Microsoft word - china morning meeting minutes 081909 eng.doc

Analyst Express
Principal Market Indices
Gain/loss %
Comment on 2009 national basic pharmaceutical system and catalogue:
with the basic pharmaceutical system and catalogue unveiled, we prefer
markets of lower level and relevant pharmaceutical makers – Composite Index 2910.88 1.40
Outperform (Reiterate)
™ Event: Opinions on Establishing National Basic Pharmaceutical System, Measures for National Basic Pharmaceutical Catalogue (Provisional) and National Basic Pharmaceutical Catalogue (the section for supplies for health care intuitions of lower levels) (2009 Edition) were released on August 18 and this marks the formal start of China’s efforts to establish national basic pharmaceutical system. Major Futures
™ Content of the national basic pharmaceutical system is largely in line with Gain/loss %
Commodity
expectations in terms of pharmaceutical production, purchase, use and ™ The national basic pharmaceutical system is further clarified in its content, ™ Our view: when products of pharmaceutical makers are included into the basic pharmaceutical catalogue, their sales volume will go up according on markets of Gain/loss %
lower level and producers’ profitability will be maintained or improved due to lower cost ratio and expense ratio and scale effect. As dispatching of basic pharmaceuticals will be carried out by pharmaceutical distributors with modernized logistics capability or other eligible enterprises. As such we believe that national or locally leading health care distributors such as CNMC (600511), Shanghai Pharmaceutical (600849), NanJing Medical (600713) and Accord Pharmaceutical Hong Kong Market
(000028) and heath care distribution division of Yunnan Baiyao will all benefit Turnover
(HK$ 100m) (HK$ 100m)
™ Traditional Chinese medicine. We believe that TCM makers that boast monopolized TCM products contributing considerably to revenue and gross margin or take up no huge share in distribution via hospitals will benefit more notably from this positive. And enterprises we pick out by these metrics includeYunnan Baiyao (000538), Qianjin Pharmaceutical (600479), Sanjiu Medical and Pharmaceutical (000999), Zhongxin Pharmaceutical (600329), Jinling Pharmaceutical (000919), Mayinglong Pharmaceutical (600993), Guangzhou Pharmaceutical (600332), Zhongheng Group (600252) etc. and enterprises whose TCM products as percent of their total products is huge and growth rate is expected to increase with sales volume of basic pharmaceuticals going forward: Tasly Pharmaceutical (600535). In addition, we also prefer Kangmei (600518) as consumption of herbal pieces prepared for decoction will go up when reimbursement ratio for herbal pieces will be raised gradually. ™ Chemical and biological pharmaceuticals. We believe that one can find relevant beneficiaries from the following aspects: I. enterprises with more products included into the basic pharmaceutical catalogue such as North China Pharmaceutical (600812), Baiyunshan Pharmaceutical (000522), Double Crane Pharmaceutical Note: PER and PBR are based on data from the (600062) etc. II. Makers boasting almost monopolized products or products with latest annual reports and market cap and turnover are based on the data on the last trading day. huge market share such as Double Crane Pharmaceutical with Jiangya 0# Source: CITIC Quantitative Investment Analysis System, Please refer to the Disclaimer and attached note on investment ratings at the end of this document (Compound Hypotensive Tablets）,Baiyunshan with Cefixime (Ceftriaxone), North China Pharmaceutical with VB12, Fosun Pharmaceutical (600196) withanimal insulin and artemisinin, Huapont Pharmaceutical (002004) with Vitamin A acid and Humanwell High-tech Industry (600079) with alfentanil. III. Makers of API whose business will increase in line with expansion of market for chemical or pharmaceutical preparation such as North China Pharmaceutical, Tianyao Pharmaceutical (600488)etc. IV. Beneficiaries from vaccines under planned inoculation programmes such as Tiantan Biological Products (600161). Comments on SINOPEC’s acquisition of addax: with the acquisition accomplished, expectation of
overseas assets injection strengthened – Buy (Reiterate)
™ Event: SINOPEC (600028) announced that its parent company China Petrochemical Corporation had already accomplished acquisition of 100% stake in Addax, the Swiss oil company and undergone the delivery. This acquisition is the largest overseas acquisition project executed by Chinese company up to now. ™ Addax: an independent multinational oil company with huge potential. ™ Analysis of acquisition efficiency. As of June 24, price of Addax’s shares closed at US$ 48.96 with share capital at 157 mn and market value totalling US$7.24 bn. The 08 PE of this acquisition stands at 9X and PB at 2.95X. in 2008, It reported total revenue of US$3.762 bn and net income of RMB784 mn. Its operating cash flow stands at ~ US$1 bn per year. Its 06-08 cash flow came in at US$1.085 bn, 869 mn and 1.521 bn. In 1Q09, impacted by plunging crude price, Addax’s revenue went down over 50% (earnings similar to most oil&gas companies worldwide). Crude extracting cost stands at US$ 7.07 