dawnrays pharmaceutical (2348 hk) china...

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11 Oct 2017

Wilfred Yuen

[email protected]

(852) 2235 7131

Trading data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditors

Result Due

4.21/5.59

0.5

794

3,553

Mr. Li Kei Ling (43%)

Mr. Leung Hong Man (6%)

Mr. Li Tung Ming (5%)

E&Y

FY17: Mar

Company description

Founded Suzhou, China, in 1995, Dawnrays

Pharmaceutical is engaged in the development,

manufacturing, and sales of intermediates and bulk

medicines, cephalosporin antibiotics and drugs for

cardiovascular and liver diseases.

Price chart

Source: Bloomberg

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Thrive on China’s generic drug reform

Rating Buy Initiation

Target Price HK$5.50

Current price

HK$4.48 Upside +23%

Thrive on bioequivalence for Amlodipine and Entecavir We are initiating coverage on Dawnrays with Buy rating and target price of HK$5.50. We believe Dawnrays represents one of the best pharmaceutical companies in the smaller cap space that are poised to benefit from China’s generic drug reform, which is calling for an industry-wide bioequivalence (BE) for generics with new guidelines and imminent deadlines. We see upcoming progress on BE testing on Amlodipine and Entecavir in the next 12-18 months to be the major re-rating catalyst for Dawnrays. The competitive landscape after the completion of BE testing will favour faster adoption of generics against originator drugs, which allows us to model an accelerating sales growth for the company. We highlight that the company’s Anneizhen was a first-to-market generic Amlodipine Besylate in China and its generic Entecavir (Leiyide) is a domestic premium brand, securing better pricing in government-led tendering vs. other domestic generic entecavir. We estimate EPS to grow 11%/14%/19% in FY17/18/19E, after a 12% drop in FY16.

Sales recovery for generic Entecavir after sales restructuring In Jul 2016, the company terminated the agency contract with its master agency for the sales of Leiyide in China, as the agency was acquired by an SOE and did not purchase the products in 2Q16. The company had completed sales restructuring for Leiyide by 2Q17 and the product saw a growth recovery in 1H17, with sales amounting to RMB100mn in 1H17 vs. RMB40mn/RMB67mn in 1H16/2H16. We model 134%/15%/20% sales growth for Leiyide in FY17/18/19E.

Solid hypertension franchise We project an accelerating growth for “An” series for the next 3 years, with 12%/15%/20% growth in FY17/18/19E (vs. FY14-16 CAGR of 19%), due to: i) accelerated sales growth of Anneizhen (Amlodipine Besylate tablet) after BE test, ii) volume-led growth of Anneixi (Losartan Potassium and Hydrochlorothiazide) due to inclusion of the new NRDL (National Reimbursement Drug List) in 2017, and iii) a well-established brand equity of “An” series.

Valuation and Risks Dawnrays is trading at 9.1x forward FY18E P/E. Our target price of HK$5.50 is based on a target PEG multiple of 0.85x, which is at a 15% discount to peers’ average of 1.0x. We project 18% and 14% 3-year CAGR for revenue and net profit respectively. We expect a re-rating of the company, owing to i) FY17 results on strong growth recovery of entecavir generic, ii) progress on quality consistency evaluation/ bioequivalence tests, and iii) new drug launches (Esomeprazole in 2Q/3Q18). Risks include i) slower than expected progress on BE tests, ii) delayed approvals for new products (Esomeprazole).

RMB mn FY15A FY16A FY17E FY18E FY19E

Revenue 985 824 1,025 1,155 1,341

Net profit 302 266 292 331 392

EPS (RMB) 0.38 0.33 0.37 0.42 0.49

P/E (x) 10.1 11.5 10.4 9.1 7.7

Sources: Company, CIRL estimates

Dawnrays Pharmaceutical (2348 HK)

China Puti

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Generic entecavir, boosted by BE test and sales restructuring

Leiyide (entecavir) to accelerate growth after quality consistency evaluation

Dawnrays launched its entecavir generic, with a brand name of Leiyide (雷易得), in

2011. Bristol-Myers Squibb first launched its originator drug, namely Baraclude, in Apr

2005 in US and Feb 2006 in China. In China, originator Baraclude is selling at a

premium price (c.RMB25 per tablet), with a market-leading share of 40% in the

entecavir market, despite a dozen of domestic generics (most launched in 2010-13)

selling at a discount of 50%+. We have not seen a real “patent cliff” on Baraclude and

the branded drugs have been given “improved quality score” in provincial tenders,

thereby protecting it from direct generic competition in the hospital market. We expect

to see such a preferential treatment to eliminate after domestic generic manufacturers

complete the quality consistency evaluation (一致性評價)/ bioequivalence (BE) test,

thereby driving a faster adoption of generics and favouring leading domestic

drugmakers.

Dawnrays submitted CFDA filing for quality consistency evaluation for Entecavir

generic in Aug 2016 and its bioequivalence (BE) test was initiated in Aug 2017.

Dawnrays expects Leiyide to accelerate growth after quality consistency evaluation is

completed and will continue to position Leiyide as a domestic premium brand to rival

with originator drug, citing:

1) Dawnrays is the only domestic entecavir manufacturer that maintained the

tender pricing “perfectly”, with an average price of RMB16 per tablet (vs. only

c.RMB10 for other domestic Entecavir tablets). (See Exhibit 7 for tender prices of

Dawnrays’ Leiyide vs. Sino Biopharmaceutical’s Runzhong in 2015-17)

2) Leiyide has export sales to developed countries/regions. The company has

been supplying entecavir tablets in Hong Kong market through its distribution

business partner GlaxoSmithKline since 2014.

3) Leiyide is the only entecavir produced as a cyclodextrin inclusion compound,

which help enhancing bioavailability. Moreover, Leiyide has a longer shelf life of 36

months (vs. 24 months for Sino Biopharmaceutical’s Runzhong).

