china biologic products, inc. outperformdoc.xueqiu.com/14a0d0e3d02573febb2e2666.pdfin 2012, the...

EQUITY RESEARCH

INITIATION OF COVERAGE

Oppenheimer & Co Inc. 85 Broad Street, New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229

Ingrid Yin, [email protected]

Oppenheimer & Co. Inc. does and seeks to do business with companies coveredin its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investmentdecision. See "Important Disclosures and Certifications" section at the end ofthis report for important disclosures, including potential conflicts of interest. See"Price Target Calculation" and "Key Risks to Price Target" sections at the end ofthis report, where applicable.

Stock Price Performance Company DescriptionChina Biologic Products is the largest non-state-owned fully integrated blood productcompany in China. Currently, the company ispermitted to manufacture 25 bio-products in9 categories, 7 of which are plasma-deviredproducts.

March 13, 2014 CHINA/HEALTHCARE

Stock Rating:

OUTPERFORM12-18 mo. Price Target $46.00CBPO - NASDAQ $36.39

3-5 Yr. EPS Gr. Rate 15%52-Wk Range $38.60-$19.10Shares Outstanding 26.9MFloat 6.4MMarket Capitalization $850.4MAvg. Daily Trading Volume 23,392Dividend/Div Yield $0.00/0.00%Book Value $8.74Fiscal Year Ends Dec2014E ROE 24.8 %LT Debt $30.0MPreferred $0.0MCommon Equity $238MConvertible Available No

EPSDiluted Q1 Q2 Q3 Q4 Year Mult.

2013A 0.57 0.61 0.57 0.35 2.12 17.2x2014E 0.53 0.67 0.84 0.72 2.76 13.2x2015E -- -- -- -- 3.15 11.6x

China Biologic Products, Inc.Leader in China Plasma Products with GrowthOpportunities Ahead; Initiate with OutperformSUMMARY

China Biologic Products is China's largest, fully integrated, non-state-owned bloodproduct company. In an industry with high entry barriers and limited competition, itis well positioned to leverage competitive advantages in diversified products, a richpipeline, and significant plasma supply to gain market share and grow above theindustry rate in the next 3-5 years. CBPO is the only US-listed plasma pharmaceuticalcompany with full exposure to this industry's high growth potential. The stock iscurrently trading at 12x our FY15 non-GAAP EPS estimate of $3.15, very compellingvs. global peers' average of 18x. We initiate coverage with an Outperform rating anda price target of $46.

KEY POINTS

■ Attractive Industry. China's plasma products industry is highly profitable asdemand exceeds supply. The industry grows at a 15% CAGR. Current playerssuch as CBPO face limited competition from both new entrants and MNCs astechnological and regulatory barriers are high.

■ Industry Leader with Share Gain Opportunities. As the largest non-state-owned domestic player with diversified products, a rich product pipeline, largeplasma collection capacity, and sufficient cash for M&A, we believe CBPO willunlock its potential in coming years as regulations dictate industry consolidation.

■ Pipeline Drives Growth and Profitability. Besides the human coagulation factorIII launched in 2013, CBPO has six more products in its pipeline, three expectedto receive CFDA approval in 2014 and 2015. These products, once approved, willimprove CBPO’s plasma utilization and provide operating leverage.

■ Strong Cash-generating Capability. High profitability and limited capexrequirement allows CBPO to generate healthy cash flow. We expect CBPO togrow free cash flow at a 23% CAGR to $132M in 2017.

■ Compelling Valuation. We believe CBPO can grow non-GAAP EPS at a 22%CAGR to $3.15 in 2015. The current 12x 2015E P/E valuation is attractive, vs.global/China-listed peers’ 18x/33x. CBPO is the only US-listed China plasmacompany allowing investors to gain exposure to the industry. Our $46 price targetimplies a 15x FY15 P/E multiple.

2

Table of Contents

Investment Thesis ........................................................................................ 3

Industry Overview ....................................................................................... 4

China’s Plasma Products Market is the Second Largest in the World ........ 4

Highly Profitable Niche Industry with High Entry Barriers ...................... 7

Growth Drivers........................................................................................ 8

Competitive Landscape ............................................................................ 9

Company Overview ................................................................................... 11

Competitive Advantages ............................................................................ 11

A Diverse Portfolio of Market-leading Products .................................... 11

Market Leading Position ........................................................................ 12

16% Market Share of Plasma Supply ...................................................... 12

Strong Pipeline ....................................................................................... 13

Growth Strategies ...................................................................................... 14

Increase Plasma Collection and Production Capacity ............................. 14

New Product Offerings .......................................................................... 14

Restructure Distribution Network .......................................................... 14

Operation Potential ................................................................................ 15

Share Dispute Issue Resolved ..................................................................... 15

Valuation.................................................................................................... 17

Investment Risks to Price Target ................................................................ 18

Financial Performance Analysis .................................................................. 19

Corporate Structure .................................................................................... 23

Management .............................................................................................. 24

Financial Statements ................................................................................... 25

China Biologic Products, Inc.

3

Investment Thesis We Are Initiating Coverage of China Biologics Products (CBPO) with an Outperform

Rating and a Price Target of $46

An Industry with Sustainable Growth Opportunities and Limited Competition.

China‟s plasma derivatives product industry is highly profitable due to strong demand

driven by the country‟s fast-aging population. China has a significant shortage of plasma

supply which totaled only 4,200MT in 2013 and only 10+ products, while we estimate

demand to be above 8,000MT annually for 20+ product varieties. We expect the industry

to grow at a 15% CAGR in the coming years. The entry barriers for the industry are

extremely high on both the technological and regulatory fronts. Competition from both new

entrants and MNCs is therefore limited, and current players enjoy high levels of

profitability with favorable pricing.

CBPO Is a Leading Player with Share Gain Opportunities. Of the 26 domestic players

currently in operation, CBPO is one of the five largest. With a diversified product portfolio,

rich product pipeline, the largest non–state-owned plasma collection capacity, and

sufficient cash for acquisitions, we expect CBPO to benefit from the industry‟s further

expansion and consolidation.

New Product Launches Will Drive Growth and Profitability. Besides the human

coagulation factor III product launched in 2013, CBPO currently has six products under

development, three of which are expected to get CFDA approval in 2014 or 2015. These

high-end products, once approved, likely will improve CBPO‟s utilization of plasma and

provide further operating leverage.

CBPO Could Sustainably Generate Cash. High profitability and limited capex

requirements enable CBPO to generate healthy cash flow. We expect CBPO to grow free

cash flow at a 23% CAGR to $132M in 2017. This estimate excludes significant

acquisitions which are unpredictable in timing and size.

An Asset Significantly Undervalued. We expect CBPO‟s revenue to grow at 14-15% in

the next 3-5 years. With operating leverage, we expect non-GAAP EPS to grow at a 22%

CAGR to $3.15 in 2015. The stock trades at only a 12x FY15E P/E multiple, a valuation

that is quite compelling compared with US-listed peers‟ trading at 18x and the China-listed

peer group trading at 33x. On an EV/EBITDA basis, CBPO trades at 8x estimated FY15

EBITDA, compared with the 12x of its global peers. Our price target of $46 implies 15x our

FY15 non-GAAP EPS estimate of $3.15, in line with the 14.2% non-GAAP net income

CAGR from 2013 to 2017E.


4

Industry Overview

China Has the Second-largest Plasma Products Market in the World

Life Saver: Plasma Products

Plasma proteins are special biopharmaceutical medicines extracted from human plasma,

a component of human blood. They are used to treat serious and often life-threatening

conditions, such as low albumin, bleeding shock, immunodeficiency, blood clot

complications, tetanus or tropical stanch, hemophilia and autoimmune diseases (Exhibit 1).

These proteins, including human albumin, immunoglobulin (IG), alpha-1 protease

inhibitors, and clotting factors such as Factor VIII and Factor IX, are obtained by

separating them from plasma on a large scale using fractionation processes. These

products are a unique group of biological drugs with no substitutes available. As they are

usually used in critical medical care and the raw material comes from human blood,

plasma collection, production and distribution are highly regulated in many countries,

including China.