bbl, down 5%. ™ Acquisition further optimizes the structure of the group’s overseas oil&gas resources and the Listco (the Company) is highly sensitive to assets injection. According to our calculation, irrespective of natural gas, up to now, the group’s share of crude output beyond China amounts to ~12.34 mn tonnes, equivalent to ~28.6% of the Company’s current crude output. If these assets are injected into the Company, its upstream resources supply will be enhanced significantly and profit margin will be improved notably. ™ Risk factors: drastic movement of crude price; geopolitical risks for overseas oil&gas exploration. ™ Earnings forecast and rating. SINOPEC (09/10EPS: RMB0.74/0.87; 09/10PE: 17/15X; Last price: RMB 12.64; PT: Offshore Oil Engineering (600583): 2009 interim results comment: posted record high workload but
with mounting cost pressure – Buy (Reiterate)
™ Slightly lower than expected performance mainly due to lower gross margin. In 1H09, the Company posted operating income of RMB6.066 bn, operating profit of RMB514 mn, net income of RMB 434 mn, up 84.0%, 29.6% and 46.3% respectively. EPS came in at RMB 0.13, slightly lower than our expectation. Faster growth of operating costs (99%) than that of revenue mainly accounts for the counter’s lower than expected performance, leading gross margin to further drop to 11.44% (by 6.85%) and rapidly mounting costs are mainly due to increase in rental for extra vessels resulting from soaring workload. ™ 09 workload is well ensured. CNOOC’s target of accomplishing 50 mn cubic meters and Bohai 30 mn cubic meters oil and gas equivalent will provide sufficient workload for the counter. In 1H09, the Company posted record high workload over the same period in history with 35 large/medium projects underway concurrently. As such, there are still ~RMB1.37 bn construction fee for projects in progress unsettled. In addition, we predict that the counter is still communicating with the party outsource their construction projects to it regarding connected transaction and compensation due to changes of factor prices. We thus believe that there is still room for its profit margin to improve going forward and satisfactory 09 performance can still be expected. ™ Projects under construction are well underway. ™ Potential risks: risk of slower than expected capacity release, risk of continual sluggishness for oil&gas industry, risk of shrinking gross margin of the counter and risk of uncertain time for recognizing revenues of its projects. ™ Earnings forecast and rating. Offshore Oil Engineering (09/10EPS: RMB 0.53/0.65; 09/10PE: 20/16X; Last price: Market Update:
Top 5 Gaining Sectors on A Share
Hong Kong Market
On Tuesday, HK market was volatile. HIS fell below 20000 in the morning session. The market recovered driven by HSBC (00005.HK) and Li&Fung (00494.HK). HIS closed at 20,306, up 0.8%, and HSCEI advanced 0.5% to close at 11,448. Intraday turnover came in at HK$71.5 bn. China stocks presented mixed performance. Auto sector led the advancement, up 0.9%, among which Greatwall Motor (02333.HK) Top 5 Losing Sectors on A Share
jumped 9.1%. Real estate, energy and raw material sectors, which had suffered the most the day before, were among the best performers, up 0.5% on average. Consumer products, health care and transportation sectors all recorded huge loss, down ~1-2%. As for individual stocks, AirChina (00753.HK), which announced to acquire stake in Cathy Pacific(00293.HK) from CITIC Pacific (00267.HK), fell 2% z A-share Market
On Tuesday, Shanghai Composite Index closed at 2910.88, up 40.25 or 1.40%, A Share Market
and Shenzhen Component index closed at 11773.30, up 104.50 or 0.90%. Turnover on the exchanges came in at RMB 180.201 bn. Stock indices were drastically volatile yesterday. The two markets opened lower and staged two rounds of rebound. The first rebound saw resistance at 2900. In the afternoon, individual stocks performed actively. Oil giants, steel and coal mining sectors pushed the markets to rebound again and close in positive territory finally. Steel plays became the main force driving the whole market to rebound with Overview of Sectors Covered by CITICS
90% steel stocks closing higher. Nonferrous metals stocks rebounded notably in the afternoon. Jien Nickel (600432) and Zhongjin Gold (600489) rose by over 6%.As of close, public utilities, nonferrous metals and steel sectors were the top performers while financial and real estate sectors performed poorly. Headlines:
China Securities Market
China initiates formally the development of National Basic Pharmaceutical ™ The new type of pension for farmers will be subsidized more by central Disclaimer
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Performance of stock or sector relative to MSCI-China over next 6 months after research publications Relative performance over MSCI-China Index >20% Relative performance over MSCI-China Index 5% ~ 20% Relative performance over MSCI-China Index -10% ~ 5% Relative performance over MSCI-China Index > -10% Relative performance over MSCI-China Index >10% Relative performance over MSCI-China Index -10% ~10% Relative performance over MSCI-China Index > -10%

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