Exhibit 1: Leiyide to accelerate growth after BE test and sales restructuring

Source: Company, CIRL estimates

-100%

-50%

0%

50%

100%

150%

0

50

100

150

200

250

300

350

400

2013 2014 2015 2016 2017E 2018E 2019E

Sales of Leiyide (RMB mn) Growth rate (% YoY)

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Sales restructuring of Leiyide was completed by 2Q17

In Jul 2016, the company terminated the agency contract with its master agency for

the sales of Leiyide in China, as the master agency was acquired by an SOE and did

not purchase the company’s products in 2Q16. The company had completed sales

restructuring for Leiyide by 2Q17 and the product saw a growth recovery in 1H17, with

sales amounting to RMB100mn in 1H17 vs. RMB40mn/RMB67mn in 1H16/2H16.

Despite a higher selling ratio for Dawnrays after the termination of a master agency,

we are positive to this change in sales strategy for Leiyide due to:

1) The termination of a master agency is essentially cutting off a layer of

distribution from manufacturer/Dawnrays to hospitals/patients. According to

management, the company could raise the ex-factory price of Leiyide to

distributors at provincial level, whereas distributors could purchase products

directly from Dawnrays at a discount. This creates a win-win situation for

Dawnrays and distributors.

2) Dawnrays has more resources to develop the product in a long-term and

strategic approach vs. agency’s short-termism. According to management,

the company currently has 200 sales representatives for Leiyide responsible for

academic promotion, marketing, and hospital coverage expansion for Leiyide.

3) The sales mode is now more of a direct sales model, in the sense that

Dawnrays has more control in distributors’ inventory level and intelligence in

terminal sales. The company had completed the restructuring of sales for Leiyide

by 2Q17 and its sales jumped 152% YoY to RMB100mn in 1H17.

Background: HBV therapeutics and the standard of care in China

Hepatitis B is a potentially life-threatening liver infection caused by the hepatitis B

virus (HBV). According to US CDC, approximately 95% of infants and 25-50% of

children aged 1-5 years will remain chronically infected with HBV, and long-term

complications of HBV infections include cirrhosis and liver cancer. In 2015, WHO

formulated guidelines for the treatment of chronic hepatitis B infection and

recommended the preferred use of nucleos(t)ide analogues i.e. Tenofovir or Entecavir,

which have a high barrier to drug resistance, for the first- and second-line treatment.

The treatment only suppresses the replication of HBV and does not cure hepatitis B

infection. Entecavir is off-patent while Tenofovir is protected by a patent until 2018 in

most developed countries.

According to WHO, an estimated 90mn people in China currently have chronic

hepatitis B, with 28mn needing treatment and 7mn requiring urgent treatment due to

advanced liver disease and the high risk of developing cancer. Despite an improving

trend on incidence thanks to HBV vaccination (free to all infants since 2005), China’s

incidence rate was still at 68.6 per 100,000 population in 2015, almost 6x the rate in

the US. The number of new cases of hepatitis B in China was 0.93-0.94mn each year

in 2014-16 vs. 19,200 in US in 2014, according to data compiled from Chinese CDC

and US CDC.

The current HBV therapeutics in China include i) nucleoside/nucleotide antiviral

agents (First-line: entecavir, tenofovir; Second-line: lamivudine, adefovir), ii) interferon,

and iii) hepatic protectors. Among the nucleotide/nucleoside drugs, the market share

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of entecavir increased from 46% in 2013 to 60% in 2015. The major entecavir

products in China are Bristol-Myers Squibb’s Baraclude, Sino Biopharmaceutical’s

Runzhong, and Dawnrays’ Leiyide, occupying a market share of 40%, 35%, and 7%,

respectively.

We categorize the entecavir manufacturers in tiers, using the following evaluation

criteria: i) time to launch, ii) pricing / less price erosion in government-led, provincial

tenders, iii) and market share:

Originator: Bristol-Myers Squibb

First-tier players: Sino Biopharmaceutical, Dawnrays

Second-tier players: Qingfeng Pharmaceutical, Fujian Cosunter

Third-tier players: Hainan Zhonghe, Sichuan Haisco, Shandong Lukang, Anhui

Biochem, Hunan Qianjin Xieli

Exhibit 2: China’s HBV incidence rate (2007-2016)

Source: Chinese CDC, World Bank, CIRL

Exhibit 3: Antiviral agents against HBV

* high in Hong Kong and other Asian countries

^ at 10mg dose

Source: WHO report (March 2015)

0

10

20

30

40

50

60

70

80

90

100

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

no. of new HBV cases (mn) Incidence per 100,000 population

Antiviral agent Potency against HBV Reistance barrier Activity against HIV Cost

Interferons Moderate Not applicable Moderate High

Tenofovir High High High Low *

Entecavir High HIgh Weak HIgh

Emtricitabine Moderate Low High Low

Telbivudine High Low Unclear High

Lamivudine Moderate-high Low High Low

Adefovir Low Moderate None^ High

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Exhibit 4: China’s nucleotide/nucleoside market (2013-15) Exhibit 5: Market share of entecavir in China

Exhibit 1:

Source: SMERI, CIRL Source: Company, CIRL

Exhibit 6: Entecavir manufacturers’ CFDA filings for quality consistency evaluation

Source: NIFDC, CIRL

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2013 2014 2015

RMB mn

Entecavir Adefovir Lamivudine Telbivudine Tenofovir

2013-2015 CAGR:

Tenofovir: 139.2%

Telbivudine: 18.6%

Lamivudine: -8.0%

Adefovir: -5.6%

Entecavir: 30.5%

BMS, 40%

Sino Biopharm,

35%

Dawnrays, 7%

Jiangxi Qingfeng,

5%

Cosunter, 3%

Others, 10%

Date of CFDA filing Company Strength Dosage

Entecavir dispersable tablet

2016-06-12 Qingfeng Pharmaceutical 0.5mg Tablet

2016-07-08 Sino Biopharmaceutical 0.5mg Tablet



2016-08-01 Dawnrays 0.5mg Tablet

2016-08-01 Dawnrays 1mg Tablet

2016-09-20 Sino Biopharmaceutical 0.5mg Dispersable tablet

2016-09-20 Sino Biopharmaceutical 1.0mg Dispersable tablet

2016-10-19 Hainan Zhonghe 0.5mg Dispersable tablet




2017-03-03 Anhui Biochem 0.5mg Tablet

2017-03-28 Hunan Qianjin Xieli 0.5mg Tablet

Entecavir capsule

2016-06-12 Qingfeng Pharmaceutical 0.5mg Capsule

2016-06-14 Sichuan Haisco 0.5mg Capsule


2016-09-01 Fujian Cosunter 0.5mg Capsule

2016-10-09 Sichuan Haisco 0.5mg Capsule

2016-10-19 Hainan Zhonghe 0.5mg Capsule


2017-02-13 Sino Biopharmaceutical 0.5mg Capsule

2017-02-14 Fujian Cosunter 0.5mg Capsule

Entecavir tablet

2017-04-21 Pharmadax 0.5mg Tablet

2017-04-21 Pharmadax 1mg Tablet

2017-07-14 Sino-American Shanghai Squibb 0.5mg Tablet

2017-07-14 Sino-American Shanghai Squibb 1mg Tablet

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Exhibit 7: Tender prices of Leiyide vs. Runzhong In 2015-17