Exhibit 1. Human Plasma Separation Diagram in terms of Applications

Source: Plasma Protein Therapeutic Association, Oppenheimer & Co. Inc. Research

World Plasma Market Has Entered a Stable Development Period

In 2012, the global market for therapeutic plasma proteins was sized at $12-13 billion.

There‟s a significant gap in plasma product consumption between the developed and

developing world. According to the Marketing Research Bureau (MRB), IVIG accounts for

46% of the worldwide plasma fractions market while albumin and Factor VIII account for

10% and 9%, respectively (Exhibit 2). North America and Europe together consume over

70% of total plasma products, while Asia Pacific consumes only 15% (Exhibit 3). We

believe the gap will narrow in the next few decades as affordability continues to improve in

Asia-Pacific countries.

There has been a dramatic increase in demand from emerging markets as governments

realize the importance of blood derivative agents. Despite what has traditionally been a

very cyclical industry, the world plasma business has entered a more stable development

period. Structural changes such as industry consolidation, vertical integration and

White blood

cells and platelets

(<1%)

Human Albumin

IVIG (Intravenous

Immunoglobulin)

Alpha-I Antitrypsin

Coagulation Factors

(Factor VIII & IX)

Plasma

(55%)

Red

Blood Cells

(45%)

Separation

Shock, burns, Respiratory distress

syndrome, Cardiopulminary bypass surgery

Primary immunodeficiency diseases,

Autoimmune diseases

Alpha-I antitrypsin deficiency

Hemophilia A&B Hemophilia A&B

Bleeding disorders

Blood Composition Proteins Applications


5

production efficiencies have enabled plasma protein makers, such as Baxter, CSL and

Bayer, to profit from this stable growth and overall market expansion.

Exhibit 2. Global Plasma Market by Products (ex. Recombinant Factors)

Source: Marketing Research Bureau, Oppenheimer & Co. Inc. Research

Exhibit 3. Global Plasma Market by Region (ex. Recombinant Factors) vs.

Population

Source: Marketing Research Bureau, Oppenheimer & Co. Inc. Research

We Expect China’s Plasma Products Industry to Grow at a ~15% Rate

Although China‟s plasma product industry has grown into the second-largest in the world

with an estimated size of $1.7B in 2012, it‟s still in the early stages of development

compared with developed countries‟. Biological therapeutics, including plasma-derived

medicine, is still a relatively new area to Chinese physicians as well as to the general

population. There are three big differences between China‟s plasma products market and

that of developed world, which implies substantial headroom for growth in China‟s plasma

fractionation industry:

1. China is behind in fractionation technology. There are 4-11 products derived

from plasma in China vs. 22-24 for leading multinational corporations (MNCs).

2. The utilization of basic plasma products is significantly lower. For example,

0.16 unit of Factor VIII was used per capita in China vs. 7 units in the UK and 4.8

units in Canada.

3. Plasma product mix is notably geared toward low-end products, with 59%

consumption from human albumin and only 1% from Factor VIII, while the ratio is

1:2 in a mature market (Exhibit 5).

46%

10%

9%

4%2%

29% IVIG

Albumin

Factor VIII

Hyperimmunes (IM&IV)

Factor IX

Others

37%

36%

15%

6%

3% 3%

WW Plasma Fraction Market by Region

North America

Europe

Asia&Pacific

South America

Middle East

Oceania

5%

11%

58%

9%

17%

Population

North America

Europe

Asia&Pacific

South America

Middle East


6

Exhibit 4. Plasma Product Usage Comparison: China vs. Developed Countries

Source: Marketing Research Bureau Report, Company data, Oppenheimer & Co. Inc. Research

Exhibit 5. Plasma Product Mix Comparison: China vs. US in 2012

Source: Company data, Oppenheimer & Co. Inc. estimates

Human Albumin

Human albumin accounts for over half of the proteins found in blood. It is responsible for

maintaining adequate blood volume and pressure and is essential for normal

hemodynamics. Human albumin is used to remedy blood loss caused by trauma or burns,

abnormally high intracranial pressure, edema or ascites, prevent and cure of low-density

lipo-proteinemia and neonatal hyper-bilirubinemia.

A serious shortage of human albumin in China is caused by several factors:

Strong demand. Current human albumin consumption is China is at 100 kg per

million capita, much lower than the 200-300kg consumed in developed countries.

China has raised quality standards for plasma-based production industry since

2007, causing small plasma product makers to close.

The government sets the price ceiling of RMB378/10g (around $60) for albumin

products, which discourages manufacturers from making the product.

China has the most HBV and cancer patients in the world, and human albumin is

essential for the treatment for liver cirrhosis and post-surgical cancer patients.

Insurance coverage of serious diseases will expand nationwide in 2014. We

believe domestic human albumin is a long way from being in a state of

oversupply as increasing affordability will simply drive demand;

Plasma supply shortage.

China allows the import of human albumin products to alleviate shortages. Due to

the strong demand driven by its large patient pool, China allows human albumin imports,

which currently account for 56% of total supply. With some countries experiencing

sufficient supply, prices for imported and domestic produced human albumin are

comparable, putting pressure on the selling price. At the same time, human albumin prices

125.5118

93.8

79.3

62.5

52.546.1

7.8 5.30.2

Australia Canada Sweden France Spain Italy UK China Brazil India

Kg per M populationIVIG

7 6.86.3 6.2

5.98

4.8

2.91

1.050.56

0.16 0.13 0.01

Int'l Unit per capitaFactor VIII


7

are regulated by the government and volumes are largely dependent on plasma

availability.

The MNCs‟ products are increasingly rushed into China‟s market to arbitrage, gaining

significant market share to 56% in 2013 from 46% in 2012. We believe human albumin

growth in China is pressured by domestic plasma collection volume as well as the

incremental volume of imports. However, we expect foreign threats to be limited in the

next three years due to:

Global demand for human albumin remained solid going into 2014 and beyond.

Global ASPs trending up steadily could reduce MNCs‟ need to enter the Chinese

market;

Plasma collection capacity in China is expected to grow, increasing the

productivity of domestic companies in 2014;

The China Food and Drug Administration‟s (CFDA‟s) warning on hestastarch,

which bears risks of increasing kidney failure and mortality rate, could create

additional demand for human albumin as an alternative.

IVIG

IVIG is the most commonly used immunoglobulin product. Intravenous Immunoglobulin

(IVIG), a plasma-derived Immunoglobulin (IG), is commonly used to treat autoimmune,

infectious, and idiopathic diseases due to genetic disorders. Immunoglobulins (IGs), also

called antibodies, are proteins produced by plasma cells and lymphocytes responsible for

body‟s immune system.

China‟s IVIG consumption, at 7.8kg per million population, is significantly lower than that

of developed countries (Exhibit 4). Unmet medical needs should propel market growth.

Despite being constrained by plasma supply problems, the volume and price of IVIG are

both increasing dramatically. IVIG imports into China are not permitted.

Factor VIII

China has about 100,000 hemophilia patients, with around 10% of patients registered and

treated in only 40 registered hospitals. According to Baxter, current usage per capita is

only 0.16 units, significantly below average levels in developed countries at 6 units per

capita (Exhibit 4). We believe the tight supply-demand situation will persist for some time,

as low Factor VIII consumption level is limited by affordability.

Due to insufficient supply of Factor VIII, China allowed the imports of Bayer‟s

Recombinant Factor VIII “Kogenate” in 2007 and set a retail price ceiling of RMB1320. In

May 2012, Baxter‟s “ADVATE” recombinant Factor VIII received CFDA approval, to meet

the urgent need of Chinese patients. However, due to its being set at a ~2.6x higher price

than domestic products (~RMB1320/250IU vs. ~RMB400/200IU) and strict reimbursement

limitations of rFVIII for severe bleeding of hemophilia patients, we believe imported rFVIII‟s

current addressable market is limited.

