New Drugs to Drive Growth of Asiapharm

Below expectations. 3Q07 net profit of Rmb21.7m (+8% yoy) is 50% below our
expectation and forms 16% of consensus full-year estimate. The shortfall can be
attributed to a fall in Lutingnuo and Nuosen sales as a result of price cuts by the PRC
government, higher SG&A expenses from the integration of newly-acquired entities and
higher finance costs. 9M07 net profit accounts for 41% of our full-year forecast and 53%
of consensus.

Revenue growth led by new products. Revenue grew 68% yoy to Rmb130.5m on the
back of higher sales of its pharmaceutical drugs. Main contributors to the 92% yoy
increase in pharmaceutical drug sales to Rmb61.7m were CMNa, Lipusu and Tiandixin,
which offset a fall in revenue from Lutingnuo and Nuosen. Maitongna sales slightly
improved. Distribution sales of other companies’ drugs grew 104% yoy to Rmb1.6m,
mainly led by higher sales of Lipusu and Tiandixin through its trading subsidiary. Sales of
R&D results fell 92% yoy as the group devoted most of its resources to the research of its
own products. Export sales of active ingredients also slipped 89% yoy to Rmb0.4m as the
group continued to downplay this business on account of its low margins and high credit
risks.

Gross margins expanded 8% pts yoy to 86%, thanks to a focus on the sale of
pharmaceutical drugs, which command higher gross margins. In addition, drugs from
recent acquisitions such as CMNa, Lipusu and Tiandixin have higher margins.
International collaboration. While the group continues to focus on the domestic sale of
pharmaceutical drugs and unlocking synergies from its acquisitions, it is also exploring
collaborative opportunities with international partners to expand its product portfolio and
enhance its international status.

Maintain Outperform; target price reduced to S$0.75 from S$0.98. We have cut our
FY07-09 earnings estimates by 4-37% on lower revenue and higher operating cost
assumptions. We have also rolled forward our target basis from end-CY07 to end-CY08.
Following the above, our target price has been shaved to S$0.75 from S$0.98, still
based on peer average (7.3x CY09 P/E). With the integration of acquired companies
expected to be completed in the next 6-12 months and a recovery of the pharmaceutical
industry, earnings should gather momentum, led by higher-margin oncological and new
products. Maintain Outperform for Asiapharm.