Exhibit 2:

Source: WIND, CIRL

Province Date FormulationTender price

(RMB)

Average

price

/ Tablet

(0.5mg)

Province Date FormulationTender price

(RMB)

Average

price

/ Tablet

(0.5mg)

Dwanrays' Leiyide Sino Biopharmaceutcal's Runzhong

Liaoning 2017-08-11 0.5mg*28 440.33 15.7 Liaoning 2017-08-11 0.5mg*7 77.7 11.1

Liaoning 2017-08-11 0.5mg*14 225.81 16.1 Liaoning 2017-08-11 0.5mg*21 295.45 14.1

Liaoning 2017-08-11 0.5mg*7 115.8 16.5 Jiangsu 2017-07-31 0.5mg*1 11.1 11.1

Jiangxi 2017-07-07 0.5mg*28 494.3 17.7 Ningxia 2017-07-12 0.5mg*1 10.6 10.6

Jiangxi 2017-07-07 0.5mg*14 247.2 17.7 Jiangxi 2017-07-07 0.5mg*28 257.04 9.2

Jiangxi 2017-07-07 0.5mg*7 123.6 17.7 Shanxi 2017-06-13 0.5mg*7 77.7 11.1

Shanxi 2017-06-13 0.5mg*7 115.9 16.6 Heilongjiang 2017-04-18 0.5mg*1 16.6 16.6

Shanxi 2017-06-13 0.5mg*14 226 16.1 Shanghai 2017-03-14 0.5mg*28 486.7 17.4

Heilongjiang 2017-04-18 0.5mg*1 16.5 16.5 Shanghai 2017-03-14 0.5mg*14 249.6 17.8

Shanxi 2016-09-12 0.5mg*14 258.9 18.5 Guangxi 2016-10-10 0.5mg*28 478.66 17.1

Shanxi 2016-09-12 0.5mg*7 132.8 19.0 Shandong 2016-09-20 0.5mg*7 99.98 14.3

Qinghai 2016-08-29 0.5mg*14 226 16.1 Shanxi 2016-09-12 0.5mg*7 77.7 11.1

Shangdong 2016-08-23 0.5mg*7 136.2 19.5 Guangdong 2016-09-02 0.5mg*1 20.2 20.2

Heilongjiang 2016-07-25 0.5mg*1 16.6 16.6 Qinghai 2016-08-29 0.5mg*7 122.3 17.5

Hubei 2015-07-15 0.5mg*7 147 21.0 Anhui 2016-05-30 0.5mg*7 118 16.9

Shanghai 2015-01-27 0.5mg*14 272.9 19.5 Hubei 2015-07-15 0.5mg*7 146.96 21.0

Shanghai 2015-01-27 0.5mg*7 139.9 20.0 Shanghai 2015-01-27 0.5mg*7 138 19.7

Average price per tablet (RMB) 17.7 Average price per tablet (RMB) 15.1

Lowest price per tablet (RMB) 15.7 Lowest price per tablet (RMB) 11.1

Average vs. Lowest (%) -11.1% Average vs. Lowest (%) -26.5%

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Solid Hypertension Franchise

Hypertension franchise to accelerate growth

“An” series (「安」系列 ) is Dawnrays’ antihypertensive drug varieties, namely

Anneizhen, Anneiqiang, Anneixi, and Anneiping, launched in 2002, 2006, 2008, and

2011, respectively, targeting different market segments from essential markets to

OTC to large public hospitals. Anneizhen is a first-to-market (FTM) generic Amlodipine

Besylate product (originator: Pfizer’s Norvasc), Anneiqiang is a generic Telmisartan

product (originator: Boehringer Ingelheim’s Micardis), Anneixi is a FTM generic

Losartan Potassium and Hydrochlorothiazide product (originator: Merck’s Hyzaar),

and Anmeiping is a generic Levamlodipine Besylate product (originator: Shihuida).

Sales of “An” series grew from RMB250mn in 2013 to RMB424mn in 2016,

representing a 3-year CAGR of 19.2%.

Exhibit 8: Sales growth of hypertensive drugs “An” series


We project an accelerating growth for “An” series for the next 3 years, with

12%/15%/20% growth in FY17/18/19E, due to:

1) Quality consistency evaluation/ BE impact: Dawnrays submitted CFDA filing

for quality consistency evaluation for Amlodipine generic in Jun 2016 and its

bioequivalence (BE) test was initiated in Aug 2017. According to the company,

Anneizhen now captures around 30% share of Amlodipine among domestic

manufacturers, which only have a combined share of 20% vs. 80% occupied by

originator Pfizer’s Norvasc despite its off-patent status. We expect the company to

complete the BE test for Amlodipine by 2018 (i.e. the deadline mandated by

CFDA), after which the competition landscape will favour Dawnrays, given its

leading position among domestic manufacturers of Amlodipine.

2) NRDL impact: Anneixi (Losartan Potassium and Hydrochlorothiazide) was

newly included in the new NRDL (National Reimbursement Drug List) in 2017.

Sales of Anneixi was up from RMB20mn in 1H16 to RMB40mn in 1H17. The

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

700

2013 2014 2015 2016 2017E 2018E 2019E

Sales of "An" series (RMB mn) Growth rate (% YoY)

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company expects peak sales of RMB200mn for Anneixi, driven by volume-led

growth due to NRDL inclusion and continued hospital coverage expansion.