Highly Profitable Niche Industry with High Entry Barriers

China„s plasma products industry is highly regulated, which creates multiple barriers to

entry. There are several levels of regulation:

Regulation on raw material supply created a shortage of plasma. Raw

plasma is collected at company-owned-and-run plasma collection stations and


8

processed into plasma derivatives such as human albumin and immunoglobulin

drugs. Since 1985, imported plasma has been banned due to HIV infection fears.

In 2004, China implemented a reform of collection station ownership and in 2007

strengthened quality control standards for plasma product production, causing

many plasma stations to close. Total plasma collection volume dropped from

5,000 tons in 2005, and further to 2,500 tons in 2007 before it grew to 4,180 tons

in 2010. The closure of 18 plasma collection stations in Guizhou further hurt

volume in 2011. Even in 2012, collection volume was little changed from 2010‟s

(Exhibit 6).

Exhibit 6. Plasma Collection Volume in China 2003-2012

Source: Oppenheimer & Co. Inc. Research

CFDA controls the plasma production GMP license. Due to the biological

nature of plasma products, the Ministry of Health (MoH) and CFDA set stringent

standards for new product and GMP license approval processes. Ten stages are

involved in the CFDA approval process for new plasma products, which takes 22-

28 months. Only when the manufacturer meets all GMP standards, is it permitted

to launch commercial production.

NICBPB controls the testing of plasma products. Each batch of plasma

product requires inspection by the National Institute for the Control of

Pharmaceutical and Biological Products (NICBPB). Only after they have gained

NICBPB approval can the batch products be sold on the market. Delays in the

testing process could hinder companies from selling the products and

significantly hurt their financials.

In addition, China‟s plasma fractionation industry remained on the foreign investment

prohibition list, under the “Catalog of Industries for Foreign Investment 2011.”

We believe these regulations not only create extremely high barriers to entry, but also

speed up industry consolidation. Industry leaders with many collection centers, substantial

capital and advanced technology will eventually dominate the market.

Growth Drivers

We believe the strong demand for special blood derivative products in China is

sustainable and expect the industry to keep growing at above 20% based on:

Favorable demographics in China create a strong need for pharmaceutical

products. In the past three years, China‟s pharmaceutical industry has been

growing at a CAGR of 20%. We expect the industry to continue growing at 15-20%


9

CAGR in the next 3-5 years, driven by the largest population in the world which is

aging fast.

Increasing awareness of the therapeutic benefits of plasma proteins. With

more promotional and educational activities by manufacturers, physicians and

patients will understand the therapeutic benefit of plasma proteins, which should

add another layer of growth for the industry.

Healthcare reform boosts insurance coverage expansion. China‟s healthcare

reform supports the plasma industry by improving accessibility to healthcare

services for both urban and rural populations. Healthcare insurance expansion,

especially the government‟s proposal to cover serious diseases nationwide by

mid-2014, will be another growth driver. In November 2009, Human

Immunoglobulin, IVIG, Human Rabies Immunoglobulin and Recombinant Factor

VIII were added to the basic healthcare insurance drug list. As such, most major

plasma products are included in the national basic healthcare insurance catalog

(Exhibit 7), except for Human Hepatitis B Immunoglobulin and Histamine Human

Immunoglobulin.

Exhibit 7. National Basic Healthcare Insurance Coverage for Plasma Products (国家

基本医疗保险工商保险和生育保险药品目录 2009/2012年版)

Source: MoH, Oppenheimer & Co. Inc. Research Note: Class A drugs can be fully reimbursed by the insurance; Class B drugs need co-pay by patients.

Industry consolidation will benefit large players. China has a total of 32

registered plasma product manufacturers, 26 of which are in operation. This is

very fragmented compared with the global market. We expect China‟s plasma

product industry to consolidate, due to:

(1) Stricter requirements for the approval of new plasma collection centers.

To apply for a new plasma collection station license, an enterprise needs at least six CFDA-registered plasma derivative products and must include Human Albumin, Human Immunoglobulin and Human Coagulation Factor products. We expect future plasma collection resource approvals to be concentrated among leading players, leading to further industry consolidation.

(2) Increasing costs will drive out smaller players.

a. With a limited number of plasma collection stations available, large

players tend to acquire plasma collection stations, making it expensive for small players to expand.

b. Due to a lack of plasma donors, companies have been raising donation subsidies, resulting in higher plasma costs.

c. Operating costs have increased over the years as batch approval regulations require more testing and sampling fees. The 90-day

After 2009/11 Before 2009/11ASP after

lifting

ASP Before

lifting

Applicable

Formulation

Human Albumin National Class B National Class B 378 360 10g/vial

Human Immunoglobulin National Class B - - - -

IVIG National Class B - 561 412 2.5g:50ml

Human Tetanus Immunoglobulin National Class B National Class B 69.6 63.3 200IU

Human Rabies Immunoglobulin National Class B - 228 NA 200IU

Factor VIII National Class A National Class A 396 250 200IU

Recombinant Factor VIII National Class B - - - -

Human Prothrombin Complex

ConcentrateNational Class B National Class B - - -

Human Fibrinogen National Class B National Class B 595 250 1g

Products

Coverage Category ASP Adjustment


10

quarantine required for plasma sources before production also increases the inventory risk.

Competitive Landscape

China no longer grants Good Manufacturing Practice (GMP) certification to new blood

product manufacturers. Stricter inspection standards were imposed in January 2008,

increasing inspection items from 225 to 259. Currently, only 26 of the 32 manufacturers

are still in business, among which only 13 manufacturers developed a diversified product

line and owned annual plasma supply of more than 100MT. Domestic players mainly

compete on plasma collection volume/resources, and the number of product offerings

available. CBPO has three GMP certificates; an asset the company can leverage to

expand market share. Among the leading domestic players, Hualan Biooffers the largest

product portfolio with a total of 11 products, while Sichuan Shuyang (private) offers eight,

and Tiantan Bio, Shanghai RAAS, and Boya Bio offer seven products each. CBPO has a

total of seven plasma-derived products.

Guizhou‟s government decided to close 18 of its 22 existing plasma collection stations in

August 2011 for industry integration and regulatory purposes as the safety issues, driven

by economic interests and violating collection in the largest plasma collection province,

have been a serious problem all the time, and the local government had no motivations of

being responsible to an industry which is bearing significant risks on safety but generating

no GDP (due to its non-industrial-products intrinsic). Guizhou has historically supplied 20-

30% of plasma supply nationwide. Five of CBPO‟s plasma collection stations (one of

which was inactive) were suspended. Collection volumes for the closed plasma collection

stations amounted to 34% and 23% of CBPO‟s total collection volume in 2010 and 2013,

respectively. Hualan‟s collection volume was reduced by ~50%. Currently Tiantan owns

16 plasma stations while CBPO trails with 15. Hualan now owns 14 stations, down from

18. The closure of the stations created further plasma supply shortages in the country and

gave MNCs the opportunity to gain market share.

Quite differently from other plasma products, competition in human albumin is intense, as

imports are permitted due to supply shortages before 2007. A total of 26 domestic players

and nine foreign players compete in the human albumin market. In 2013, domestic players

accounted for 44% of the market while MNCs held 56% share by volume, compared with

only 46% in 2012. CSL Behring, Baxter, and Grifols are the three largest MNC players,

controlling 22%, 12%, and 12% share, respectively. China National Biotech Group (private)

is the largest domestic player with 10% share. CBPO, with its three subsidiaries, had over

7% market share in 2013, down from 10% in 2012. Other domestic players hold low single

digit shares. The price of imported human albumin is even more competitive than

domestic products, creating an ASP ceiling, despite robust demand.

There are only four domestic manufacturers capable of producing Factor VIII, namely

CBPO (20% share in 2013), Green Cross China (21%), Hualan Bio (34%) and Shanghai

RAAS (26%). Imports of recombinant Factor VIII by Baxter were approved in May 2012.

However, due to the high price and insurance only covering limited indications when

human plasma-derived therapy is not available, we expect minimum competition from

MNCs. CBPO was the last domestic manufacturer to receive CFDA manufacturing

approval for Factor VIII in June 2012, since which it has ramped up production to 20%

share, or ~2% of its 2013 sales.


