Company Report Excerpt December 25, 2008

Jiangsu Hengrui Medicine (600276): Enjoys

Preferential Tax Rate as Expected --- Recommended
By Li Yingpeng

Event:
The company received Notice of the Second Batch of High-tech Enterprises Authorization of Jiangsu
Province in 2008 (No. 9 – 2008) from Coordination Group of Jiangsu High-tech Enterprise Authorization and
Management on November 19, 2008, being informed that the company was identified as a high-tech
enterprise and certificate was valid for 3 years starting October 21, 2008. According to relevant provisions,
income tax rate will be cut to 15% from 2008 to 2010. Jiangsu Hengrui Medicine is to enjoy the preferential
policy soon after handling relevant procedures.

Our Analysis and Estimation:

1) Gaining preferential tax rate is in line with our expectation.
The company devotes up to Rmb200mn to research and development each year, with peculiar focus on
research and development. Up to records posted in 2008 interim report, the company has applied 8 items
for patents in China and another 3 for world patent or known as PCT. Meanwhile, for some products, the
company is engaged in FDA verification and has submitted injection and oral solution samples to American
FDA.

Since the company’s prominence in research and development, its approval as high-tech enterprise and
relevant tax rate preference are quite in line with the market expectation.

2) Preferential tax rate will boost earnings.

Being cautious, we have not evaluated the company’s 2008 earnings based on preferential tax rate; as for
now, we make the adjustment accordingly: Net profit attributed to parent is to reach Rmb499mn from former
forecast of Rmb440mn in 2008; EPS is forecasted to increase Rmb0.11 at Rmb0.96, up by 12.9% yoy.

3) Priority should be given to sustainable high growth in main business induced from the company’s
plentiful product lines.
To mention the point of view stated in previous research report again, we hold that revenue from main
business is to grow by 20% in 2009, due to factors below:

(1) Two main products are to be developed substantially. The two products are applied in treatment of
stomach carcinoma and they will better utilize the current marketing channels after approval, despite current
growth slowdown due to increasing cardinal number and price reduction; however, we forecast they will
realize no less than Rmb500mn sales volume and maintain the growth at 10% and 15% in the coming three
years, which basically guarantees sustainable growth in main business.

(2) Follow-up anticarcinoma drugs are launched continuously. According to conservative calculation, each
product will profit satisfactorily.
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(3) Peri-operation drugs grow fast. The company is making great effort to enter the contrast media and
narcotic markets and has gained remarkable achievement. We forecast sales volume of contrast media and
sevoflurane will break through Rmb100mn in 2009; additionally, contrast media own huge potential for the
global market and narcotic will maintain fast growth, thus their sales are expected to reach Rmb300mn and
Rmb500mn in 2009 and 2010.

(4) Medicament of other fields goes well. In terms of angiocarpy, Irbesartan, one of the antihypertensive
agents is expected to achieve over Rmb100mn revenue; in antibiotics, sales volume of Clarithromycin is
predicted to reach ~Rmb200mn.

(5) OTC business is under cultivation, including Ambroxol Hydrochloride and Compound Econazole Nitrate
Ointment etc. with some traditional Chinese drugs as well. We believe OTC business is to attain large scale
in three or four years, and current performance will produce limited impact.

(6) Bulk drugs stay stable. Demand of overseas market is uncertain amid economic turmoil, but the
company’s products are featured, which are unsusceptible to the market. To consider conservatively, we
suppose its bulk drug business maintain zero growth in the coming three years.

Investment Suggestion:
In the short run, the company’s main business will rapidly grow, and about 10 products are to be launched,
each profiting Rmb1bn with explicit earning growth; in the long run, the company is expected to become an
international biogenerics manufacturer or even patent medicine supplier from domestic generic drugs
manufacturer and bulk drugs supplier; it is likely to become a global medium-sized enterprise in the future.
As a result, the company is to enjoy premium properly without considering the merger with Jiangsu
HANSOH Pharmaceutical Co., Ltd.

We forecast 2008-2010E sales revenue to be Rmb2.49bn, Rmb3.03bn and Rmb3.62bn respectively, with
CAGR at 20.52%; favored by preferential tax rate, 2008-2010E net profit is predicted at Rmb499mn,
Rmb674mn and Rmb858mn separately, with CAGR at 31.2%; and diluted EPS is to peg at Rmb0.96,
Rmb1.30 and Rmb1.66. With DCF evaluation and given WACC=9.03%, g=1%, reasonable evaluation is
Rmb43.66, representing 2009 P/E ratio at 33.5x, thus we maintain “Recommended” rating for the counter.

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