Robust growth delivered in 1Q16. Growth driven by oncology drugs, contrast agents and exports Hengrui reported revenue/core profit of RMB2,669/686m in 1Q16, representing YoY growth of 21%/24% respectively. Management attributed this to strong growth in exports, oncology drugs and contrast agents. We highlight that the company guided 15-20% for the domestic business in 2016, while its export business should have decent growth with the launch of Sevoflurane in the US. We continue to like its innovative drugs and export business and maintain our Buy rating. Growth driven by oncology drugs, contrast agents and exports. Management indicated that the export business achieved slightly higher growth, while the domestic business was around 20% in 1Q16. Therapeutic areas, oncology drugs and contrast agents achieved healthy growth of over 30% in 1Q16, but less than 10% growth in anaesthetics. Management highlighted that Apatinib had reached almost RMB200m sales and Imrecoxib sales doubled in 1Q16. Regarding exports, management suggested that Cyclophosphamide achieved growth of between 15% and 20% in 1Q16, partially contributed to by delayed revenue recognition in 4Q15. Management indicated that revenue recognition for the export business should be normal going forward. Additionally, Hengrui’s parent company introduced Drug Eluting Beads (DEBs) as an innovative cancer treatment, with two product launches of CalliSpheres and 8Spheres in April. Acting as a sales agent, the company expects that DEBs are likely to contribute around RMB50m in 2016. On margins, pipeline progress and policies. GM/OPM was 85.6%/29.0% in 1Q16 respectively vs. 83.6%/29.3% in 1Q15. Management guided that growth in selling expenses and R&D expenses would be slightly higher than revenue growth, due to market expansion in low-tier hospitals and steady progress of overseas clinical trials. On R&D, management indicated that Famitinib is in phase III for CRC and RCC, while Apatinib is in phase III for gastric cancer, liver cancer and lung cancer. Both drugs are expected to be launched in 2017-18. On tender progress, management expects that most provinces will implement new tender prices in 2H16 and 1H17. Maintaining price target of RMB59.5; risks. We base our price target of RMB59.5 on 43x 2016E EPS of RMB1.38. We believe that 43x is justified as A-share peers are trading at 26x with 19% EPS growth in 2016 (vs. the 25% we model for Hengrui). Key risks are delays in product launches and pricing pressure.

A strong quarter to start 2016Aier reported revenue/core EPS of RMB915m/RMB0.12 in 1Q16, representingYoY growth of 40%/33%, respectively, vs. 32%/46% in 2015. The robust resultswere driven by growth acceleration in excimer surgery, cataract surgery andoptometry. Core profit growth was slower than revenue growth for the firsttime since 2Q13, which the company attributed to the consolidation of thenewly acquired HK entity. Management expects strong growth to continue andbelieves margin should remain stable or improve slightly. Growth acceleration achieved in all three core segmentsExcimer surgery, cataract surgery, and optometry achieved revenue growth of39%, 55%, and 42% in 1Q16, compared with 31%/40%/29% in 2015. Forexcimer surgery, volume growth was 26% in 1Q16 vs. 18% in 2015. Thissuggests approximately 10% ASP improvement, which we attribute to theramp up of VFLS (VisuMax femtosecond laser surgery). For cataract surgery,management indicated that volume growth was 60% in 1Q16, suggesting anaverage ASP decline due to outgrowth of low-/mid-end surgeries, a trend thatbegan in 2015. The company expects the strong growth to continue as thecataract surgery market is significantly underpenetrated when compared toother countries. Expecting further improvement in marginGross margin increased to 45.5% in 1Q16 from 44.1% in 1Q15, driven bystrong ASP growth in the excimer surgery business, cost savings inprocurement, and economies of scale. OPM decreased to 18.0% in 1Q16 from18.7% in 1Q15. Management attributed this to the consolidation of theacquired HK entity, which achieved sales/profit of approximately RMB29m/3min 1Q16. The company expects margins to remain stable or improve slightly. Increasing price target to RMB36, from RMB34; risksWe increase our PT to RMB36, based on 33.5x 2016E EV/EBITDA, as weincrease our 2016E EBITDA by 5%. We believe a 33.5x multiple is justified, asits Asia-listed peers are trading at 23x 2016E EV/EBITDA with 6% EBITDAgrowth in 2016 (vs. 36% for Aier). We believe Aier deserves a significantpremium because of its proven, replicable business model and strong earningsgrowth potential. Key risks include competition; expansion delays; slowerASP/volume growth.

