Hengrui PD1 enters the fourth registration trial. As of June 5, camrelizumab entered the fourth registration study, a phase 2single arm for relapsed or refractory classical Hodgkin Lymphoma (cHL)according to CDT website. As a reminder, camrelizumab is in phase 3 studiesfor 1L NSCLC and relapsed/ refractory esophageal cancer, and a P2/3 study forrelapsed/ refractory liver cancer. We believe the rationale to start this study isdue to the possibility for regulatory approval based on a small single armstudy. Recall KEYNOTE-087 was also a single arm study with 210 cHL patients. Among domestic competitors, Beigene entered cHL in April 2017 with a P2study scheduled to enroll 68 patients (60 in China and the rest in South Korea)among 17 sites (14 in China), while another compound IBI308 entered P2 inApril as well targeting 90 patients among 29 hospitals. Hengrui plans to enroll60 patients at two sites. As the speed of enrollment is obviously the key forthis race, we continue to stay optimistic that Hengrui is likely to win. ECHO-301 study will be closely watched. We believe recent stock rally was largely due to US IND approval of its IDO, asHengrui became the first Chinese company with both IDO and PD1 inhibitor. As a reminder, the most advanced IDO P3 study, ECHO-301 from Incyte, islikely to be unblinded in 2017, while the fate of IDO could be largelydetermined. Earlier today, Roche returned the rights of IDO inhibitor GDC-0919to NewLink Genetics, after expressing doubts over IDO as a valid target at theanalyst event this Monday. While it is possible this could be compoundspecific, we would wait for ECHO-301 data to adjust POS (probability ofsuccess) for Hengrui's IDO. DB view: expecting a crowded IO market in China. We remind investors that there are 15 domestic PD1 obtained CFDA approvalfor clinical studies already, while both Hengrui and Sino Biopharm are waitingfor its PD-L1 IND approval (or CTA) from CFDA. Based on our conversationwith Chinese physicians during ASCO, their top concern is cost, as they believedrug efficacy/ safety profiles of these PD1 might be largely similar.

Adjusting price target to RMB58.5on 6:5stock split The 6for 5stock split has been effective on May 31, which increased thenumber of shares outstanding to 2,817million. We adjust our price targetproportionately to RMB58.5from RMB70.0to reflect the stock split. Our netprofit forecasts remain unchanged, and we adjust EPS forecasts to RMB1.13and RMB1.39for 2017E and 2018E respectively. Reiterate Buy on Hengrui. Valuation and risks Our price target of RMB58.5is based on 42x 2018E EPS. We believe that 42xis justified as A-share peers are trading at 29x with 18% EPS growth in 2017(vs. 24% we model for Hengrui). We believe a multiple premium is justified dueto its best pipeline in China and the potential earnings growth accelerationdriven by blockbuster launches. Key risks include product launch delays andprice cuts.