3) Well-established brand equity: Dawnrays launched China’s first-to-market

generics of Amlodipine in 2002. Since then, the company developed its

hypertension franchise through new product launches to develop its “An” series as

well as academic promotion. In 2007, Dawnrays was appointed as the exclusive

research and cooperation partner and designated supplier for drugs used in the

“Chinese Hypertension Intervention Efficacy Study” (CHIEF Study), which was a

key project jointly supported by the Ministry of Health and the Ministry of Science

and Technology. The study is then the largest integrated clinical research project

of its kind in China, involving more than 150 clinical centres and 13,000

hypertensive patients worldwide. In Nov 2013, Anneizhen (Amlodipine Besylate

tablets) was jointly recognised by five industry associations including China

Pharmaceutical Industry Association as the excellent product brand in

cardio-cerebrovascular category of the Chinese pharmaceutical manufacturing

industry in 2013. In Jul 2014, the bulk medicine and tablets under the brand of

“Anneizhen” of Amlodipine Besylate were credited by Science and Technology

Department of Jiangsu Province as hi-tech products of Jiangsu Province (江蘇省

高新技術產品). In Dec 2016, “Anneizhen” was honoured as “Excellent Product

Brand Award in Pharmaceutical Industry of Jiangsu Province” (2016 江蘇省醫藥行

業優秀產品品牌獎). These recognitions and clinical research provide a solid basis

for the company’s academic-based promotion.

Exhibit 9: Dawnrays’ CFDA filings of quality consistency evaluation for antihypertensive drugs in “An” series

Exhibit 3:

" deadline to complete BE is by the end of 2018

* Losartan Potassium

^ Hydrochlorothiazide

Source: NIFDA, CIRL

Date of filing Brand name Generic name Strength Manufacturer of reference drugListed on EDL

and approved before Oct 2007

2016-06-13 Anneizhen Amlodipine Besylate 5mg Pfizer Yes"

2017-04-25 Anneizhen Amlodipine Besylate 2.5mg Pfizer No

2017-04-25 Anneizhen Amlodipine Besylate 10mg Pfizer No

2016-10-28 Anmeiping Levamlodipine Besylate 2.5mg Shihuida No

2016-07-11 Anneixi Losartan Potassium and Hydrochlorothiazide 50mg*, 12.5mg^ Merck No

2016-07-11 Anneiqiang Telmisartan 40mg Boehringer Ingelheim No

2016-07-11 Anneiqiang Telmisartan 80mg Boehringer Ingelheim No

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Hypertension in China

Hypertension is chronic condition in which the blood pressure in the arteries is

elevated. According to the Report on Cardiovascular Diseases in China (2016)

published by the National Center for Cardiovascular Diseases in Aug 2017, it is

estimated that 25.2% of adults aged over 18 years old in China had hypertension in

2012 and the total number of people with hypertension in China was approximately

270mn. China, as in most developing countries, fails to detect and manage

hypertension effectively. According to Chinese CDC, awareness, treatment and

control of hypertension were 46.5%, 41.1%, and 13.8%, respectively in 2012, whereas

the respective rates in US were 82.7%, 75.6% and 51.8% according to data from the

National Health and Nutrition Examination Survey 2011-12.

With the promulgation of government policies on the national tiered medical system

(分级诊疗) and chronic disease management (Diabetes and hypertension are the two

highlighted diseases), the hypertension market gradually shifts to the community level,

which possesses a larger unpenetrated market and offers additional growth

opportunities for Anneizhen.

Exhibit 10: China’s prevalence of hypertension Exhibit 11: Management of hypertension in China vs. US.

Exhibit 4:

Source: National Center for Cardiovascaular Diseases, China Source: Chinese guidelines for the management of hypertension (2015)

5.1%

7.7%

13.6%

17.6%

25.2%

0% 5% 10% 15% 20% 25% 30%

1958-59

1979-80

1991

2002

2012

30.2%

24.7%

6.1%

46.5%

41.1%

13.8%

82.7%

75.6%

51.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Awareness rate Treatment rate Control rate

2002 (China) 2012 (China) 2011-12 (US)

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According to Guangzhou PICO Medicine Information, the market of antihypertensive

drugs in China increased from RMB25.5bn in 2010 to RMB47.3bn in 2014, and is

expected to grow to RMB88.4bn, representing a CAGR of 13.3% from 2014 to 2019.

Major antihypertensive drug types include calcium channel blockers (CCB),

angiotensin II receptor blockers (ARB), angiotensin converting enzyme inhibitors

(ACEI), beta blockers and diuretics. In 2014, CCB and ARB accounted for 42.3% and

22.8% of antihypertensive drugs in China, according to PICO.

Exhibit 12: China’s antihypertensive drug market Exhibit 13: Market share of Amlodipine manufacturers in 2015

Exhibit 5:

Source: PICO (广州标点医药信息) Source: MENET

25.5

47.3

88.4

0.0

20.0

40.0

60.0

80.0

100.0

2010 2014 2019E

RMB bn

2014-2019 CAGR: 13.3%

2010-2014 CAGR: 16.7%

Pfizer, 85.6%

Saike, 4.97%

Yangzijiang , 3.34%

Dawnrays, 2.27%

Kunming Sinoway,

1.37%

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Valuation

Initiate at Buy with Target Price of HK$5.50

Dawnrays is trading at 9.1x forward FY18E P/E. Our target price of HK$5.50 is based on

a target PEG multiple of 0.85x, which is at a 15% discount to peers’ average of 1.0x. We

project 18% and 14% 3-year CAGR for revenue and net profit respectively. We expect a

re-rating of the company, owing to i) FY17 results on strong growth recovery of

entecavir generic, ii) progress on quality consistency evaluation/ bioequivalence tests,

and iii) new drug launches (Esomeprazole in 2Q/3Q18). Risks include i) slower than

expected progress on BE tests, ii) delayed approvals for new products (Esomeprazole).

Exhibit 14: Peers’ comparisons

Exhibit 6:

Source: Bloomberg, CIRL

Risk Factors

Slower than expected progress on BE test

There are risks to meet clinical safety, efficacy, or other standards for quality

consistency evaluation/ bioequivalence (BE) tests, or a slower than expected progress

may negatively affect the sales growth of the company due to issues that may arise

from regulation/ reputation/ market access.

