe this might be the requirement from CFDAthe pyrotinib were to gain CFDA approval based on P2data. Lastly, the companyindicated that P2data would be presented in December.. US strategy; changes to our model. Management indicated that pyrotinib is in phase I study in US. However thetarget indication for future development is NSCLC with her 2mutation, differentfrom China pathway. It is estimated that 2-3% of the NSCLC patients have her2mutation according to the company. For our model, we increase revenueestimates to RMB300/900m from RMB100/450m respectively for 2019/2020aswe now expect approval in 2H18vs. 1H19before. Our EPS estimates increased0.9% and 1.7% for 2019/2020respectively. TP is unchanged; reiterate Buy..

Multiple catalysts ahead; late-stage pipeline represents 17% market cap by DBe. We update pipeline progress following the meeting with Chairman Sun. Majorcatalysts are: 1) approval of 19K and Abraxane generic by YE17; 2) resubmissionof retagliptin in the near term; 3) clarity on pyrotinib development, includingan earlier submission of marketing approval; 4) updates on clinical progressfor camrelizumab; and 5) phase 3 data release on Incyte's ECHO-301. We alsohighlight potential upside from additional US IND approval and clinical progressof its novel compounds in the US. Our NPV analysis indicated the pipeline valueis RMB9.2 per share. This comprehensive report includes key ongoing clinicalstudies for all mid/late study compounds, as well as competitors' studies. Camrelizumab as the largest driver; IDO inhibitor provides significant upside. We have updated our peak sales for camrelizumab to RMB5-6bn in China andincreased the probability of success to 75-85%, based on the strong ORR datafrom the phase 1 study. Four registration trials are being conducted at present. We expect Hengrui to get the first domestic PD-1 approval, with safe data fromsufficient number of patients required by the CFDA. Additionally, we expect INDapproval for its IDO inhibitor from CFDA in the near term, following US INDapproval in May. We believe it would be significantly positive to the IO franchiseand we forecast RMB3-4bn peak sales for the IDO inhibitor. DB proprietary patient-based PD-1/PD-L1 model. Our model indicates that the addressable market for PD-1/PD-L1 would beRMB19bn in China in 2017 and RMB29bn in 2030, representing a CAGR of 15%. NSCLC and GC are likely to be the largest indications due to a large patient baseand unmet medical need. Our model is based on 14 tumor types, including theapproved indications and major indications being investigated. Among domesticnames, we identified six companies that are conducting late stage studies fortheir PD-1/PD-L1 with Hengrui being the leader. Valuation and risks. Our current valuation for the late stage pipeline represents 17% of the market cap,vs. 15% as of our first attempt in September 2016. Our TP of RMB58.5 is basedon 42x 2018E EPS. We believe 42x is justified, as A-share peers are trading at 29xwith 18% EPS growth in 2017 (vs. the 24% we model for Hengrui). We believethe premium is justified, given the top China pipeline, major upside from exportsand the potential earnings growth acceleration driven by blockbuster launches. Key risks include product launch delays and price cuts.