A solid quarter in 1Q; growth outlook remains strong Sales growth of human albumin accelerated in 1Q Hualan reported revenue/core profit of RMB538m/230m in 1Q17, representing YoY growth of 31%/35%, respectively, vs. 31% and 34% for 2016. Management indicated that human albumin was the key growth driver, with 54% growth in 1Q17 vs. 7% in 2016. The robust growth was mainly due to the 40% growth in plasma collection volume in 2016. The company targets 1,250 tons of plasma collection in 2017, suggesting 25% growth. We expect strong earnings growth to continue; however, we highlight the company recorded operating cash outflow of RMB90m, the first time since 2Q12. Sales growth of human albumin accelerated in 1Q According to the company, revenue growth for PDTs was 28% in 1Q17 vs. 34% in 2016. On flagship products, sales growth for human albumin/IVIG/factor VIII was 54%/10%/24% in 1Q17, compared with 7%/73%/46% in 2016. Management indicated that growth for human albumin was driven by volume, while ASP remained stable. For the vaccine business, the company indicated that revenue was largely flat in 1Q17. Management expects approximately RMB30m loss for the vaccine business in 2017 and breakeven in 2018, compared with RMB45m loss in 2016. OPM declined mainly due to vaccine business GM and OPM stood at 65.6% and 45.3%, respectively, in 1Q17 vs. 64.3% and 48.6% in 1Q16. Management indicated that the change in margins was driven mainly by the vaccine business, while the margins for PDTs remained stable. We highlight that selling expenses increased to RMB33m in 1Q17 from RMB4m in 1Q16 due to high invoicing for the vaccine business. Additionally, the company recorded operating cash outflow of RMB90m as AR days increased to 75 days in 1Q17 vs. 48 days in 2016. Management attributed this to prolonged credit terms granted to hospitals and distributors. Maintain target price at RMB43.5;risks We used a PE-multiple based approach for valuation, in line with other companies in our coverage universe. Our target price is based on 35x 2018 EPS. We believe that 35x is justified, as its A-share peers are trading at 32x with 20% growth in 2018 (vs. the 28% we model for Hualan). Risks include lower-than-expected plasma collection volume, greater-than-expected cost inflation, and a smaller-than-expected ASP increase.

Solid profit growth driven by channel penetration. High growth momentum continueJointown reported revenue/core net profit of RMB18.8bn/172mn in 1Q17, up 22%/32% YoY. For FY2016, Jointown delivered revenue/core net profit of RMB61.6bn/826mn, representing 24%/43% YoY growth. The company continued to outgrow the industry, driven by its high exposure to low-tier cities, smooth ramp-up of new businesses and margin improvements. Management is actively reviewing distribution companies for future M&A, with more than 100 companies having initiated negotiations by 2M17. We retain Buy on high earnings growth momentum and mild margin improvements. High growth momentum continues. Chemical drugs, TCM, medical devices and nutritional supplements registered YoY growth of 19%, 12%, 44% and 59%, respectively, in 1Q17, compared with 20%, 12%, 39% and 112% growth in 2016. In pharma distribution, Jointown expanded its logistics network coverage to 30 provinces and 50+ municipal cities as of YE16, vs. 28 and 49, respectively, as of 1H16. Management indicated longer AR/inventory days following the adoption of 15% mark-up removal and more revenue exposure to hospital clients. Jointown aims to tackle the liquidity pressure via 1) negotiation of better credit terms with upstream manufacturers; and 2) multiple financing tools, including ABS and short-duration bonds. Margin expansion in 1Q17. GM/OPM stood at 7.50%/2.54% in 1Q17, vs. 7.06%/2.26% in 1Q16. We attribute the margin improvement to growth in high-margin segments such as nutrition supplements and medical devices, with 59% and 45% YoY growth respectively in 1Q17. Going forward, management guided for mild margin expansion driven by the ramp-up of new business segments and conversion of IDS (indirect sales) into DS (direct sales). Adjusting target price to RMB25.1 (from RMB26.1); risks. Our TP is now based on 33x 2018E EPS of RMB0.76, vs. the 42x 2017E EPS we used previously, as we roll over to using 2018E EPS for valuation. This still represents a premium to peers, which are trading at 27x 2018E EPS with 18% growth in 2018 (vs. the 16% we model for Jointown). We believe the premium is justified by its growth profile and improving product mix. Key risks include policy headwinds and a slower-than-expected ramp-up of new businesses.