Delayed approvals for new products

There are risks of failure to meet safety, efficacy or other standards during the R&D

process, or the failure to obtain necessary regulatory approvals. Competition risks and

rapidly changing market demand would make commercialisation efforts more complex

and less certain.

Key personnel risk

The company’s success depends upon the continued service of senior management

and key R&D and BD personnel. The loss of services or significant change in key

management could severely disrupt business and growth.

Company Ticker Price Mkt Cap 3-year PEG

HK$ HK$mn 2016 2017E 2018E 2016 2017E FY18E FY19E CAGR FY18E 2016 2017E 2018E

Dawnrays 2348 HK 4.46 3,553 11.5 10.4 9.1 -12.0 9.9 13.3 18.5 13.8 0.7 17.1 16.9 17.1

Lee's Pharm 950 HK 6.25 3,693 14.7 13.4 11.8 10.0 6.7 14.9 12.3 11.3 1.05 16.4 16.7 15.7

Jacobson Pharm 2633 HK 2.16 3,922 19.1 15.8 13.5 23.2 39.0 16.8 15.4 23.3 0.58 13.5 14.0 14.6

HEC Pharm 1558 HK 19.98 9,031 16.5 15.1 12.2 43.2 33.1 23.1 20.1 25.3 0.48 16.5 14.5 18.5

The United Lab 3933 HK 6.66 10,835 NA 25.2 19.2 NA NM 32.2 23.6 NA NA -4.9 1.4 7.0

Livzon 1513 HK 47.45 33,102 30.1 22.2 18.5 26.0 22.2 21.5 17.1 20.2 0.91 14.5 14.2 12.2

Sino Biopharm 1177 HK 8.95 66,339 21.2 29.6 26.0 7.6 14.2 12.7 12.3 13.1 1.99 23.0 22.8 22.5

Average 20.3 20.2 16.9 22.0 23.0 20.2 16.8 18.6 1.0 13.2 13.9 15.1

P/E (x) Earnings growth (%) ROE (%)

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Financials

Revenue

We project Dawnrays to deliver revenue growth of 24% in FY17E, 13% in FY18E, and

16% in FY19E, which translates into a FY16-19E CAGR of 17.6% vs. -3.4% in

FY13-16. We attribute the revenue growth to: i) growth recovery of Leiyide (Entecavir),

ii) originator drug substitution on Amlodipine Besylate and Entecavir after BE tests are

completed, and iii) a volume-led growth of Anneixi (Losartan Potassium and

Hydrochlorothiazide) due to NRDL inclusion.

Exhibit 15: Revenue model, FY15-19E


Exhibit 16: Revenue growth , FY15-19E


RMB mn FY15 FY16 FY17E FY18E FY19E

Leiyide 267 107 250 288 345

"An" series 341 424 474 545 654

Xikew ei and Xikexin 38 47 52 57 63

Antibiotics 88 65 88 97 102

Others 12 18 19 20 21

Finished drugs 745 661 883 1,006 1,185

Intermediates and bulk medicines 240 164 142 149 156

Revenue (HK$mn) 985 824 1,025 1,155 1,341

% YoY FY15 FY16 FY17E FY18E FY19E

Leiyide 50% -60% 134% 15% 20%

"An" series 12% 24% 12% 15% 20%

Xikew ei and Xikexin 7% 24% 10% 10% 10%

Antibiotics -17% -27% 36% 10% 5%

Others 5% 56% 5% 5% 5%

Finished drugs 18% -11% 34% 14% 18%

Intermediates and bulk medicines 60% -32% -13% 5% 5%

Revenue Growth Rate (% YoY) 25.7% -16.3% 24.3% 12.8% 16.1%

% FY15 FY16 FY17E FY18E FY19E

Leiyide 27% 13% 24% 25% 26%

"An" series 35% 51% 46% 47% 49%

Xikew ei and Xikexin 4% 6% 5% 5% 5%

Antibiotics 9% 8% 9% 8% 8%

Others 1% 2% 2% 2% 2%

Finished drugs 76% 80% 86% 87% 88%

Intermediates and bulk medicines 24% 20% 14% 13% 12%

Revenue mix (%) 100% 100% 100% 100% 100%

-20%

-10%

0%

10%

20%

30%

0

200

400

600

800

1,000

1,200

1,400

1,600

FY15 FY16 FY17E FY18E FY19E

RMB mn

Leiyide "An" series

Xikewei and Xikexin Antibiotics

Others Intermediates and bulk medicines

Revenue Growth Rate (% YoY)

of 21

Exhibit 17: Revenue mix by business segment (FY12-16) Exhibit 18: EBIT of business segments (FY12-16)

Exhibit 7:

Source: Company, CIRL estimates Source: Company, CIRL estimates

Margin analysis, SG&A ratio, R&D expenses

The company’s gross profit margin was up 4.2ppt YoY to 62.0% in FY16, mainly due

to change in product mix. Due to higher growth rate of finished drugs vs.

intermediates/bulk medicines, we model continued GPM improvement, at

66.7%/67.2%/68.0% in FY17/18/19E.

SG&A ratio was up from 17.2% in FY15 to 19.8% in FY16, due to increased selling

expenses for Leiyide after the termination of master agency. Despite higher SG&A,

operating profit margin was up from 40.6% in FY15 to 42.2% in FY16, thanks to GPM

expansion. We model operating profit margin of 40.3%/40.7%/41.5% in FY17/18/19E.

Management guides the cost of conducting quality consistency/ bioequivalent (BE)

test at a total of RMB150-200mn in FY17-19E. As a result, we model total R&D

expenses of RMB60mn/RMB70mn/RMB80mn in FY17/18/19E (vs. RMB27mn in

FY16).