11

Exhibit 8. Products and Plasma Stations of Key Domestic Players

Source: CFDA, Oppenheimer & Co. Inc. Research *Note: our market share data showed below might differ from actual situations due to: (1) Market share data were collected from National and Provincial Institutes of Food and Drug Control. However, we could not access data of Gansu, Hubei and Sichuan Institutes; (2) Data collected are the products those received sales approvals, not actual volume of product sold.

Exhibit 9. China Plasma Product Market Share in 2013

Source: NIFDC, Local Institutes of Food and Drug Control, and Oppenheimer & Co. Inc. Research

Company Overview

CBPO has secured its leadership position in an attractive high-demand, highly profitable

industry. With a sound business strategy in place to grow both organically and

inorganically, it has evolved into a fully integrated company with the capability of collecting

Products CBPOHuanlan

Bio

Tiantan

Bio

Shanghai

RAAS

Sichuan

ShuyangBoya Bio

Human Albumin ■ ■ ■ ■ ■ ■

Human Immunoglobulin ■ ■ ■ ■ ■

Lyophilized Human Immunoglobulin ■

Human Immunoglobulin for Intravenous

Injection ■ ■ ■ ■ ■ ■

Lyophilized Human Immunoglobulin for

Intravenous Injection■

Human Tetanus Immunoglobulin ■ ■ ■ ■

Human Hepatitis B Immunoglobulin ■ ■ ■ ■ ■

Human Hepatitis B Immunoglobulin for

Intravenous Injection■

Human Rabies Immunoglobulin ■ ■ ■ ■

Histamine Human Immunoglobulin ■ ■

Human Coagulation Factor VIII ■ ■ ■

Human Prothrombin Complex ■ ■

Lyophilized Fibrin Sealant (Human) for

Surgery■ ■

Lyophilized Human Thrombin for external

use■ ■

Human Fibrinogen ■ ■ ■

Number of Product Offerings 7 11 7 7 8 7

Number of Plasma Collection Stations 15 14 16 12 13 5

Human

Albumin IVIG

Hepatitis

B Ig Rabies Ig

Tetanus

Ig

Factor

VIII PCC Human Ig

Human

Fibrinogen

Domestic Players 44% 100% 100% 100% 100% 100% 100% 100% 100%

CNBG 10.3% 23.0% 30.9% 7.9% 24.3% 0.2% 0.0% 52.6% 0.0%

CBPO 7.4% 17.9% 8.1% 14.6% 15.6% 19.9% 0.0% 4.8% 0.0%

Hualan Bio 4.6% 12.9% 5.5% 5.9% 12.0% 33.5% 90.6% 8.0% 2.5%

Sichuan Yuanda Shuyang 2.8% 4.6% 19.5% 9.7% 22.5% 0.0% 0.0% 34.6% 0.0%

Shanghai RAAS 1.9% 4.2% 0.0% 0.0% 0.0% 25.9% 0.0% 0.0% 27.8%

Guangdong Shuanglin 2.1% 3.8% 2.4% 31.5% 0.0% 0.0% 0.0% 0.0% 0.0%

Shanxi Kangbao 3.5% 8.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Shenzhen Weiwu 1.4% 3.5% 10.3% 2.5% 2.5% 0.0% 0.0% 0.0% 0.0%

Anhui Tonrol 2.9% 5.2% 5.8% 19.6% 19.7% 0.0% 0.0% 0.0% 0.0%

Jiangxi Boya 1.1% 3.4% 3.0% 1.4% 0.0% 0.0% 0.0% 0.0% 51.4%

Hunan Nanyue 2.0% 4.1% 13.1% 6.2% 2.6% 0.0% 0.0% 0.0% 0.0%

Other Domestic 4.5% 9.2% 1.3% 0.7% 0.7% 20.6% 9.4% 0.0% 18.3%

MNCs 56% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

CSL Behring 22.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Baxter 11.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Grifols Bio 11.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Octapharma 9.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


12

plasma, research, manufacture, market and distribute end products. CBPO has created a

reputable brand name and gained numerous awards over the years, which has helped

management to maintain a strong relationship with government to facilitate its sustainable

growth in a highly regulated industry.

Competitive Advantages

A Diverse Portfolio of Market-leading Products

CBPO has fractionation technologies to produce nine plasma-derived products, while

average manufacturers can produce only four products. CBPO currently markets human

albumin, IVIG, human rabies IG, IG intramuscular injection, hepatitis B IG, human tetanus

IG, thymo-polypeptides injection, and Placenta Polypeptide (Exhibit 10). Human Albumin

and IVIG are the main revenue contributors, representing ~83% of annual sales.

Exhibit 10. CBPO Products

Source: Company Reports, Oppenheimer & Co. Inc. Research

Market Leading Position

CBPO, with its three subsidies Shandong Taibang, Guizhou Taibang and Xian Huitian,

leads in various plasma product market (Exhibit 11). Human albumin (44% of 2013 sales)

and IVIG (38% of 2013 sales) are the company‟s largest and second largest revenue

contributors, respectively. CBPO has 7.4%, or the second largest, market share in a very

fragmented human albumin market and 18%, or the second largest, market share in IVIG,

demonstrating strong capability in both manufacturing and sales/marketing.

Sales

($'000)

% of

Sales

Sales

($'000)

% of

Sales

Human Albumin

Shock caused by blood loss trauma or burn; raised intracranial pressure caused by

hydrocephalus or trauma; Oedema or ascites caused by hepatocirrhosis and nephropathy;

prevention and cure of low-density- lipoproteinemia; and Neonatal hyperbilirubinemia.

82,451 44.6% 89,672 44.1%

Human Immunoglobulin for

Intravenous Injection 72,005 39.0% 77,342 38.0%

Human Immunoglobulin - - - -

Human Hepatitis B ImmunoglobulinPrevention of measles and contagious hepatitis. When applied together with antibiotics, its

curative effect on certain severe bacteria or virus infection may be improved

Human Tetanus Immunoglobulin Mainly used for the prevention and therapy of tetanus. Particularly applied to patients who

have allergic reactions to Tetanus Antitoxin.

Human Rabies Immunoglobulin

Mainly for passive immunity from bites or claws by rabies or other infected animals. All

patients suspected of being exposed to rabies will be treated with a combined dose of

rabies vaccine and human rabies immunoglobulin.

Thymopolypeptides Injection

Cure for various original and secondary T-cell deficiency syndromes, some auto-immune

deficiency diseases and various cell immunity deficiency diseases, and assists in the

treatment for tumors.

Placenta Polypeptide Cure for cell immunity deficiency diseases, viral infection and leucopenia caused by various

reasons, and assist in postoperative healing .

Human coagulation factor VIIITreatment for coagulopathie such as hemophilia A and increase concentration of

coagulation factor VIII- - 4,067 2.0%

Original immunoglobulin deficiency, such as X chain low immunoglobulin, familiar variable

immune deficiency, immunoglobulin G secondary deficiency; Secondary immunoglobulin

deficiency: such as severe infection, newborn sepsis; and Auto-immune deficiency

10,089

Products Indication

13,667 19,683

12,151

2012 2013

5.5% 6.0%

7.4% 9.7%


13

Exhibit 11. CBPO’s Market Share in Major Plasma Products, 2013

Source: Company Reports, Oppenheimer & Co. Inc. Research

16% Market Share of Plasma Supply

With raw material a constraint on growth, we believe CBPO has been taking the right steps to secure sufficient supply. The company owns majority or minority stakes in 15 of the 160 plasma collection stations in China, with an estimated plasma collection capacity of 670 tons. It controls ~16%, or the second-largest, market share in terms of plasma collection (670 tons/4,200tons) (Exhibit 12).

Exhibit 12. Plasma Fractionation Market Share in China

Source: Oppenheimer & Co. Inc. Research

Strong Product Pipeline

CBPO maintains a portfolio of strong pipeline products. Most pipeline candidates have the

potential to meet with high demand and record richer margins. Besides Factor VIII, CBPO

currently has six pipeline products (Exhibit 13). The CFDA approved manufacturing of

Human Prothrombin Complex Concentrate (PCC) in July 2013. The GMP certification for

the PCC production facility from CFDA is expected in late 2014.