Multiple catalysts ahead; late-stage pipeline represents 17% market cap by DBe We update pipeline progress following the meeting with Chairman Sun. Majorcatalysts are: 1) approval of 19K and Abraxane generic by YE17; 2) resubmissionof retagliptin in the near term; 3) clarity on pyrotinib development, includingan earlier submission of marketing approval; 4) updates on clinical progressfor camrelizumab; and 5) phase 3data release on Incyte's ECHO-301. We alsohighlight potential upside from additional US IND approval and clinical progressof its novel compounds in the US. Our NPV analysis indicated the pipeline valueis RMB9.2per share. This comprehensive report includes key ongoing clinicalstudies for all mid/late study compounds, as well as competitors' studies.Camrelizumab as the largest driver; IDO inhibitor provides significant upsideWe have updated our peak sales for camrelizumab to RMB5-6bn in China andincreased the probability of success to 75-85%, based on the strong ORR datafrom the phase 1study. Four registration trials are being conducted at present.We expect Hengrui to get the first domestic PD-1approval, with safe data fromsufficient number of patients required by the CFDA. Additionally, we expect INDapproval for its IDO inhibitor from CFDA in the near term, following US INDapproval in May. We believe it would be significantly positive to the IO franchiseand we forecast RMB3-4bn peak sales for the IDO inhibitor. DB proprietary patient-based PD-1/PD-L1model Our model indicates that the addressable market for PD-1/PD-L1would beRMB19bn in China in 2017and RMB29bn in 2030, representing a CAGR of 15%.NSCLC and GC are likely to be the largest indications due to a large patient baseand unmet medical need. Our model is based on 14tumor types, including theapproved indications and major indications being investigated. Among domesticnames, we identified six companies that are conducting late stage studies fortheir PD-1/PD-L1with Hengrui being the leader. Valuation and risks Our current valuation for the late stage pipeline represents 17% of the market cap,vs. 15% as of our first attempt in September 2016. Our TP of RMB58.5is basedon 42x 2018E EPS. We believe 42x is justified, as A-share peers are trading at 29xwith 18% EPS growth in 2017(vs. the 24% we model for Hengrui). We believethe premium is justified, given the top China pipeline, major upside from exportsand the potential earnings growth acceleration driven by blockbuster launches.Key risks include product launch delays and price cuts.

Solid growth from insulin franchise; reiterate Buy Tonghua Dongbao (THDB) reported sales/core profit of RMB616m/199m in 2Q17,representing YoY growth of 40%/31% respectively. We highlight the revenuegrowth acceleration in 2Q17, compared with 25%/34% YoY growth in 1Q17. Thegrowth acceleration was primarily due to inventory build-up from newly-signeddistributors. As for insulin glargine, THDB is in the final stage of data collection,with production filing expected in August according to management. We expectthe volume boost from NRDL inclusion to start in 4Q17. Reiterate Buy on highearnings visibility/ sustainability, and near-term catalysts. Solid ramp-up of 40R sales, while 50R lagged We estimate that insulin products achieved sales of RMB470mn in 2Q17 vs. RMB359mn in 2Q16, representing 31% YoY growth. Insulin needles and teststrips delivered over 30%/ 20% growth respectively, in 2Q17, suggesting growthmoderation vs. 38%/ 56% achieved in 1Q17. The slowdown in test strips wasdue to device compatibility and configuration issues of Bionime blood glucosemonitors. THDB's dual-product strategy started to bear fruit for Gansulin 40R, butyielded little results for 50R this quarter. As for flagship 30R, 20% growth couldbe maintained. Management estimated total sales of 40R to surpass RMB100mnin 2017. Expecting stable margins ahead, operating efficiency improved GM/OPM contracted to 74.5%/39.8% in 2Q17 compared with 76.4%/44.2% in2Q16. Management attributed the margin decline to low margins from real estateinvestment disposal. THDB guided stable margins going forward, with limitedASP erosion expected from provincial tenders. CCC days returned to 650 daysin 1H17, down from 897 days in 1H16, suggesting the conclusion of inventorydestocking issue. Lowering PT to RMB23.7 from RMB25.8; risks Our target price is based on 42x 2018E EPS. We believe the multiple is justifiedas its A-share peers are trading at 28x with 18% growth in 2018 (vs. the 21% wemodel for THDB). In our view, the premium is justified by its growth sustainabilityof the insulin franchise, ramp-up of CDMP and a compelling risk profile. Key risks:larger-than-expected ASP erosion, growth slowdown and product launch delays.