Exhibit 19: Margin analysis (FY15-19E) Exhibit 20: SG&A and R&D ratio (FY15-19E)

Exhibit 8:

Source: Company, CIRL estimates Source: Company, CIRL estimates

(100)

0

100

200

300

400

500

600

FY11 FY12 FY13 FY14 FY15

RMB mn

Intermediates and bulk medicines Finished drugs

44% 40%

19%24% 20%

56% 60%

81%76% 80%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 FY15 FY16

Intermediates and bulk medicines Finished drugs

57.8%

62.0%

66.7% 67.3% 68.0%

40.6%42.2% 40.4% 40.8%

41.5%

30.7%32.3%

28.5% 28.6% 29.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%


Gross profit margin Operating profit margin

Net profit margin

17.2%

19.8%

26.3% 26.5% 26.5%

3.3% 3.2%

5.9% 6.1% 6.0%

0%

10%

20%

30%


SG&A ratio R&D ratio

of 21

Net profit

Net profit was down 12.0% YoY to RMB266mn in FY16, due to the temporary impact

caused by termination of master agency for Leiyide. We model net profit at

RMB292mn/RMB329mn/RMB390mn in FY17/18/19E.

Exhibit 21: Net profit, FY15-19E


Cash position, dividend and share repurchase

As of Jun 2017, the company had no debt, with a cash position of RMB534mn.

Dividend payout ratio were 33.4% and 34.5% in FY15 and FY16, respectively. Cash

paid for dividend and share repurchase were RMB101mn and RMB17mn, respectively

in FY16 (vs. RMB75mn and RMB16mn, respectively in FY15).

Exhibit 22: Net profit, free cash flow, dividend, and share repurchase (2015-19E)


-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

50

100

150

200

250

300

350

400

450


RMB mn

Net profit (RMB mn) Growth rate (% YoY) Net profit margin (%)

0

50

100

150

200

250

300

350

400

450

2015 2016 2017E 2018E 2019E

Net profit (RMB mn) Free cash flow (RMB mn)

Dividend (RMB mn) Share repurchase (RMB mn)

of 21

Exhibit 23: Financial Summary


Income statement Cash flow

Year to Mar (RMB mn) FY15 FY16 FY17E FY18E FY19E Year to Mar (RMB mn) FY15 FY16 FY17E FY18E FY19E

Revenue 985 824 1,025 1,155 1,341 PBT 377 333 365 414 490

COGS (416) (313) (341) (378) (429) D&A 54 53 49 46 43

Gross profit 569 511 683 777 912 CFO before WC change 437 394 395 439 512

SG&A (169) (164) (270) (306) (355) Taxes (63) (74) (73) (83) (98)

Operating profit 400 348 414 471 557 Change in w orking capital (146) (106) (46) 4 5

R&D expenses and others (53) (39) (70) (80) (90) Cashflow from operation 298 320 213 328 353

Other income 31 24 25 26 27 CAPEX (43) (25) (12) (12) (12)

Finance costs (2) (0) 0 0 0 Investments in associates 0 0 49 49 49

PBT 377 333 365 414 490 Cashflow from investing (146) (106) (46) 4 5

Tax (75) (67) (73) (83) (98) Repurchase of shares (16) (17) (14) 0 0

Minority Interests 0 0 0 0 0 Repayment of bank loans (213) (18) (9) 0 0

Net profit 302 266 292 331 392 Dividends paid (75) (101) (91) (97) (110)

Cashflow from financing (38) (117) (114) (97) (110)

Balance Sheet Ratios

Year to Mar (RMB mn) FY15 FY16 FY17E FY18E FY19E Year to Mar (RMB mn) FY15 FY16 FY17E FY18E FY19E

Cash & cash equivalents 686 663 717 951 1,199 Growth rate (%)

Inventories 148 125 165 177 199 Revenue 25.7% -16.3% 24.3% 12.8% 16.1%

Trade receivables 282 226 308 338 397 Gross profit 23.8% -10.2% 33.6% 13.7% 17.3%

Other current assets 18 229 258 258 258 Operating profit 33.5% -13.0% 18.9% 13.9% 18.2%

PPE 597 566 528 493 461 Net profit 47.3% -12.0% 9.9% 13.3% 18.5%

Other intangible assets 60 65 68 71 75 EPS 47.6% -11.8% 10.6% 13.8% 18.5%

Other non-current assets 13 13 63 65 67 Margins (%)

Total assets 1,804 1,886 2,107 2,354 2,656 Gross profit margin 57.8% 62.0% 66.7% 67.3% 68.0%

Operating profit margin 40.6% 42.2% 40.4% 40.8% 41.5%

Trade payables 143 88 118 131 151 Net profit margin 30.7% 32.3% 28.5% 28.6% 29.2%

ST borrow ings 9 9 0 0 0 Other ratios

Other current liabilities 132 104 117 117 117 ROE (%) 22.2% 17.1% 16.9% 17.1% 17.8%

LT borrow ings 0 0 0 0 0 ROA (%) 17.3% 14.4% 14.6% 14.8% 15.7%

Other non-current liabilities 45 49 49 49 49 Net gearing (%) Net cash Net cash Net cash Net cash Net cash

Total Liabilities 330 250 283 296 317 Interest coverage (x) 262 2,216 NA NA NA

Inventory days 103 159 155 165 160

Share capital 85 85 85 85 85 Receivables days 282 226 308 338 397

Reserves 1,389 1,552 1,739 1,973 2,255 Payables days 143 88 118 131 151

Shareholders' equity 1,474 1,637 1,824 2,057 2,339 Effective tax rate (%) 20% 20% 20% 20% 20%

Minorities 0 0 0 0 0

Total equity 1,474 1,637 1,824 2,057 2,339

of 21

Appendix 1: Company Background

Exhibit 24: Company history

Source: Company, CIRL

Exhibit 25: Major products of Dawnrays


Antibiotic business

The company’s antibiotic products include pharmaceutical intermediates, bulk

medicines, powder for injections and oral antibiotics. For the production of

cephalosporin antibiotics, the company adopts a vertically integrated process from

intermediates to bulk medicines and finished drugs.

In 2014, the company completed its new GMP adaptive renovation works in

association with its bulk medicines and powder for injection, passed government

inspection and obtained GMP certification. As of Jun 2017, the company’s

supplementary research for production of Cefoperzone Sodium and Tazobactam

Sodium for injection was completed and declaration for production was submitted,

expecting to launch in 2017.