PCC is the major treatment for hemophilia B as no factor IX is produced or sold in China.

The domestic market size is estimated at $9M in 2012. As the economy continues to grow

decently and medical insurance coverage continues to expand, we believe more cases of

hemophilia B will be diagnosed and treated. Besides, PCC is also used for liver disease

and surgery to reverse the bleeding effect of Coumadin or heparin. This could be another

source of upside as China has the largest liver-disease patient base in the world and

increasing surgery volume, underpinned by substantial new hospital beds added each

year.

Currently, only three domestic manufacturers are selling PCC in China, namely Hualan,

Shanghai RAAS, and Shanghai Xinxing Medicine. We expect PCC to fuel CBPO‟s

medium- to long-term growth in 2016 and beyond, associated with factor VIII‟s ramp-up.


14

Exhibit 13. Pipeline Products

Source: Company Data, Oppenheimer & Co. Inc. Research

Growth Strategies

Increase Plasma Collection and Production Capacity

CBPO‟s business model depends on both organic and inorganic growth. Its acquisition

strategy targets both plasma collection stations and manufacturing facilities. The

acquisitions of Guizhou Tiabang and Xi‟an Huitian, in addition to the self-established Cao

Xian plasma station, have enabled CBPO to own 15 of the 160 plasma collection stations

in China. The Xi‟an Huitian and Guizhou Taibang facilities are under new GMP upgrade,

which could have a significant impact on CBPO‟s financials in 1H14.

Driven by the government‟s plan to double plasma collection volume by 2016,

certifications of eight new plasma collection stations have been granted to Hualan Bio,

Jiangxi Boya, CNBG, and Anhui Tonrol (two for each). But this was insufficient to meet the

goal. Besides, new GMP upgrades to be completed by year-end 2013 provided

opportunities for industry leaders to break the bottleneck of plasma supply. Hualan Bio

acquired Henan Banghe in mid-2013, and Walvax Bio acquired Hebei Da‟an Bio in late

2013. With a strong balance sheet, CBPO is able to expand its collection volume by ~15%

annually, both internally and externally.

New Product Offerings

Great disparity exists between CBPO‟s product offering and that of MNCs (multinational

corporations), such as Baxter and CSL. First-class manufacturers could isolate 22-24

factors, while the best producer in China can only isolate 10-11. This leaves ample room

for CBPO to expand its product portfolio with more high-margin products. Leading

producers in developed countries usually depend on high-end products to make most of

their profit.

Pipeline Products Cure/Use Status Stage

Estimated Time

for Commercial

Production

1Human Prothrombin

Complex Concentrate

Used for the prophylaxis and treatment of

bleeding in patients with single or multiple

congenital deficiencies of factor II or X and in

patients with single or multiple acquired

prothrombin complex factor deficiency

requiring partial or complete reversal.

Obtained the manufacturing

approval certificate in July

2013; expected to obtain the

GMP certification for the

production facility in late 2014

Registration Late 2014

2

Human Hepatitis B

Immunoglobulin (PH4)

for Intravenous

Injection

Prevention of measles and contagious

hepatitis. When applied together with

antibiotics, its curative effect on certain severe

bacteria or virus infection may be improved.

In Phase III clinical trial Registration 2015

3 Human FibrinogenCure for lack of fibrinogen and increase human

fibrinogen concentration.

Start Phase III clinical trial in

3Q13Clinical trials 2016

4

Varicella

Hyperimmune

Globulins

Used for treatment of eczema vaccinatum,

vaccinia necrosum, and ocular vaccinia

Develop scope and technique

for testing the new medicine

Pre-clinical

ResearchNA

5

Immune Globulin

Intravenous (Human),

Caprylate/Chromatogr

aphy Purified & 20 nm

virus filtration

Cure for original immunoglobulin deficiency;

secondary immunoglobulin deficiency and

Auto-immune deficiency diseases

Application made to the

National Institutes for Food

and Drug Control for official

virus inactivation. Approval of

clinical trials expected in 2015

Pre-clinical

ResearchNA

6Human Antithrombin

III (concentration)

Treatment for (i) hereditary antithrombin III

deficiency in connection with surgical or

obstetrical procedures and (ii)

thromboembolism

Pre-validation of viral

inactivation and removal.

Approval of clinical trials

expected in 2015.

Pre-clinical

Research2015


15

From 2006 to 2013, CBPO decreased its human albumin revenue contribution from 76%

to 44%, with a gross margin of ~50%. Sales contribution from immunoglobulin products

(with GM of ~70%) doubled from only 24% to 48%. With ramp-up of Factor VIII sales (with

GM of 70-80%) and commercial production of PCC in the near future, we expect the

product mix shift to drive margin expansion.

Exhibit 14. Evolution of CBPO’s Product Mix


Restructured Distribution Network

CBPO sells most of its products directly to 1000+ hospitals and clinics in China. Since

2009, the company has conducted a restructuring of its distribution network to increase

direct sales. Direct sales contribution increased from 32.7% in 2009 to 66.8% in 2013

(Exhibit 15) while the number of distributors declined from 397 in 2008 to 263 in 2011 and

208 in 2013. Moreover, CBPO has expanded its sales and marketing team (sales and

after-sales personnel) from only 50 personnel in 2007 to 132 in 2013. We believe the

strategy to increase direct sales is beneficial to CBPO. It can obtain clinical feedback for

better positioning and marketing, and generate synergies among product lines.

Although sales contribution from distributors has declined in recent years, CBPO is

increasingly engaging with capable distributors in tier-1 cities to improve its branding and

deepen its foothold in high-end markets, which also cover surrounding areas.

Exhibit 15. Sales Breakdown of Distributor and Direct Sales


Operational Expansion Potential

China Biologic Products currently owns 35% and 54% interests in Xi‟an Huitian Blood

Products Co. Ltd. and Guizhou Taibang Biological Products Co., respectively. CBPO did

not put full efforts developing Xi‟an Huitian as it does not have full control of the subsidies.


16

Possible acquisitions of the remaining equity interests could create operational synergies

and reduce minority interests. As CBPO has only a 54% interest in Guizhou Taibang as

well, the company is consistently trying to increase control of its subsidies and further

unleash the potential of Xian Huitian and Guizhou Tiabang.

What‟s more, the policy of closing Guizhou plasma stations is subject to review in 2014,

which may lead to reopening some of the 18 closed plasma collection stations. Currently,

CBPO owns two of the only four existing stations in Guizhou, so even a very limited

number of reopenings could have a substantial upside for CBPO‟s plasma fractionation

capacity.

Share Dispute Issue Resolved

In March 2013, CBPO received a letter from a Hong Kong law firm notifying it of a claim

filed against Ms. Lin Ling Li (Ms. Li) and Ms. Siu Ling Chan (Ms. Chan), two individual

shareholders of CBPO, and their respective spouses. The Hong Kong law firm represents

a group of individuals who allege in their complaint that the defendants misappropriated

their entitlements in up to 6.66M shares of the common stock (4.59M shares registered

under the name of Ms. Li and 5.36M shares registered under the name of Ms. Chan).

On May 21st, 2013, Mrs. Siu Ling Chan (Mrs. Chan) and her spouse Mr. Tung Lam (Mr.

Lam, ex-CEO of the company) signed an agreement with Shanghai, one of CBPO‟s key

competitors in China, to sell 2.66M shares or 9.9% of the common stock, at $20 per share,

a discount of over 20% relative to the $26 previous 30-day average.

On June 2013, CBPO‟s board deemed the acquisition a hostile takeover and, as a

defense, decided to activate the “poison pill” rights agreement. The “Rights Agreement to

protect stockholders from coercive or otherwise unfair takeover tactics” was approved by

the board on November 2012 and could significantly lift the acquisition cost (refer to the

Form 8-K released on November 19, 2012).

