Excerpts:

Event:

The company announced to have signed the Investment Transfer Agreement on October 17, 2008, transferring 78.82% or Rmb20mn of the total equity stake of its subsidiary Kanion Trading to Jiangsu Jinglve Industrial Development (it is herein after referred to as Kanion Trading) at Rmb36.1031mn.

Meantime it also issued 2008 Q3 report, according to which the company realized sales income of Rmb857.7198mn (+22.29% yoy), net profit attributable to parent of Rmb95.4928mn (+45.13% yoy), and EPS of Rmb0.36, among which the net profit in Q3 reported to be 41.2723mn, an increase of 37.75% yoy, and EPS stood at Rmb0.15.

Our Analysis and Estimation:

I.     Performance of Q3 is in line with our expectation

1.      Sales reformation, cost control and tax rate cut mainly contributed for the company’s performance growth.

As we have predicted, sales reformation accelerated sales growth in its pharmaceutical industry, while the company’s cost were effectively controlled through fine management, and it has been paying its corporation tax at the rate of 25%, which have somewhat increased net profit of the current term.

2.      Q3 Performance growth slowed down, which is concurring with our prediction.

As we have remained, positive effect of the company’s sales reformation stood out in 2H2007, as a result, performance benchmarks of the corresponding period might resulted in a slower year-on-year performance growth of the current year, which is reported to be 11.58%, and net profit growth to be 37.75%. Statistics above are comparatively low than that of 1H2008.

II. Pharmaceutical business split off will improve profitability of the company

1.     Reasonable transfer price will improve performance of 2008

The company transferred part of the stock equity at Rmb36.1031, which is 10.25x P/E of audited net profit of Konion Trading in 2007, and the one-off ROI of Rmb16.1031mn will add EPS in 2008 at ~Rmb0.05.

2. Pharmaceutical business split off will improve profitability of the company

As far as we are concerned, the company will be able to concentrate more on operation of pharmaceutical industry after the split-off; consequently, this will add much more to its profitability. Statistic shows composite gross margin of the company will be improved from 56.50% of 2007 to 70.78% by 2009; ROE will be improved from 17.27% of 2007 to 19.7% by 2010.

III. Performance growth speed might be accelerated

1.     Continuous expansion of pharmaceutical industry is expected to increase the company’s performance

After the split-off, the company will strengthen its sales system construction, which is beneficial to its product expansion. We predict that seven big products of the company will get better promotion, which will in turn cause a compound growth rate of 27.26% within the whole pharmaceutical industry.

2.     Fine management lowered periodical expense

Our estimation: Gross /net margin generated from its pharmaceutical business inferred that the company’s sales expenses ratio in 2007 might have reached to 40%. Given sales expansion of the pharmaceutical industry as well as the strengthened expense control, the company’s sales expense ratio is expected to slide gradually, thus profit will be further increased. Statistics in the model shows EPS will be improved by ~Rmb0.04-Rmb0.05 with reduction of 1ppt of sales expenses ratio.

3.     Tax rate of 15% will soon be implemented

According to relative stipulation, the company will receive a 10% preference in terms of its corporation tax rate during 2008 and 2010 suppose it is designated as hi-tech enterprise, namely, it will pay the corporation tax at the rate of 15%. This is favorable for alleviation of its tax burden, and its performance will thus be improved. (Given that the company is most likely to get the designation, we defined the nominal tax rate in the model as 15%). Statistics in the model shows EPS in 2008 will be varied by ~Rmb0.07 due to disparity of the tax rate.

Investment Suggestion:

We project the company’s sales income during 2008 and 2010 to be Rmb1208.4005, Rmb1186.7931 and Rmb1479.5545 respectively, net profit attributable to parent of Rmb143.1634, Rmb208.7686 and Rmb277.9836 separately; net profit compound growth rate during 2007 and 2010 to be 42.36%, while this was reported to be 40% before split-off of the pharmaceutical business, and EPS during 2008 and 2010 to be Rmb0.54, Rmb0.78 and Rmb1.04 respectively.