Year Event

1995 Suzhou Daw nrays Pharmaceutical w as established in Suzhou, China

1998 The company launched cefoperazone sodium and bismuth potassium citrate

2002 The first-to-market generic of Amlodipine Besylate, namely Anneizhen, w as launched

2003 Listed on the Main Board of Hong Kong Stock Exchange

2007 The company w as appointed as the designated supplier of drugs for Chinese Hypertension Intervention Efficacy Study

2011 Leiyide, entecavir generic, w as launched

2012 Entered into an agreement w ith GSK to supply entecavir in Hong Kong and Macau

2014 Began to supply entecavir to Hong Kong market as GSK w as aw arded a supply contract

2016 Terminated the master agency of Leiyide, after w hich the company directly engaged w ith distributors at provincial level

Brand name Generic name Therapeutic areaLaunch

yearOriginator drug

System specific medicine:

Xikew ei (西可韋) Cetirizine Hydrochloride Tablet Anti-allergic 1998 Zyrtec (UCB)

Anneizhen (安內真) Amlodipine Besylate Tablet Anti-hypertension 2002 Norvasc (Pfizer)

Anneiqiang (安內強) Telmisartan Tablet Anti-hypertension 2006 Micardis (Boehringer Ingelheim)

Anneixi (安內喜) Losartan Potassium and Hydrochlorothiazide Tablet Anti-hypertension 2008 Hyzaar (Merck)

Leiyide (雷易得) Entecavir Dispersible Tablet Chronic Hepatitis B 2010 Baraclude (BMS)

Anmeiping (安美平) Levamlodipine Besylate Tablet Anti-hypertension 2011 Levamlodipine Besylate Tablet (Shihuida)

Jieshitong (杰士同) Potassium Citrate Sustained-release Tablet Endocrine calculus 2011 Urocit-K (Mission)

Cephalosporin powder for injection:

Xianshu (先舒) Cefoperazone Sodium and Sulbactam Sodium for Injection Anti-infective 2001

Xianqin (先嗪) Cefoperazone Sodium Bulk Medicine Anti-infective 2002

Xiankang (先康) Sulbactam Sodium Bulk Medicine Anti-infective 2006

Cephalosporin tablet:

Silijie (司力捷) Cefixime Anti-infective 2005

Silineng (司力能) Cefpodoxime Proxetil Anti-infective 2005

Silike (司力可) Cefprozil Anti-infective 2010

of 21

Exhibit 26: Sales of Cephalosporin production line


Pipeline

As of Jun 2017, Dawnrays has a total of 28 R&D projects, covering therapeutic areas

including circulatory system, digestive system, endocrine system and anti-virus drugs,

of which 6 projects are currently undergoing clinical trials. Moreover, the company is

processing quality consistency assessment for 8 drugs, of which 4 are undergoing

bioequivalence (BE) clinical research. According to management, Esomeprazole

Sodium for Injection is expected to launch in 2Q/3Q18.

Partnering with Akeso Biopharma on developing mAb drugs

In Dec 2016, Dawnrays Biotech, a wholly-owned subsidiary of the company and

Akeso Biophama Inc announced to establish a joint venture, namely AD

Pharmaceutical. The total investment amount of the JV was RMB244mn. The

aggregate investment amount to be contributed by Dawnrays Biotech is RMB150mn

in cash and Akeso Biopharma contributes the IP Rights to the JV. The aggregate

investment amount to be contributed by Dawnrays Biotech is RMB150mn, comprising

registered capital of RMB50.3mn and capital reserve of RMB99.7 to be payable in

stages upon the clinical developments of the AK102 Project and AK109 Project.

AK102 is a monoclonal antibody (mAb), cholesterol-lowering drug under development

while AK109 is a mAb drug under development to treat primarily gastric cancer, lung

cancer and rectal cancer.

Found in Mar 2012, Akeso Biopharm focuses on discovering and developing

innovative biologics with intellectual rights for the treatment of a broad spectrum of

diseases, including oncology, inflammation, autoimmune and cardiovascular diseases.

In 2015, the company sealed an agreement with Merck to develop and commercialise

its immune checkpoint blocking antibody AK-107 for an undisclosed upfront payment

and up to $200mn in milestone payments.

0

100

200

300

400

500

600

2011 2012 2013 2014 2015

RMB mn

Intermediates and bulk medicines for Cephalosporin

Oral and powder for injections of Cephalosporin antibiotics

of 21

Exhibit 27: Management Profile

Source: Company

Name Poistion Experience and Responsibility

Ms. Li Kei LingChairman

Executive Director

Mrs Li is one of the founder of the company.

Mrs Li w as the CEO of the company from Mar 2015 to Apr 2016.

Mrs Li has over 20 years of experience in corporate management for pharmaceutical enterprises in China

Mr. Chen Shaojun CEO

Mr Chen has been appointed as CEO from Apr 2016.

Mr Chen joined sales and marketing department of Suzhou Daw nrays in Aug 2002 as area manager.

Mr Chen has accumulated almost 20 years of experience in pharmaceutical sales and marketing and

corporate development and management.

Mr. Li Tung Ming Executive Director

Mr. Li joined the company in Apr 2000.

Mr. Li has over 20 years of experience in the pharmaceutical industry in PRC.

Mr. Li is responsible for liaison w ith the company's academic netw ork of medical experts and academic

advisers and assists in new product development

of 21

Appendix 2: Quality consistency evaluation / BE test

China requires generics to show bioequivalence to the originator product

Background: In 2013 the CFDA issued guidance for Bioequivalence (BE)

comparison and selected 75 types of generics for which testing would be required.

However, the progress and achievement were unsatisfactory, mainly due to the

disputes over the evaluation methods and the definition of “reference drug”.

In Aug 2015, the State Council issued “Opinions concerning the reform of the review

and approval system for drugs and medical devices” (國務院關於改革藥品醫療器械審

評審批制度的意見), thus opening the reform curtain. Improving the efficacy, safety,

and quality of drugs is the core of reform of drug review and approval system. In Mar

2016, the State Council issued “Opinion on Conducting Consistency Evaluations of

Quality and Efficacy of Generic Drugs” (國務院辦公廳關於開展仿製藥質量和療效一致

性評價的意見), mandating that pharmaceutical companies must ensure that the

quality and efficacy of their generics are on par with brand-name drugs through

in-house assessments with new deadlines and modified bioequivalence (BE) testing

rules. According to the new guidelines, a reference product must be the brand name

version of the generic drug or an imported, globally recognised generic version if the

original branded drug is no longer available, thereby prohibiting the use of

locally-made generics as reference products.