On January 27th, 2014, CBPO eventually entered into a “Repurchase Agreement” with Ms.

Chan and Mr. Lam, from whom the company agreed to repurchase 2.5M shares, or 9.67%

of the total common stock outstanding, at $28.00 per share ($70M cash in total, financed

by offshore debt). And this shareholder issue has been resolved.

With the redemption of 1.48M shares belonging to Ms. Lin Ling Li (Ms. Li), an individual

shareholder, and her spouse Mr. Ze Qin Lin (Mr. Lin), which was finalized in August 2013,

the basic share count was diluted by 3.98M shares to 23.2M starting from 1Q14.


17

Valuation

We derive our $46 fair-value target for CBPO shares by applying a discounted cash flow

valuation as we believe CBPO‟s business model is able to generate stable and predictable

cash flow. We assume a 3.5% terminal growth rate, in line with China‟s expected inflation

rate, and an 11.3% weighted average cost of capital (WACC), derived by weighting the

average of a 13.3% required return on equity (ẞ=1.69) and a 2.7% US 10-year Treasury

rate. CBPO is trading at a significant discount to both international and domestic peers,

due to US investors‟ limited exposure to China‟s plasma derivatives industry. We believe

CBPO‟s valuation is attractive, with its stock trading at 13x and 12x our 2014 and 2015

adjusted non-GAAP diluted EPS estimates of $2.76 and $3.15, respectively. Our price

target of $46 implies 15x our FY15 non-GAAP estimate, basically in line with the

company‟s 14.2% non-GAAP net income CAGR from 2013 to 2017E.

Exhibit 16. DCF Analysis

Sensitivity scenario

Source: Company Reports, Oppenheimer & Co. Inc. estimates

$'000, except per share data 2011 2012 2013 2014E 2015E 2016E 2017E

Revenue 153,092 184,813 203,357 233,990 271,429 317,571 374,734

EBIT 32,217 74,489 86,933 103,060 117,258 134,015 157,388

Taxes (10,900) (15,163) (15,540) (19,660) (22,216) (25,232) (29,439)

After tax EBIT 21,318 59,326 71,392 83,400 95,043 108,783 127,949

Add D&A 7,648 8,881 7,462 9,247 10,498 11,477 12,550

Less CAPEX 8,394 27,945 21,819 42,118 38,000 34,933 29,979

Less Change in WC (17,797) (5,929) (12,986) (7,642) (15,273) (21,386) (21,901)

FCF 38,370 46,191 70,022 58,171 82,815 106,714 132,422

Cost of Capital 11.3%

NPV of cash flows, 2012-2017E 317,416

Terminal Growth 3.5%

Terminal value 1,767,358

NPV of terminal value 1,036,880

Current net debt -126,607

Equity Value 1,227,690

Shares outstanding (Diluted) 26,911

Value per share ($) 46

45.6 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

9.8% 48 51 55 59 64 69 76

10.3% 45 47 50 54 58 62 68

10.8% 42 44 47 49 53 57 61

11.3% 39 41 43 46 49 52 56

11.8% 36 38 40 42 45 48 51

12.3% 34 36 38 39 42 44 47

12.8% 32 34 35 37 39 41 43

Terminal Growth Rate

WA

CC


18

Exhibit 17. Comp Table, CBPO

Source: FactSet, Oppenheimer & Co, Inc. estimates O Outperform NC Not Covered

Investment Risks to Price Target

Regulatory Risk: The collection of human plasma is heavily regulated in China. The

government oversees operations, product quality and pricing policies of plasma-based biopharmaceutical companies located in China. Failure to comply with these standards may lead to the closure of all or some of the company‟s plasma collection facilities. Any changes in the current policies may slow down or disrupt production as the company adapts to the new regulatory environment.

Competitive Risk: Imports of most blood-based products are currently prohibited in

China. Relaxation of the policy may open the market to new competitors potentially putting pressure on CBPO.

Clinical Trial Risk: CBPO is currently testing several new drugs with one in the later

stages of the SDFA approval process. Failure to receive CFDA approval and commercialize new drugs may limit the company‟s future growth.

Price

Company Name Ticker Currency Rating 3/12/2014 14E 15E 14E 15E 14E 15E 14E 15E 14E 15E

Bayer AG BAYN-DE EUR NC 95.45 78,932 15 14 1.7 1.2 9 9 10% 13% 11% 5% 6% 3%

Baxter International Inc. BAX USD NC 67.62 36,730 13 12 1.5 2.3 10 9 10% 6% 8% 9% 3% 4%

Grifols, S.A. Class A GRF-ES EUR NC 40.99 9,769 25 22 1.0 1.9 14 13 32% 13% 23% 27% 6% 10%

Novo Nordisk A/S Class B NOVO.B-DK DKK NC 246.70 653,051 24 21 2.4 1.7 na na 11% 14% 12% 7% 10% 6%

CSL Limited CSL-AU AUD NC 72.50 35,086 24 21 2.1 1.9 17 16 13% 12% 13% 5% 8% 10%

Average 20 18 1.7 1.8 13 12 15% 12% 14% 10% 6% 7%

Jiangxi Boya Bio-Pharmaceutical 300294-CN CNY NC 44.67 3,386 28 21 1.5 0.9 15 12 22% 33% 28% 22% 20% 23%

Hualan Biological Engineering 002007-CN CNY NC 26.63 15,344 27 21 1.4 1.0 15 na 25% 28% 26% 23% 18% 26%

Shanghai Raas Blood Products 002252-CN CNY NC 50.56 29,489 89 71 3.5 3.4 19 na 35% 27% 30% 21% na na

Beijing Tiantan Biological Products 600161-CN CNY NC 18.89 9,737 20 18 2.1 2.1 15 na 11% 10% 10% 7% na na

Average 41 33 2.1 1.8 16 12 23% 24% 24% 18% 19% 24%

China Biologic Products, Inc. CBPO USD O 36.39 840 13 12 0.6 0.9 9 8 30% 14% 22% 15% 16% 14%

Sales

CAGR

'12-'15E

Mkt Cap

(M)

PE PEG EV/EBITDA EPS Growth EPS

CAGR

'12-'15E

Sales Growth


19

Financial Performance Analysis

Revenue

From 2007-2013, benefiting from volume and price increases of human albumin and IVIG,

CBPO‟s revenue grew at a 35.8% CAGR from $32.4M in 2007 to $203.4M in 2013. During

the period, CBPO has reduced its reliance on human albumin; IVIG‟s contribution to

revenue has increased from 10% in 2007 to 38% as of 2013. The company guided its full-

year 2014 revenue to be $230-240M, implying 13-18% year-over-year growth. We expect

revenue to grow at a 16.5% CAGR to $374.7M in 2017 at an accelerating pace, driven by

product launches, expanding geographic coverage, and incremental plasma supply but

slightly capped by a lower utilization rate in 1H14 due to the GMP upgrade.

Exhibit 18. YoY Pricing Change of CBPO’s Key Products


Exhibit 19. Actual/Estimated Revenue and Growth, CBPO


Gross Margin

CBPO‟s gross margin expanded from 69% in 2007 to 74% in 2010, mainly due to

favorable pricing. However, since 2010, National Development and Reform Commission

(NDRC) pricing regulation on most plasma products has capped pricing upside, while the

mandatory shutdown of plasma collection stations in Guizhou has hurt CBPO‟s

fractionation utilization rate. Further, raw material prices and incentives to donors surged

from around RMB150 per donor before 2010 to over RMB300 per donor in 2013. CBPO‟s

GM has decreased slightly to 70% in 2011 and 68% in 2012 and 2013. Going forward,

although there are tailwinds, such as improving product mix, new product launches, and


20

increasing utilization, we expect GM to erode toward 62% in 2017, converging to the

industry average in the long term (Exhibit 20).