Guiding 30% core profit growth in 2016; Buy. Solid growth for insulin products Tonghua Dongbao (THDB) reported sales/core profit of RMB431m/113m for 4Q15, representing YoY growth of 2%/34%, respectively. The deceleration in revenue growth in 4Q15 was due to a high base in 4Q14 from a change in the VAT rate as well as delayed revenue recognition for 4Q15. The robust profit growth was driven by COGS savings from procurement of insulin pens as well as a loss-making subsidiary. Management guided to 20% and 30% for insulin sales and core profit growth in 2016, respectively. Solid growth for insulin products Sales growth of insulin products reached 22% in 2H15, vs. 22% in 1H15. We remind investors that the company had a high revenue base in 4Q14 due to the VAT rate cut and a change of booking method. On an apple-to-apple basis, sales growth, based on the amount of shipped products, was approximately 20% in 2015, according to the company. Going forward, the company is confident its human insulin business can achieve 20% growth. We expect the launch of insulin Glargine in 1H17 to add another leg of growth. Multiple drivers to support margin expansion GM/OPM reached 79.1%/31.6% in 4Q15 vs. 68.3%/24.5% in 4Q14. In 2015, GM/OPM was 75.3%/34.3%, vs. 68.9%/25.1% in 2014. The margin expansion in 2015 was due to COGS savings from procurement of insulin pens and a loss-making subsidiary, and a rising utilization rate as well as operating leverage improvement. We believe margin expansion will continue due to: 1) continued GM expansion from improved product mix, limited price cuts with the ramp-up of 40R/50R as well as new product launches in 2017; and 2) R&D cost savings. For selling expense, we believe the operating leverage improvement on this side could still be maintained in 2016. Maintaining price target of RMB29; risks We base our RMB29 price target on 55x 2016E EPS of RMB0.53. We believe 55x is justified as its A-share biotech peers are trading at 51x on 2016E EPS with 24% growth in 2017E (vs. the 27% we model for THDB). In our view, the premium is justified by its higher growth sustainability and visibility of insulin franchise vs. most other therapeutics, and a compelling risk profile. Key risks include larger price cuts and pipeline failure.

4Q growth slightly decelerated Hengrui reported revenue/core profit of RMB2.4bn/592m in 4Q15, representingYoY growth of 25%/57% vs. 25%/41% in 9m15. Excluding the upfront paymentfrom Incyte of USD25m, revenue/core profit growth would have been 16/14%in 4Q15. We attribute the deceleration to the export business, as in our viewthe revenue booking might have been delayed. The company guided 15-20%for the domestic business in 2016, while the export business would havedecent growth with the launch of Sevoflurane in the US and market shareexpansion of Cyclophosphamide. We forecast 21% and 40% YoY growth for China and export in 2016 Export revenue in 2H15 was RMB129m vs. RMB227m in 1H15. We believe therevenue booking might have been delayed as IMS data indicated that the salesin 2H15 were similar to 1H15. Management expects healthy growth in 2016 asit plans to achieve 50% market share of Cyclophosphamide in the US vs.approximately 40% at present, while Sevoflurane’s launch in the US would addanother leg of growth. For the domestic business, the company highlighted theramp-up of Imrecoxib and Apatinib, driven by inclusion in provincial RDL. Weforecast sales of Apatinib would reach RMB780m in 2016. For the maturedrugs, Hengrui expects price erosion of 15-20%. We believe growth in 1H16might be slower than 2H16. However, we expect the company to achievehigher end of the guidance. On pipeline and margins Management expects higher R&D spending while it would adjust its R&Dstrategy. For example, of the 11 withdrawn applications in 2015, Hengruiwould re-file nine after assessing the market opportunities. For 19K, after 2rounds of self-inspection, the company would submit supplementary data in2Q16. As for Retagliptin, re-filing is expected in 3Q16. The company expectsGM erosion for most product lines but Apatinib growth should absorb majorityof the margin pressure. We model 85.3% and 26.1% for GM and OPM,respectively, in 2016, vs. 85.3%/26.0% for GM/OPM in 2015. Adjusting price target to RMB59.5; risks Our price target of RMB 59.5 is based on 43x 2016E EPS of RMB1.38, as welowered our EPS estimate by 3%. We believe 43x is justified, as A-share peersare trading at 24x with 23% EPS growth in 2016 (vs. the 25% we model forHengrui). Key risks are delays in product launches and pricing pressure.