Solid growth driven by insulin franchise; reiterating Buy. Tonghua Dongbao (THDB) reported sales/core profit of RMB565m/214m in1Q17, representing YoY growth of 25%/34%. Steady performance in 1Q17 wasdriven by sustainable growth from the insulin arm, smooth ramp-up ofCDMP/mobile App and minimal ASP erosion from drug tenders. The companyis in the final stage of data collection, with filing for insulin glargine expectedby 17 May. Management expects the commercial launch of insulin glargine in1H18, while progress on insulin aspart could be delayed. We reiterate Buy onhigh earnings visibility and sustainability of the insulin franchise. Smooth ramp-up of insulin-related products. We estimate that insulin products achieved sales of RMB440m in 1Q17 vs. RMB370m in 1Q16, representing 19.3% YoY growth. Insulin needles and teststrips delivered over 38% and 56% growth, respectively, in 1Q17. Additionally,THDB will continue its product substitution strategy with Gansulin 40R/50R inprovinces where Gansulin 30R did not enter. As a reminder, ASP of Gansulin40R/50R is 10-12% higher than that of Gansulin 30R. For third-generationinsulin; production approval for insulin glargine will be filed in 17 May, and thecommercial launch is expected in 1H18. Management suggested furtherdelays in insulin aspart based on internal assessment of competitive landscapeand resource allocation. Expecting stable margins ahead. GM/OPM stood at 75.8%/44.1% in 1Q17 vs. 78.0%/44.0% in 1Q16. GM erosionwas caused by an approximately RMB30m one-off selling expense of a realestate project. Excluding that effect, management indicated that GM waslargely stable at 78-79% during 1Q17. OP margin remained flat YoY, despitethe GM decline, which is contributed by a 220bps improvement in sellingexpenses. Management guided for stable margins in 2017, with less than 2%ASP cuts from provincial tenders. Adjusting target price to RMB25.8 from RMB26.0; risks. Our target price is based on 42x 2018E EPS. We believe the multiple is justifiedas its A-share peers are trading at 27x with 18% growth in 2018 (vs. the 25%we model for THDB). In our view, the premium is justified by its growthsustainability of the insulin franchise, ramp-up of CDMP and a compelling riskprofile. Key risks: larger-than-expected ASP erosion, growth slowdown andproduct launch delays.

A solid quarter; retaining Buy on strong growth momentum. Solid growth achieved for the three major segments Aier reported revenue/core profit of RMB1.2bn/151m in 1Q17, representing YoY growth of 31%/25% respectively. This represents an acceleration when compared with the growth of 26%/19% for revenue/core profit in 2016. We attribute the robust results to the consolidation of nine hospitals from the asset injection deal, while the three major business segments continued to exhibit decent growth. For 2017, we expect the growth momentum to continue, and the consolidation of Clinica Baviera in 4Q17 is likely to add another leg of growth. We model 35%/29% growth for revenue/core profit in 2017. Solid growth achieved for the three major segments. Excimer surgery, cataract surgery, and optometry achieved YoY growth of 36%, 26%, and 32% in 1Q17, compared with 36%, 22%, and 37% in 2016, respectively. The company attributed the robust growth to strong demand growth in China and the solid brand image of Aier, as well as improving product mix towards high-end services. On the acquisition front, the company completed the deal for AW Healthcare Management in the US in March 2017. We believe the acquisition of Clinica Baviera is on track and we expect the consolidation of financials in 4Q17. Margin eroded slightly in 1Q17. Gross margin and operating margin registered 44.1% and 17.3%, respectively, in 1Q17, compared with 45.5% and 18.0% in 1Q16. We attribute the slight decline to the consolidation of nine hospitals acquired from the M&A fund of the company. We continue to expect operating margin improvement for Aier as the new hospitals ramp up. Maintaining price target of RMB43.0; risks. Our valuation is based on EV/EBITDA multiple, in line with the approach we use for hospital companies in our coverage. Our TP is based on 25x EV/EBITDA on 2018 EBITDA, vs. the 24x we used previously due to recent sector re-rating. We believe 25x is justified as its Asia-listed peers are trading at 18x with a 7% CAGR from 2017 to 2019 (vs. the 36% we model for Aier). Key risks include delays in geographical expansion and slower ASP/volume growth.