Exhibit 20. Actual and Estimated Gross Margin, CBPO

Source: Company Reports, Oppenheimer & Co. Inc. Estimates

Operating Margin

Due to CBPO‟s strategic shift to more direct sales since 2009, selling expenses and G&A

cost as percentage of revenue have increased over the years. In 2012, CBPO initiated

selling-expense control by reducing commissions to distributors and cut selling expense to

~4% of sales. We expect the SG&A ratio to be maintained at the 5% level, considering

that CBPO is increasingly engaging with distributors in top-tier cities. We also believe that

CBPO‟s economies of scale will help lower G&A expense at a 1% of sales pace, annually,

going forward. Therefore, we expect the operating expense ratio to be further reduced to

20% in 2017 from the current 25% and the operating margin to trend down from 43% in

2013 to 42% in 2017 (Exhibit 21), mainly reflecting the lower gross margin.

Exhibit 21. Operating Margin 2007-2017E


Net Income

CBPO‟s non-GAAP adjusted net income, which excludes any non-cash charge or gain

related to change in the fair value of derivative liabilities and stock-based compensation

expense, grew at a 39% CAGR from $8.2M in 2007 to $59.0M in 2013. The company

guided its full-year 2014 non-GAAP net income to be $67-69M, implying 14-17% yoy

growth. We expect CBPO‟s non-GAAP net income to grow at a CAGR of 14.2% to

$100.4M in 2017 (Exhibit 22), reflecting the moderate margin contraction.


21

Exhibit 22. Net Income 2010-2017E


Balance Sheet and Cash Management

As of September 2013, CBPO has $181.3M cash on hand and $39.8M debt. Net cash per

share was $5.26. The current ratio is a very healthy 4.17. Inventory days increased from

393 days in 2009 to 566 days in 2011 due to the high raw plasma inventory levels

required to pass 90 quarantine day productions. Inventory days slightly improved to 469 in

2012 and went back up to 494 days in 2013 due to piling up inventory for facility

suspension for the GMP upgrade. We expect it to gradually improve to 464 in 2017.

Accounts receivable days also increased from only 6 in 2009 to 26 in 2010 and 40 in 2011.

CBPO started initiatives to speed up A/R turnover in 2012, which reduced A/R days to 31

in 2013 (Exhibit 23).

Exhibit 23. Cash Cycle, CBPO


Cash Flow

CBPO continues to improve cash management and operating efficiency; we expect

operating cash flow to grow at a 15.6% CAGR to $132.9M in 2017. Operating cash flow

declined from $50.3M in 2009 to $38.5M in 2011, mainly due to higher A/R and inventory.

However, through effective cost reductions, improved cash management, and sales

restructuring, CBPO generated operating cash flow of $74.3M in 2013. Capex as a

percentage of total revenue increased in 2008, 2009, 2010, 2012, and 2013 due to a

series of acquisitions and expenses for new GMP approval. We believe GMP upgrades for

CBPO‟s Guizhou and Xi‟an facilities and contingent acquisitions of plasma collection

capacity will keep the capex ratio for routine operation and maintenance at a basic level of


22

around 10% of sales. Besides, investments into the new Shandong facility, which is

expected to be finished by mid-2018, will require an additional aggregate of RMB400-

500M capex during the period. We accordingly expect capex of $42M, $38M, $35M, and

$30M from 2014 to 2017 (Exhibit 25). With the increasing capex, we still expect free cash

flow to grow steadily at a 23% five-year CAGR to $132.4M in 2017 (Exhibit 26), reflecting

the intrinsic cash-generating ability of CBPO‟s business in China.

Exhibit 24. Actual and Projected Operating Cash Flow


Exhibit 25. Actual and Projected Capex and Capex as % of Revenue


Exhibit 26. Actual and Projected Free Cash Flow



23

Corporate Structure

Exhibit 27. Corporate Structure, CBPO

Source: Company Report, Oppenheimer & Co. Inc. Research


24

Management

Exhibit 28. Management Team and Board Members

Mr. David (Xiaoying) Gao 62 80,000 620,000 Chairman and CEO

Mr. Gao has been a member of the Board since October 6, 2011, the Chairman

since March 30, 2012 and the Chief Executive Officer since May 10, 2012. From

February 2004 until the company‟s acquisition by Sanofi in February 2011, Mr.

Gao served as the Chief Executive Officer and director of BMP Sunstone

Corporation (Nasdaq: BJGP). Follow ing the acquisition, he served as a senior

integration advisor for Sanofi from February to August 2011. From February

2002 through February 2004, Mr. Gao served as Chairman of BMP China‟s board

of directors. Mr. Gao served as President and director of Abacus Investments

Ltd, a private w ealth management company, from August 2003 until June 2004,

and as Chief Executive Officer of Abacus from July 2003 to June 2004. From

1989 to 2002, Mr. Gao held various executive positions at Motorola, Inc.,

including: Vice President and Director, Integrated Electronic System Sector, Asia-

Pacif ic operation, from 1998 to 2002; Member, Motorola Asia Pacif ic Management

Board, Management Board of Motorola Japan Ltd., from 2000 to 2002; and

Motorola China Management Board from 1996 to 2002. Mr. Gao holds a B.S. in

Mechanical Engineering from the Beijing Institute of Technology, a M.S. in

Mechanical Engineering from Hanover University, Germany, and an M.B.A. from

The Massachusetts Institute of Technology.

Mr. Ming Yang 41 55,000 50,000 CFO

Mr. Ming Yang. Mr. Yang has been the CFO since August 7, 2012. Mr. Yang

served as the interim CFO betw een May 31 and August 6, 2012 and the

VicePresident-Finance & Compliance and Treasurer betw een March 30, 2012

and August 6, 2012. Mr. Yang also serves as an independent director for

Kunming JidaPharmaceutical. Mr. Yang has six years of f inancial management

experience in corporations and 11 years audit experience in accounting f irms.

Mr. Yang has extensive experience in dealing w ith the PRC tax regulations, PRC

GAAP, IFRS and internal control matters. He w as an audit senior manager at

KPMG, w here he provided audit services for initial public offerings, right issues

and merger and acquisition transactions. He also w orked on the annual reports

of various public companies listed in Hong Kong and mainland China. His audit

clients ranged from state-ow ned enterprises and Chinese listed companies to

multinational companies, including Angang Steel, Shenhua Energy, BOE

Technology and BHP Billiton. Mr. Yang is a certif ied public accountant in China.

Board of Directors Age Shares Option Title Affiliation

Mr. David (Xiaoying) Gao 62 80,000 620,000 Chairman and CEO

& PresidentCBPO, Executive Chairman, President & CEO

Dr. Bing Li 44 5,000 30,000 Director Warburg Pincus Asia LLC

Mr. Charles (Le) Zhang 41 5,000 10,000 Director DT Capital Partners

Mr. David Li 46 - - Director Warburg Pincus Asia LLC; Zhejiang Weixin BioPharmaceutial;

Mr. Sean Shao 56 27,500 70,000 DirectorLightInTheBox Holdings Co. Ltd.; UTStarcom Holdings Corp.; Xueda Education

Group; Yongye International, Inc.; China Biologic Products, Inc.;Agria Corporation.

Prof. Wenfang Liu 75 10,976 20,000 Director Sichuan Yuanda Shuyang Pharmaceuticals;

Mr. Zhijun Tong 53 11,000 25,000 Director

Spain Qifa Corporation Ltd.; Hong Kong Tong‟s Group; Sunstone (Qingdao) Plant

Oil Co., Ltd.; Shengda (Zhangjiakou) Pharmaceutical Co., Ltd.; Shengda (Qianxi)

Chinese Medicine Cultivation Co., Ltd.

Mr. Albert (Wai Keung)

Yeung70 11,000 25,000 Director Albert Yeung & Associate Consulting Co., Ltd.

Stheces: Company f inancial statements; Oppenheimer & Co. Inc.