Key takeaways from dbAccess China healthcare service tour Chairman Chen attended the briefing and articulated near/mid/long operationalpriorities. For the near term, Aier is targeting three objectives: 1) the integrationof four acquired ex-China assets; 2) the opening of 200facilities by YE17vs. 180now; and 3) meeting the RMB100m sales target for 15-17facilities that openedin the 2014/2015period in provincial capitals. For expansion in prefecture-levelcities, management cautioned that a reasonable length of time is required to allowa meaningful revenue ramp-up as establishing an RIDS takes time. More growth drivers than expected; old pony with new tricks Chairman Chen anticipates 30% growth in the next 5-10years, driven by M&Aand organic growth. The company sees substantial growth opportunities ahead,including prefecture/county level growth in the mid/long term, and growth inmature/sub-mature hospitals with mid-teen/more than 20% growth respectivelyin the mid term. For example, the oldest flagship hospital, Changsha Aier Hospital,has a target of RMB300m in 2017, vs. RMB233m / RMB212m in 2016/2015,respectively. The growth acceleration was mainly driven by increased investmentin equipment and personnel. Management also indicated that Aier is largerthan the top 2-9competitors combined, while capital, talent and its first-moveradvantage remain key to its competitive edge. Key statistics review for 1Q17and 2016 For cataract surgery, we expect growth to pick up in 2Q17from a low base in2Q16as the company was affected by the Putian incident. As a reminder, revenuegrowth in 1Q17, 4Q16, 3Q16, and 2Q16was 26%/33%/3%/10% respectively. Weestimate that organic growth for 1Q17would be 14% excluding new hospitals.Additionally, volume/ASP growth in 2016was 14%/8% vs. 49%/-6% in 2015, asper our estimates. For excimer surgery, volume/ASP growth was 20%/13% in2016vs. 18%/11% in 2015. The ASP growth was ascribed to service mix changetowards high-end procedures. On volume, the growth was driven by VFLS and ICLwith 100% and 50% growth respectively. We highlight VFLS and ICL accountedfor 45%/13% of sales within excimer surgery in 2016vs. 29%/11% in 2015. Maintaining price target of RMB28.7; risks Our TP is based on 25x EV/EBITDA on 2018EBITDA, in line with the approachwe use for hospital companies. We believe 25x is justified as its Asia peers aretrading at 18x with 16% growth in 2019(vs. the 29% we model for Aier). Key risksinclude delays in geographical expansion and slower ASP/volume growth.

1H results pre-announced, below expectation. Hualan pre-announced 1H17 results, with 0-15% profit growth in 1H17 vs. previous guidance of 20-35% YoY growth. Additionally, company indicated thatgovernment grant was RMB8.1mn 1H17, vs. RMB53mn in 1H16. We spokewith the company this evening, while there are multiple drivers that impacted2Q17 performance especially implementation of the two invoices, managementindicated that prices (ex-manufacturing) are largely stable, while acknowledgingpressure on this front. This is consistent with comments from 1Q17 call inlate April. We highlight that the delta in government grants in 1H17 vs. 1H16represents 11% of the profit (GAAP profit) generated in 1H16. Excluding theimpact from government grant, the mid-point of the new guidance is largely inlinewith lower end of the previous guidance. As such, we reduce our full yearrevenue/EPS estimates by 10% and 12% respectively for 2017, and 12.5%/12.5%for 2018E. DB view on PDTs in 2H17 and 2018. We believe a confluence of the factors are impacting competitive landscapeof the PDTs. The challenging elements include 1) low single digit price (exmanufacturing)erosion of albumin due to growth acceleration of importedalbumins, urge to clear inventory build-up from few domestic players especiallyHualan; 2) price erosion or discount due to pressure from 15% mark-up removal;3) implementation of two invoices which might have and will continue to lead tore-distribution of market share. The positive factors include 1) potential growthdeceleration of imported albumin due to CFDA inspection of GMP facilities ofglobal companies in 2H17, as well as potential implementation of the newgovernment policy on PDT regulations, 2) robust demand for IVIG in the mid/long term. Importantly, we remind investors that some of these elements couldbe temporary, especially impact from 15% mark-up removal and implementationof the two invoices. We believe CBPO might be less impacted as its direct salesrepresent a much larger percentage of the sales vs. Hualan (70% vs. 50% in 2016by our estimates however this ratio could change). Reducing PT to RMB38.0 from RMB43.5; risks. We lower our price target to RMB38.0 from RMB43.5. The PT is based on 34xof 2018E EPS vs. 35x we used previously. We believe that 34x is justified, as itsA-share peers are trading at 28x with 24% growth in 2018 (vs. 27% we modelfor Hualan). Risks include lower plasma collection volume, cost inflation and ASPpressure.