A solid quarter with 17% organic growth Humanwell reported revenue/core profit of RMB3.3bn/195m in 1Q17, representing YoY growth of 24%/39%. We attribute the robust growth to the consolidation of newly-acquired businesses. Excluding the contribution from Epic Pharma, we estimate organic revenue/core profit growth of 17%/17% in 1Q17, representing a growth recovery when compared with 12% organic revenue growth in 2H16. We maintain our healthy growth outlook for the company in 2017, based on new product launches, the ramp-up of exports, and a positive impact from the implementation of the new NRDL. Organic growth recovered to 17% in 1Q17 from 12% in 2H16 We highlight that organic sales growth in 1Q17 was 17% for Humanwell vs. 12% in 2H16, if we exclude the contribution from Epic Pharma. The growth recovery is likely due to the end of inventory destocking in YE16, which affected growth in 2H16. We continue to expect stable growth for the CNS franchise due to limited competition. Management highlighted that the completion of its private placement would be a key priority for 2017. We remind investors that the private placement would raise approximately RMB1.2bn, which would be used to repay debt. Margin improvement continued in 1Q17 Gross margin and operating margin improved to 39.1%/13.3% in 1Q17 from 36.2%/11.0% in 1Q16. We attribute the improvement to the change in product mix, as the CNS segment, which carries a higher margin, is likely to grow faster than other segments. However, we highlight that administrative expenses increased by 36% this quarter, which is ascribed to one-off costs related to the acquisition of Epic Pharma. We expect margins to continue to improve gradually as the business mix improves. Maintaining our target price of RMB23.0; risks We derive our target price of RMB23.0 from a sum-of-the-parts valuation, by applying 27x on 2018E EPS of RMB0.68 for the CNS and exports franchise, and 15x/30x/30x on 2018E EPS of RMB0.18/0.07/0.03 for the IVD/PDT/hospital arm. We believe the multiples are justified in comparison with A-share peers. Our TP also implies an overall P/E multiple of 26x on 2018E EPS with 27% growth, vs. 25x with 18% growth in 2018E for the A-share peers. Key risks include price cuts and slower progress in exports and the hospital business.

Inking another accretive deal. Management indicated that China remains the top priority for the next fiveyears, while global expansion is a strategic focus in the longer term. Throughthe acquisition of a 90% stake in Clinica Baviera (CB) and previous overseasdeals, the company aims to bring cutting-edge technologies from the globalmarket to China and thus make Aier a first mover in China’s high-endophthalmology service market. We view the CB acquisition as value-accretiveas the acquisition multiple is 21x on 2016 profit and 17x on 2017 profit, vs. the59x/44x that Aier is trading at on 2016/2017E EPS, respectively. Key highlights of the acquisition. Aier announced that it aims to acquire a 90% stake in CB for EUR152m, withthe remaining 10% stake to be owned by the company’s management team. Inaddition to the access to high-end technology, management indicated that thebusiness model of CB, which typically builds several ophthalmology clinicsaround a surgery center, could be a reference for its business in China. Ontalent retention, management highlighted that it is important to retain thecurrent staff of CB through a better incentive scheme. In terms of financials,CB generated revenue/profit of EUR92m/7.9m in 2016, representing 7%/64%growth. Management attributed the rapid profit growth to a recovery in Spainand Germany, as well as cost savings in promotion. Management guidedrevenue/profit of EUR100m/10m in 2017, while growth is likely to be 8-10% inthe long run. Background of Clinica Baviera. Founded in 1992, CB is the largest ophthalmology clinic chain in Europe, withthe largest market share in excimer surgery in Spain and Germany. As of April2017, CB operates 76 clinics in Europe. The company is listed in Spain, whilethe management team and several private equity funds owned a 69% stake. Through the acquisition, Aier will purchase a 90% stake. However, Aierindicated that CB is likely to remain listed in Spain after the deal. Increasing price target to RMB43.0 (from RMB41.0); risks. Our valuation is based on EV/EBITDA, in line with the approach for hospitalcompanies under our coverage. We increase our PT to RMB43.0 as we haveraised our 2018 EBITDA estimate by 8%. Our PT is based on 24x EV/EBITDA2018E. We believe 24x is justified as its Asia-listed peers are trading at 16xwith 7% growth (vs. the 43% we model for Aier). Key risks include delays ingeographical expansion and slower ASP/volume growth.