We expect delay for the launch of Retagliptin. Hengrui withdrew the application of Retagliptin, an innovative DPP-IV inhibitorfor type 2 diabetes. The company indicated that it is challenging to predict thetimeline for re-filing, however a completely new phase 3 study appearsunnecessary. Management previously expected the product launch in 2017and we expect delay given the withdrawal and uncertainly in re-filling. Wecontinue to believe the company has one of the best pipelines and R&Dcapabilities in China. What’s New? Hengrui withdrew the application of Retagliptin. On April 8, the company announced on Shanghai Stock Exchange that it hadwithdrawn the application of Retagliptin from CFDA. The announcement didnot provide a detailed explanation for the withdrawal but the company wouldre-file the application as soon as possible. Retagliptin is a Class 1.1 new drugfor the treatment of type 2 diabetes. Management previously expected thelaunch of Retagliptin in 2017 and it would be the first DPP-4 inhibitordeveloped by a domestic company. According to the company, clinical trialsfor this drug started in March 2009 and the manufacturing approval was filedin 2H15. The total R&D spending on this product amounted to RMB101m atpresent.

2H15 results in line; healthy growth outlook Solid growth momentum for plasma-derived therapeutics (PDTs) Hualan reported revenue/core EPS of RMB361m/0.19 in 4Q15, representing 31%/16% YoY growth. We highlight the growth acceleration in plasma-derived therapeutics (PDTs) with 27% growth in 2H15 vs. 25% in 1H15. In 2015, plasma collection volume reached 723 tons, representing 34% growth. The company expects collection volume to be at least 850 tons in 2016 and reach 1000 tons in 2017. For 2016, the company guided 30% growth in revenue and profit. Additionally, it expects high-single-digit ASP growth for PDTs and the vaccine business to break even after a loss of RMB35m in 2015. Solid growth momentum for plasma-derived therapeutics (PDTs) Sales growth of PDTs reached 27% in 2H15 vs. 25% in 1H15. We highlight the growth acceleration of human albumin, at 50% in 2H15 vs. 43% in 1H15, largely driven by a higher volume of plasma collection. For IVIG, growth was 2% in 2H15 vs. -6.5% in 1H15. The company indicated that part of the plasma was utilized to produce other immunoglobulin products due to better economics, as reflected in the strong growth of 29% in other PDTs in 2H15. This is in line with industry trends. For the vaccine business, sales decreased by 39% in 2H15 due to an industry slowdown and tighter regulations. Expecting margin improvement in 2016 For the plasma business, gross margin declined to 58% in 2H15 from 60% in 2H14 due to increased plasma costs. According to the company, plasma costs per ton increased by 8% in 2015. However, GM contraction of 2ppt in 2H15 was smaller than the 5ppt in 1H15, suggesting greater ASP growth in 2H15. We expect margin to improve as management guided high-single-digit ASP growth for 2016. For the vaccine business, GM dropped to 28% in 2H15 as revenue declined. Operating margin remained largely stable at 37.7% in 2H15 vs. 38.0% in 2H14. Reducing price target to RMB52 from RMB54.0; risks We lower our price target to RMB52 as we reduce our 2016E EPS estimate by 3% due to uncertainties in the vaccine business. Our price target is based on 47x 2016E EPS of RMB1.11. We believe 47x is justified as its A-share listed peers are trading at 36x with 12% growth in 2016 (vs. the 27% we model for Hualan). Risks include lower-than-expected plasma collection volume, greater-than-expected cost inflation, and a smaller-than-expected ASP increase.