High importance: We believe the Chinese government has been placing a high

importance on quality consistency evaluation (一致性評價) / BE testing (生物等效性試

驗) since 2016. Note that there are a total of 74 policy documents/ guiding principles

archived in the CFDA website, of which 36 and 24 were published in 2016 and 2017,

respectively, compared to a total of only 14 during 2012-15.

Deadlines: For oral solid dosage drugs that were on the Essential Drug List (EDL)

and approved before Oct 2007, the deadline is the end of 2018. For other generic

drugs, once a generic passed BE, the other generic versions are given a window of 3

years to complete BE tests and failure to do so will revoke its market access. For

drugs that require clinical trials for efficacy testing, the deadline is the end of 2021.

Scope and costs: For oral solid dosage drugs that were on the Essential Drug List

(EDL) and approved before Oct 2007, there are 289 types of generic drugs, with

17,740 approval or registration numbers, involving 1,817 domestic manufactures and

42 imported drug enterprises (进口药品企业), according to the CFDA. According to

media reports, it takes 14-32 months to complete a drug’s quality consistency

evaluation, with a price tag of RMB5-8mn.

Testing methods: Comparison studies include formulation, quality standard, crystal

form, particulate size, impurities, and dissolution profile and in vivo BE studies.

Carrot and stick: To incentivise pharmaceutical companies to initiate BE testing,

there are following favourable policies: i) drugs that passed BE testing will be

prioritised by reimbursement policies and procurement plans of public hospitals, ii)

manufacturers are allowed to add the credit on drug label for marketing purposes, iii)

manufacturers are eligible to apply for funding and subsidies.

The impacts are industry consolidation, generic substitution and “patent cliff”:

of 21

Quality consistency evaluation will i) drive industry consolidation as smaller players

cannot survive if they are unable to initiate or pass BE testing for their generic drugs, ii)

for drugs that passed BE testing, the competition landscape will turn more favourable

to these drugs, with faster adoption of generics vs. originator drugs, potentially trigger

a long-overdue “patent cliff” on originator drugs in China.

Exhibit 28: Major policies on quality consistency evaluation / bioequivalence (BE) testing

Source: CFDA, CIRL

Date Organisation Document / Policy Highlights

2015-08-13 State Council

Opinions Concerning the Reform of the Review and Approval System for Drugs and

Medical Devices

(国务院关于改革药品医疗器械审评审批制度的意见)

Improve the quality of generic drugs. Speed up quality

consistency evaluation for generic drugs, and target

to complete by 2018 for oral drugs that are listed in

the national Essential Drugs List (EDL)

2016-03-05 State Council

Opinions on Conducting Consistency Evaluations of the Quality and Efficacy of

Generic Drugs

(国务院办公厅关于开展仿制药质量和疗效一致性评价的意见)

Oral solid dosage drugs on the national Essential

Drug List (EDL) approved for marketing before

October 1, 2007 should have completed the

consistency evaluation by the end of 2018.

For drugs that need to undergo clinical trials for

efficacy testing, the deadline for completing the

evaluation is the end of 2021.

Failure to timely pass the evaluation will lead to the

revocation of registration licences or ineligibility for

government tendering.

To incentivise pharmaceutical companies to carry out

their evaluations, the Opinion stated that for each

tendered drug, no more than three drugs would be

allowed to pass the evaulation.

2016-03-18 CFDA

Three technical guidelines on the selection of reference products for oral solid

dosage

(总局关于发布普通普通口服固体制剂参比制剂选择和确定等3个技术指导原则

的通告)

Three guidelines on 1) reference products of oral

solid dosage drugs, 2) dissolution curve of oral solid

dosage drugs, and 3) Pharmacokinetic parameters

2016-11-29 CFDA

Guidelines for further regulating the selection of reference products in BE tests

(总局办公厅公开征求进一步规范仿制药质量和疗效一致性评价参比制剂选择

等

相关事宜的指导意见的意见)

Guidelines for the selection of reference products for

generics whose originator drugs have changed

manufacturer or place of production.

2016-11-29 CFDA

Guidelines for classification of drugs in bioequivalence test

(总局办公厅公开征求仿制药质量和疗效一致性评价品种分类的指导意见的意

见)

The guidelines classify 289 drugs into six categories:

(1) originator imported products; (2) originator’s

products which are manufactured and launched in

China; (3) Imported generics; (4) Domestic generics;

(5) Generics with changed specification, form and

base; and (6) unquie domestic drugs, or for dietary

supplement/ adjuvant treatment.

2017-03-17 CFDA

Directory of referece products (first batch)

(总局关于发布仿制药参比制剂目录（第一批）的通告（2017年第45号))

A list of 51 reference products codified.

A total of 610 reference drugs is codified by the CFDA

in eight anouncements from Mar to Jul 2017

2017-05-18 CFDA

Four guiding priniciple for bioequivalence test

(总局关于发布仿制药质量和疗效一致性评价研制现场核查指导原则等4个指导

原则的通告)

The guidelines cover 1) on-site R&D facility

inspections, 2) manufacturing facility inspections, 3)

clinical trial data inspections, and 4) inpsections due

to issues identified in BE testing

2017-06-16 NIFDC

The list of inspection organisations for drugs other than 289 generic drugs (first

batch)

(关于发布289目录以外品种复核检验机构名单的通知（第一批))

The list covers 16 drugs including Entecavir,

Atorvastatin, Rosuvastatin etc

of 21

Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected]

Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]

Wilfred Yuen Research Analyst (852) 2235 7131 [email protected]

Chloe Chan

Research Analyst (852) 2235 7170 [email protected]

Edith Li Research Analyst (852) 2235 7515 [email protected]

Johnny Yum Research Assistant (852) 2235 7617 [email protected]

Analyst Certification

I, Wilfred Yuen hereby certify that all of the views expressed in this report accurately reflect my personal views about

the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,

is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

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This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not

be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and

comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers

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