Revamping R&D with a focus on differentiated innovationWe attended annual shareholders meeting in Shanghai, hosted by ChairmanSun and Dr. Zhang, head of R&D. The most important takeaway is on therevised R&D strategy, which will focus more on differentiation of innovativecompounds (NCE/BLA) in both China and ex-China markets. While this isdifferent from the message from last year’s meeting, which positionedcompliance as top priority, it is consistent with communication frommanagement in the past few quarters. The key messages remain the same –diversification of NCE/BLAs, but with focuses on oncology and diabetes, fastfollow-on/limited innovation on anesthesia and analgesia, as well as increasingM&A/in-licensing activities. We continue to believe Hengrui remains the onlylarge-cap name in the space with a distinctive R&D strategy that is likely tosustain changes on competitive and regulatory changes in China. Oncology anchoring future launchesManagement discussed the balance between pipeline prioritization and resourceallocation. We continue to be impressed by the practicality of its decision-making,which is based on its call on the future competitive landscape. On specifics,management indicated that camrelizumab (SHR1210) would be the backbone offuture growth; however, the leading indication is liver cancer, a unique solidcancer type with higher prevalence in China but none of the existing PD-1s haveapproval for it (from US FDA). We also believe the combo strategy with apatiniband other compounds is likely to maximize franchise value, similar to thedecision-making process behind the IDO/Nivolumab path. Managementdownplayed the expected launch timeline but articulated the priority for resourceallocation for this program. We remind investors that MNCs are paying apremium of 30-50% for patient recruitment. On others, management highlightedthat 1) pyrotinib is in P3 in China and P1 in US; however the leading indicationwould be in an orphan drug setting; 2) c-Met ADC received IND from US FDA andwill receive CFDA approval in a month; 3) its PD-L1 (SHR1316) received IND fromFDA. Lastly, we learned that Hengrui also has an IDO/TDO in discovery stage,while CTA/CIND is expected soon. Other key takeawaysHengrui indicated that its oral GLP-1 is in P1 study in US already, although wehad difficulty identifying it on clinicaltrials.gov. We remind investors that Novo’soral semaglutide is in a P3 PIONEER program. Despite the game-changingpotential, we would like to see GI tox data before we form a view on Hengrui’sdrug. Additionally, management indicated that 1) price negotiation for apatinibwas on an invited basis, but expected to start soon; 2) refiling of retagliptin isexpected in 2Q/3Q17, and a large CV study is planned. However, we noticed thatthe FDA rejected TECOS outcome data to be added to Januvia label this week; 3)Hengrui is also focusing on less competitive categories for export.