4Q15 results in line; expecting solid growth to continue Strong growth momentum across all three major business segments Aier Eye reported 4Q15 revenue/core EPS of RMB724m/0.09 respectively, representing 28%/52% YoY growth. We highlight the growth acceleration of excimer surgery with 38% growth in 2H15 vs. 24% in 1H15, with ASP growth being at low-teen level. Gross margin for cataract surgery improved, owing to economies of scale, despite ASP declining slightly. Additionally, volume growth of Aier Eye remained strong with 32%/29% for outpatients/surgeries performed in 2015. For 2016, management reiterated its focus on expansion in prefecture-level cities, market share gains and efficiency improvements. Strong growth momentum across all three major business segments Sales from excimer surgery achieved 38% growth in 2H15, vs. 24% in 1H15. We attribute the growth acceleration to a mix change to high-end services, as well as strong volume growth. Management indicated that the number of excimer surgeries performed was 65,000 in 2015, representing 18% growth, and we estimate ASP growth to have been at low-teen levels. For cataract surgery, sales growth in 2H15 was 39%, compared with 40% in 1H15. In 2015, around 160,000 cataract surgeries were performed, representing 49% growth. However, ASP declined by a mid-single digit level, as more mid-/low-end surgeries were performed. The company has indicated that it currently has 110-120 hospitals, with the listed company owning around 60 of these. Margin improvement continued The gross margin for excimer surgery increased to 56.8% in 2H15, from 55.6% in 2H14, driven by a mix change towards high-end services. For cataract surgery, the gross margin improved to 35.5% in 2H15, vs. 33.5% in 2H14. Management attributed the margin expansion to economies of scale. At the company level, the operating profit margin increased to 18.3% in 2H15, from 17.6% in 2H14. We continue to expect margins to improve, driven by the ramp-up of new hospitals, economies of scale, and ASP increases. Raising target price (TP) to RMB34.0, from RMB33.0; risks Our TP is based on 33x 2016E EV/EBITDA. The company’s Asia-listed peers are trading at 22x 2016E EV/EBITDA, with 6% EBITDA growth in 2016 (vs. 30% for Aier). We believe Aier deserves a significant premium because of its proven, replicable business model and strong earnings growth potential. Key risks: competition; expansion delays; slower ASP/volume growth.

We model 37% growth in 2016 for exports on reported basis We believe there is moderate upside for export revenue, driven by 4%additional upside from USD:RMB and organic growth from the Sevoflurane USlaunch and the Cyclophosphamide EU launch. We model 0% organic growthfor US sales of Cyclophosphamide as recent IMS data indicated growth declinefor the overall market in 2015; however, we expect RMB75m sales from itslaunch in the EU. As for Sevoflurane, the company obtained approval in Nov2015 and we expect an RMB80m contribution in 2016. Expecting limited organic growth of Cyclophosphamide in US The entire Cyclophoaphamide market in the US achieved a CAGR10-14 of64%, reaching USD499m in 2014 based on IMS data. However, the markethad a 4% decline in 2015 while Hengrui/Sandoz had a 37% market share byDec 2015. Additionally, the 3m rolling average for the Hengrui/Sandoz producthas registered a slight sequential growth decline in seven of the nine monthssince April 2015, confirming Hengrui management’s comment that 2H15performance might be similar to that of 1H15. While management guided thatmarket share may reach 50% in 2016 from 37% by YE15, it remains unclearwhether this projection is based on shrinking market size or not. That said, wemodel 0% organic growth in US, translating into 4-5% YoY growth on areported basis. Additionally, we model RMB75m from EU sales for 2016. Assuch, we forecast 23% reported sales growth for Cyclophosphamide in 2016. We model 20% market share by YE16 for Sevoflurane Management guided that the entire US market is about USD200m and Hengruiis likely to garner 20% market share in 2016. Based on IMS data, the entireSevoflurane market in the US achieved a 2010-15 CAGR of 5.6% vs. 5.7% in2015, reaching USD115m in 2015. We believe it is likely Hengrui could achieve20% market share with 5% YoY growth for the entire market, translating intototal sales of USD40m and RMB80m for Hengrui on a recorded basis. Maintaining price target of RMB60; risks Our price target is based on 42x 2016E EPS of RMB1.4. We believe 42x isjustified, as A-share peers are trading at 24x with 23% EPS growth in 2017 (vs.the 30% we model for Hengrui). Key risks: delays in product launches,uncertainties in exports, pricing pressure, and competition.

