Well positioned for sustainable growth; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Health Care Pharmaceuticals / Biotechnology Company Jointown Pharmaceuticals Date 25 July 2016 Initiation of Coverage Well positioned for sustainable growth; initiating with Buy Reuters Bloomberg Exchange Ticker 600998.SS 600998 CH SHH 600998 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 41,068.4 49,589.2 61,765.3 76,338.1 93,189.7 DB EPS FD(CNY) 0.27 0.35 0.44 0.54 0.67 DB EPS growth (%) 6.3 28.0 24.7 24.3 23.6 PER (x) 57.6 64.0 45.7 36.8 29.8 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Growth acceleration continues; initiating with a Buy and RMB24.4 target price ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 22 Jul 2016 (CNY) 19.98 Price target - 12mth (CNY) 24.40 52-week range (CNY) 24.93 - 14.58 Shanghai Composite 3,012 Jack Hu, Ph.D Research Analyst (+852 ) 2203 6208 jack.hu@db.com Linc Yiu Research Associate (+852 ) 2203 6248 linc.yiu@db.com Bo Yu Research Associate (+852 ) 2203 5928 bo.yu@db.com Price/price relative 121620242832367/141/157/151/16Jointown PharmaceutiShanghai Composite (Rebased) Performance (%) 1m 3m 12m Absolute 17.9 17.7 -15.7 Shanghai Composite 3.7 1.8 -25.2 Source: Deutsche Bank We expect Jointown Pharmaceutical Group (JPG) to maintain its superior growth to the entire pharmaceutical sector primarily due to its focus on lower-tier hospitals and a favorable product mix with over exposure to drugs with lower-margins. As the only private company among top four largest distributors, JPG also differentiates itself from other SOEs with significant room for improvement on product mix, as well as higher efficiency which led to continuous margin improvement. We model CAGR 16-18 of 23% for revenue and 24% for EPS. We initiate with a Buy and an RMB24.4 target price. Well positioned to continue to capture favorable industry trends JPG delivered 13%, 23% and 21% sales growth for 2013, 2014 and 2015, respectively, against growth deceleration for the sector We ascribe this to the following two factors. First, JPG covered 41,200+ hospitals as of 2015 with more than 3,200-plus tier-1/2 hospitals, while lower-tier hospitals generally deliver higher growth. Secondly, JPG has a product mix with overexposure to drugs with lower margins, while these drugs exhibited higher growth in recent years. We believe its favorable geographical, hospital and product exposure are important to the outgrowth in the future. Efficiency improvement as a low cost leader Gross margin rose to 7.6% in 2015 from 6.1% in 2011 with improvement every year, primarily driven by a better product mix of drugs with higher margins and the expansion to tier-1/2 hospitals. As a result, OPM increased to 2.8% in 2015 from 2.1% in 2011. We model 7.7% GM and 2.8% OPM for 2018 respectively. Additionally, we believe JPG is better positioned for e-commerce due to the much larger volume of drugs it delivers, while maintaining similar expense ratios vs. major competitors. Initiating with a Buy and target price of RMB24.4; risks We base our target price on 45x P/E for 2017E EPS, in line with its historical average PE of 45x after adjusting for the A-share rally in 1H15. This represents a premium to its Chinese peers which are trading at 25x 2017E EPS with 17% CAGR16-18 (vs. 24% for Jointown). We believe the premium is justified by its outgrowth vs. competitors and improving product mix. Key risks include unfavorable policies and slow ramp-up of new businesses. Distributed on: 07/24/2016 21:16:45GMT 25 July 2016 Pharmaceuticals / Biotechnology Jointown Pharmaceuticals Page 2 Deutsche Bank AG/Hong Kong Model updated:22 July 2016 Running the numbers Asia China Pharmaceuticals / Biotechnology Jointown Pharmaceuticals Reuters: 600998.SS Bloomberg: 600998 CH Buy Price (22 Jul 16) CNY 19.98 Target Price CNY 24.40 52 Week range CNY 14.58 - 24.93 Market Cap (m) CNYm 32,907 USDm 4,935 Company Profile Jointown Pharmaceutical Group Co., Ltd. is principally engaged in the wholesaling and regular chain r