Stable growth in 4Q16 driven by Epic Pharma Humanwell recorded revenue/core profit of RMB3.6bn/174mn in 4Q16,representing YoY growth of 17%/14% in 4Q16, vs. 25%/32% in 3Q16 and28%/7% in 1H16. Excluding the 7-month revenue contribution from EpicPharma, apple-to-apple revenue growth would have been 12% YoY in 2H16, adeceleration of 26% YoY in 1H16. Additionally, management expectshydromorphone hydrochloride and nalbuphine hydrochloride sales to addanother leg of growth to the CNS segment in 2017, following imminent NRDLimplementation. We maintain Buy on strong prospects of exports, solid rampupof subsidiaries and the CNS franchise. Smooth ramp-up in 2H16 The company generated total sales of RMB6.6bn in 2H16 at 19% YoY growth,mainly driven by Epic consolidation and plasma products. Epic Pharmacontributed RMB366mn sales in 2H16. Its major CNS subsidiary, YichangHumanwell, achieved sales of RMB1.14bn at 5% growth in 2H16, vs. 11% in1H16. Zhongyuan Ruide, Wuhan Humanwell and IVD subsidiary Beijing Baronregistered sales growth of 22%, 36%, 19% in 2H16; vs. 0%, 17% and 17% in1H16 respectively. We highlight the robust bottom-line contribution fromsubsidiaries Gedian Humanwell and Zhongyuan Ruide, which recorded 110%and 97% YoY growth in core net profit in 2H16, vs. 77% and 30% respectivelyin 1H16. Margin expansion with an improved product mix GM/OPM stood at 37.7%/11.8% in 4Q16, vs. 34.5%/10.0% in 4Q15. Weattribute the margin expansion to a product mix change from CNS drugs (withan over 80% gross margin) and the low base last year. Maintaining our price target at RMB23.0; risks We derive our price target of RMB23.0 from sum-of-the-parts valuation, byapplying 28x on 2018E EPS of RMB0.68 for the CNS and exports franchise,15x/31x/30x on 2018E EPS of RMB0.18/0.07/0.03 for IVD/PDTs/hospital arm. Webelieve the multiples are justified in comparison with A-share peers. Our PT alsoimplies an overall P/E multiple of 29x on 2018E EPS with 18% growth, vs. Asharepharma companies, which are trading at 26x with 18% growth in 2018E. Key risks include price cuts, slower progress in exports and hospital business.

Solid revenue growth achieved in 4QAier reported revenue/core profit of RMB918m/74m in 4Q16, representing YoYgrowth of 27%/-17% respectively. We attribute the strong revenue growth tothe recovery of the cataract business, while the weaker-than-expected profitwas due to salary inflation. Management indicated that the company currentlyhas 162 hospitals, with approximately 70 in the listed co, while the revenue ofthe hospitals in M&A funds was approximately RMB2bn. Additionally, thecompany reiterated its target to have 200 hospitals in prefecture-level cities byYE17, vs. 120 at present. Management also maintained its guidance forapproximately 30% revenue growth in the next few years. Growth acceleration observed for all three major segmentsRevenue growth for excimer surgery, cataract surgery, and optometry was55%, 33%, and 46% in 4Q16, compared with 33%, 19%, and 34% in 9m16,respectively. Management attributed the robust growth to ramp-up of newhospitals and ROI from marketing efforts. For cataract surgery, the companyindicated that the negative impact from the Putian incident had concluded. Wehighlight that volume/ASP growth for cataract surgery was 14%/8% in 2016. Operating margin eroded in 4Q16Gross margin in 4Q16 registered at 42.0%, compared with 42.1% in 4Q15. However operating margin decreased to 8.9% in 4Q16 from 14.4% in 4Q15. The erosion was mainly due to higher selling and distribution costs, whichaccounted for 13.5% of sales in 4Q16 vs. 7.7% in 4Q15. The increase wasmainly due to salary inflation and higher promotional expenses. We expectmargin to improve going forward due to the economies of scale and ramp-upof new hospitals. Adjusting price target to RMB41.0 from 42.0; risksOur valuation is based on the EV/EBITDA multiple, in line with the approach weuse for hospital companies in our coverage. Our PT is based on 24x EV/EBITDAon 2018E EBITDA, vs. 31x on 2017E EBITDA previously as we roll over to 2018estimates for valuation. We believe 24x is justified as its Asia-listed peers aretrading at 16x with 7% growth (vs. the 28% we model for Aier). Key risksinclude delays in geographical expansion and slower ASP/volume growth.