Three-year guidance maintained; Insulin analogue launch in 2017 Management reiterated guidance of 20% revenue growth and 30% profit growth from core business for the next three years. Furthermore, the company expects 2%-3% price cut and over 20% volume growth in the next three years. In 2015, management indicated that over 20% and 50% growth for revenue and net profit respectively. The much higher profit growth in 2015 is mainly due to change of tax policy on VAT. Rural market remains as the priority. With continuous education among rural doctors, the company is able to retain 50% of new patients in rural market. Additionally, management expects Glargine approval and launch in 2017 as clinical studies were completed recently. On pricing, THDB plans to price its insulin analogue above that of Ganlee. Expect low-single-digit price cuts. The company is confident on the 2%-3% price cut for their insulin drugs, due to a well-maintained pricing structure. For some extreme cases including Zhejiang and Anhui, the company is able to replace 30R premix insulin with 40R premix, which is priced higher as an exclusive insulin drug. On the R&D front, the company plans to launch 4-5 insulin analogues in 2-3 years, completing its insulin franchise. Updates on the online platform and private placement. The online platform is at the stage of internal testing at present and is expected to be launched in July or August 2016. Through collaboration with third-party partners, this platform is targeting all the diabetes patients and OTC market. Management highlighted that Bionime, the Taiwanese manufacturer of blood glucose monitors, targets Rmb100m revenue in 2016. Additionally, the company expects to obtain exclusive marketing right for a new 4mm insulin needle by this month. As such, THDB will soon be fully involved in the diabetes business. Management commented that the RMB1bn private placement is expected to be completed in 1H16.

Another strong quarter driven by export business. Hengrui reported sales/core EPS of RMB2.5bn/RMB0.26 in 3Q15, representing26%/42% YoY growth respectively. With an approximately RMB100m profitcontribution, the export business represented over two-thirds of the profitgrowth. During a call we hosted this afternoon, management highlighted that1) export business is likely to deliver 20-30% sales growth in 2016; 2) Apatinibis on track to reach the sales target of RMB250-300m; 3) approval for 19K anda manufacturing inspection for Retagliptin are expected in 1H16; 4) growth inthe existing business might decelerate in 2016 due to pricing pressure. More color on 3Q15; growth outlook for 2016. In 3Q15, we believe growth for oncology, anesthetic, and contrast agentsreached 10%/20%/30% respectively. Export revenues were approximatelyRMB110m in 3Q15, similar to 2Q15. Management reiterated 20-30% growthguidance for the export business, with a 50% contribution from existingproducts and 50% from two to three product launches. For Cyclophosphamide,the company expects a 50% market share in the US in a bull-case scenario. Additionally, the upfront payment of USD25m from Incyte was received in Oct2015. Management expects Apatinib/Imrecoxib to enter the Jiangsu RDL in2016/1H16 respectively. For Imrecoxib, the opportunity in Jiangsu alone mightbe as large as the current total sales. Updates on pipeline and existing products. The company expects the launch of 19K and Retagliptin in 2016. Additionally,we expect 5-6 first-to-market generics launches in 2016, including threecontrast agents. For existing products, the company expects growth todecelerate in 2016 as drug tenders remain the largest uncertainty. Additionally,old products such as Oxaliplatin might face pricing pressure in drug tenders. However, there is upside for drugs that did not win tenders in the last round,including Capecitabine and Imrecoxib. Increasing price target to RMB60 from RMB55; risks. We increase our price target to RMB60 from RMB55, based on 42x 2016E EPSof RMB1.4 vs. the 40x we used previously. We increased our EPS estimate by4%. We believe 42x is justified as A-share peers are trading at 27x with 25%EPS growth in 2017 (vs. the 32% we model for Hengrui). Key risks: delays inproduct launches, uncertainties in export, pricing pressure, and competition.