Interim results missed expectations

SL announced its 1H16 results: revenue -12.32% YoY toRmb472mn; net profit attributable to shareholders -33.10% YoYto Rmb254mn or Rmb0.37/sh.

Trends to watch

Key products under pressure; YoY revenue decline. In1H16, revenue slipped YoY because we believe: most of itsexisting products (including Beikneng) have been covered bymedical insurance programs in most domestic regions, and theirgrowth has slowed gradually due to control of medical insuranceexpenses.

Lenalidomide likely to win regulatory approval at afaster pace. As Celgene’s blockbuster product, Lenalidomiderecorded global sales of ~US$5bn. We expect its sales in Chinamay exceed Rmb1bn.

Watch for product line upgrading. Growth of existingproduct lines has decelerated, it is imperative for SL to push forproduct line upgrading. In fact, SL has increased R&D investmentover recent years, especially for tumor, cardiovascular diseaseand diabetes medications. New product rollout could fuel growth.

Earnings forecast

Lower 2016/17e EPS by 6.83%/11.6% fromRmb0.89/0.95 to Rmb0.83/0.84, -1.2%/+1.4% YoY.

Valuation and recommendation

The stock is trading at 2016/2017e 39X/38X P/E. Consideringinnovative drug Lenalidomide could win regulatory approval, wemaintain BUY rating but raise TP by 11.43% to Rmb39 (20.93%upside, 47X P/E 2016e).

Risks

Slower-than-expected progress in new product R&D; furthershrinkage in existing product lines.