Growth acceleration expected in 2017 Strong growth momentum maintained in 2H16 Hualan reported sales/core profit of RMB528m/150m in 4Q16, representing YoY growth of 46%/37% vs. 27%/33% in 9m16. The robust growth was driven by continuous growth in plasma collection and IVIG. For 2017, management guided approximately mid 30s growth for PDTs and less loss on vaccine business, suggesting profit growth acceleration. For albumin price, the company expects no price erosion in 2017, but no inflation either. Hualan also guided 25% YoY growth for plasma collection. Strong growth momentum maintained in 2H16 Sales growth for PDTs was 35% in 2H16, compared with 33% 1H16. The strong growth was mainly driven by IVIG, which achieved 83% growth in 2H16 vs. 63% in 1H16. For human albumin, sales decreased by 4% in 2H16 vs. 20% growth in 1H16. We attribute this to a high base in 2H15 and increased inventory storage. On pricing, we anticipate Jiangsu tender results will likely be released next week, and that Hualan is likely to have made a bid with the lowest price on albumin among domestic competitors, with no price increase vs. last round. However, management also anticipates albumin ASP is unlikely to go down anytime soon while expecting modest price inflation for IVIG. Operating margin decreases due to the vaccine business Gross margin increased to 58% in 4Q16 from 50% in 4Q15. Excluding vaccines, gross margin for PDTs would remain stable at 58%. Operating margin decreased to 35.8% in 4Q16 from 39.6% in 4Q15. Management attributed this to the vaccine business, which led to additional RMB50m selling expenses in 2016 due to high invoicing. We expect margins for the PDTs business to be largely stable in the next few quarters due to stable pricing. We maintain price target at RMB43.5; risks We used a PE-multiple based approach for valuation, in line with other companies in our coverage universe. Our PT is based on 35x 2018 EPS, vs. 45x 2017 EPS previously as we are rolling over to use 2018 estimate for valuation. We believe 35x is justified, as its A-share peers are trading at 32x with 20% growth in 2018 (vs. the 28% we model for Hualan). Risks include lower-than-expected plasma collection volume, greater-than-expected cost inflation and a smaller-than-expected ASP increase.

Strong organic growth delivered in 4Q16 Hengrui reported sales/core profit of RMB2.8bn/653m in 4Q16, representingYoY growth of 16% and 10%, respectively. If we were to exclude the milestonepayment from Incyte in 4Q15, the organic sales growth would have been 24%vs. 20% in 9m16, in line with our previous expectation. For 2017, managementexpects growth to be largely similar to 2016. We believe apatinib and contrastagents could continue be the major drivers for the domestic business, whilethe ramp up of sevoflurane would add a leg of growth to exports. We model21%/24% growth for China/exports in 2017, respectively. Apatinib remains the bright spot; growth for exports likely to accelerate Growth momentum for oncology, contrast agents and anesthetics remainedstrong, with 42%, 30%, 18% growth in 2H16vs. 30%, 30%, 20% in 1H16,respectively. We attribute the strong performance of oncology to the ramp upof apatinib. We estimate the sales for this drug to be RMB950m in 2016vs.RMB280m in 2015. Management indicated that price negotiation for apatinibis ongoing for NRDL inclusion and the outcome is expected in 4Q17. Forexports, the growth for 2016was 21%, primarily driven by cyclophosphamide.Management continues to expect 5-8ANDA approvals this year. We expectgrowth for exports will likely accelerate to 24% in 2017and 33% in 2018. On margin and pipeline progress Gross margin increased to 87.7% in 4Q16vs. 86.0% in 4Q15due to productmix. Operating margin decreased slightly to 23.8% in 4Q16from 24.8% in4Q15. We attribute this to higher selling expenses from optimization of thestructure of sales force, as well as higher R&D spending. On pipeline,management indicated that the P2study for PD-1is progressing well and a P3study on liver cancer should start in 2H17. Additionally, the company plans tore-file 19K in 1H17and it is likely that the drug could be approved by YE17. Forretagliptin, the company will likely resubmit the application in 1H17after 19K. Increasing target price to RMB60.0from RMB55.0; risks We roll over to use 2018E EPS for valuation. Our target price is based on 36x2018EPS, vs. 39.5x 2017EPS previously. We believe 36x is justified, as its Asharepeers are trading at 25x 2018EPS with 18% growth (vs. 25% forHengrui). The premium is justified by the superior value of its products and itsstrong pipeline. With expected growth acceleration, we expect stock to re-rateas it delivers. Key risks include product launch delays and price cuts.

Guiding 20% revenue growth in 2017. We spoke with management recently. The company expects 20% toplinegrowth in 2017 vs. the18-20% guidance given at DB's Access Chinaconference in January 2017 and the 15-20% during DB's healthcare tour inOctober 2016. We believe this is primarily driven by the expected continuationof growth momentum in 4Q16, as we highlighted in our earnings previewpublished on February 16, 2017. Management continues to expect growthacceleration of the export business in 2018, with 6-8 FDA approvals in 2017and at least one FTM (first to market) generic in the US. Breakdown of growth expectation for export business. The company expects growth for cyclophosphamide in 2017 as Sandoz islikely to expand sales to lower tier channels, while the contribution in the EUmight be limited. For sevoflurane, the company anticipates this compoundtaking 10-15% market share in 2017, while the entire market is aboutUSD300m, based on company estimates. For the recently-approvedcisatracurium besylate, the company expects a limited contribution in 2017 butUSD20-30m sales in 2018. We highlight that this compound is being marketedby Teva not Sandoz, while Hengrui is the third generic player to obtainapproval for this drug. According to Hengrui, the sales for Nimbex fromAbbVie, the originator for this drug, were USD51m in 2015. For docetaxel,Hengrui expects a minimal contribution, just like oxaliplatin. On pipeline progress; Abraxane generic class 6 application filed already. The company expects to re-file 19K application package in the next few weeks,while retagliptin re-filing is likely to occur in May/June. As for its Abraxanegeneric, management confirmed that a class 6 application has been filed. Assuch, we continue to expect approval in 4Q17. As Hengrui has a priority reviewstatus for this drug, it is likely the compound might be the FTM generic. Maintaining price target at RMB55.0; risks. Our price target is based on 39.5x 2017E EPS. We believe 39.5x is justified asA-share peers are trading at 29x with 19% EPS growth in 2017E (vs. 22% forHengrui). The premium is justified by the superior value of its products and itsstrong pipeline. Key risks include product launch delays and price cuts.

Albumin shortage remaining, guiding 25% growth in 2017 The company guided 25% YoY revenue growth for FY17 and above 20% CAGR in 2017-19. Management estimated the plasma collection exceeded 1,020 tons in 2016; translating into 40% YoY increase. While the company expects 1,650 tons by YE19 from 23 existing plasma stations, it also plans to open 2 new stations each year. For albumin, although its ASP is unlikely to rise like before, the supply shortage remains even in tier 1 cities, according to management. This is consistent with our recent due diligence in Beijing and Shanghai. Volume and ASP upside in the PDT (plasma derived therapeutics) Revenue breakdown for PDTs among albumin, IVIG and factor VIII are about 40%, 40% and 13%, while the rest are from vaccines. Market dynamics between domestic and MNCs are stable at 40%/60% split according to Hualan. The company revealed that direct/indirect sales of albumin are 30%/70% respectively. Hualan saw supply conditions improved for albumin, while factor VIII and IVIG are still in severe shortage. Further volume and ASP upside in these products are expected. Updates on vaccine and monoclonal antibody segments Hualan booked a net loss of RMB33mn in vaccine arm in 2015, and another loss of RMB50mn expected in FY2016 following the Shandong vaccine event and distributor destocking. Hualan plans to exports vaccines upon approval of international vaccine registration. The company expects to deliver 2mn units of vaccines to overseas markets. For the mAbs, it has received the first OEM order of approx. RMB5mn last year. The company jointly invested and developed the largest domestic mAb reactor container with Hualan Genetic Engineering Limited. At present, 4 mAbs are under development, of which 3 received clinical approvals. All 4 mAbs imported R&D techniques from top 5 WW best-selling originator products.