Major ExperienceKey Officer Age Shares TitleOption


25

Financial Statements Exhibit 29. Income Statement


Income Statement (In $000, except EPS) 1Q13A 2Q13QA 3Q13A 4Q13A 1Q14E 2Q14E 3Q14E 4Q14E 2012 2013 2014E 2015E 2016E 2017E

Total Revenue 54,032 53,581 53,152 42,592 52,411 56,260 69,098 56,222 184,813 203,357 233,990 271,429 317,571 374,734

Costs of Goods Sold (16,617) (16,122) (17,166) (15,579) (17,820) (18,566) (22,802) (17,991) (58,836) (65,484) (77,179) (95,000) (117,501) (142,399)

Gross Profit 37,415 37,458 35,986 27,013 34,591 37,694 46,296 38,231 125,977 137,873 156,812 176,429 200,070 232,335

-

Selling expenses (1,836) (2,442) (2,551) (3,814) (3,145) (2,813) (3,455) (2,811) (14,421) (10,643) (12,224) (13,571) (15,879) (18,737)

General and administrative expenses (8,687) (8,866) (9,219) (9,302) (8,910) (8,439) (10,365) (8,433) (34,034) (36,074) (36,147) (39,357) (43,825) (48,715)

Research and development expenses (913) (835) (1,053) (1,422) (1,749) (1,125) (1,382) (1,124) (3,033) (4,223) (5,381) (6,242) (6,351) (7,495)

Total Operating Expenses (11,437) (12,143) (12,823) (14,537) (13,804) (12,377) (15,202) (12,369) (51,488) (50,940) (53,751) (59,170) (66,055) (74,947)

Operating Income 25,978 25,315 23,163 12,476 20,787 25,317 31,094 25,862 74,489 86,933 103,060 117,258 134,015 157,388

Interest income (expense), net 412 797 1,014 2,211 1,108 1,282 1,404 1,501 1,640 4,433 5,296 5,296 5,296 5,296

Other income (expense), net 129 611 643 (347) 259 291 211 104 5,006 1,036 865 865 865 865

Pretax Income 26,519 26,723 24,819 14,340 22,155 26,891 32,709 27,467 81,135 92,401 109,222 123,420 140,176 163,550

Income tax (4,607) (3,746) (4,871) (2,317) (3,988) (4,840) (5,888) (4,944) (15,163) (15,540) (19,660) (22,216) (25,232) (29,439)

Net Income 21,912 22,978 19,948 12,023 18,167 22,050 26,822 22,523 65,972 76,861 89,562 101,204 114,945 134,111

Minority Interest (6,996) (6,816) (5,252) (3,195) (6,289) (6,751) (7,601) (6,184) (20,750) (22,260) (26,826) (29,857) (34,933) (41,221)

Net Income from Continuing Operations (GAAP) 14,916 16,162 14,696 8,828 11,877 15,299 19,221 16,339 45,222 54,602 62,736 71,347 80,012 92,890

Common stock outstanding (Basic) 26,786 26,880 26,288 25,689 23,189 23,189 23,189 23,189 26,154 26,411 23,189 23,189 23,189 23,189

Common stock outstanding (Diluted) 27,916 28,067 27,449 26,911 24,411 24,411 24,411 24,411 26,840 27,572 24,411 24,411 24,411 24,411

Adjusted NON-GAAP Net Income (Loss) &Diluted EPS

Adjusted Net Income - Non GAAP 16,395 17,407 15,550 9,623 12,926 16,424 20,603 17,463 47,998 58,974 67,416 76,775 86,363 100,385

Adjusted Diluted EPS - Non GAAP 0.59 0.62 0.56 0.35 0.53 0.67 0.84 0.72 1.79 2.12 2.76 3.15 3.54 4.11

% Growth Rates

Revenue (Y/Y) 14% 6% 0% 25% -3% 5% 30% 32% 21% 10% 15% 16% 17% 18%

Revenue (Q/Q) 59% -1% -1% -20% 23% 7% 23% -19%

Operating Expenses (Y/Y) -10% -7% -19% 45% 21% 2% 19% -15% -31% -1% 6% 10% 12% 13%

Operating Income (Y/Y) 38% 19% 13% -10% -20% 0% 34% 107% 131% 17% 19% 14% 14% 17%

Net Income (Y/Y) - Non GAAP 29% 21% 6% 32% -21% -6% 32% 81% 31% 23% 14% 14% 12% 16%

EPS (Y/Y) - Non GAAP Diluted 20% 19% 5% 49% -9% 9% 48% 106% 31% 18% 30% 14% 12% 16%

% of Revenue

Gross Margin 69% 70% 68% 63% 66% 67% 67% 68% 68% 68% 67% 65% 63% 62%

Operating Expenses 21% 23% 24% 34% 26% 22% 22% 22% 28% 25% 23% 22% 21% 20%

Selling expenses 3% 5% 5% 9% 6% 5% 5% 5% 8% 5% 5% 5% 5% 5%

G&A expenses 16% 17% 17% 22% 17% 15% 15% 15% 18% 18% 15% 15% 14% 13%

Research and development expenses 2% 2% 2% 3% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2%

EBIT 48% 47% 44% 29% 40% 45% 45% 46% 40% 43% 44% 43% 42% 42%

Pre-Tax Income 49% 50% 47% 34% 42% 48% 47% 49% 44% 45% 47% 45% 44% 44%

Tax Rate (Adjusted) 17% 14% 20% 16% 18% 18% 18% 18% 19% 17% 18% 18% 18% 18%

Adj. Net Income - Non GAAP 27% 30% 27% 20% 25% 29% 30% 31% 26% 29% 29% 28% 27% 27%

Net Income (GAAP) 28% 30% 28% 21% 23% 27% 28% 29% 24% 27% 27% 26% 25% 25%


26

Exhibit 30. Balance Sheet


Balance Sheet (In $000) 2011 2012 2013 2014E 2015E 2016E 2017E

Assets

Cash and cash equivalents 89,412 129,609 144,138 176,833 157,657 172,077 252,320

Time deposit 6,609

Short-term investment

Restricted cash - - - -

Notes receivable - - - - - -

Account receivable,net 16,757 11,206 17,270 20,332 23,052.84 26,102 30,800

Dividend receivable - - - - -

Other receivables - - - - -

Inventories 71,339 75,679 88,635 102,356 121,027 146,474 171,659

Prepaid expenses and deposits 1,592 5,665 7,641 7,641 7,641 7,641 7,641

Others - - - - -

Total current assets 183,694 222,160 264,293 307,163 309,378 352,295 462,420

Property, plant and equipment, net 40,547 51,325 73,149 107,373 136,294 161,241 180,235

Restricted cash 2,912 30,524 100,000 40,000

Long term prepayment 4,287 - - - - -

Investment in unconsolidated aff iliate 8,357 10,537 11,350 11,350 11,350 11,350 11,350

Intangible assets, net 6,521 3,542 2,585 1,773 1,241 869 -

Land use rights, net 5,487 5,819 8,213 9,983 11,481 13,203 15,183

Receivable related to land use right 14,753 13,667 13,667 13,667 13,667 13,667

Goodw ill - - - - - -

Others - - - - - -

Total assets 248,893 311,047 403,781 551,308 523,411 552,624 682,855

LIABILITIES

Current Liabilities

Accounts payable 4,996 2,909 4,446 4,732 5,726 7,082 8,583

Notes payable - - - - - -

Short-term bank loans 11,018 7,935 9,822 9,822 9,822 9,822 9,822

Payable to noncontrolling interest holder - - - - - -

Accrued interest (holder of noncontrolling interest) - - - - - -

Other payables and accrued expenses 30,662 25,423 34,853 42,364 46,600 51,260 56,386

Due to related parties 3,320 4,082 7,207 9,513 9,513 9,513 9,513

Advance from customers 4,852 2,857 2,909 2,909 2,909 2,909 2,909

Taxes payable 7,564 4,513 4,202 5,547 6,435 7,529 8,884

Investment payable - - -

Dividend payable - - - - - -

Derivative liabilities 5,410 - - - - -

Total current liabilities 67,822 47,719 63,439 74,887 81,005 88,115 96,097

Notes payable - - - - - -

Loans payable - - - -

land use right - - - - - -

Others 2,029 - - - - -

Other payable 3,004 3,126 3,126 3,126 3,126

Deferred tax liabilities 3,369 3,506 3,506 3,506 3,506

Long-term debt 30,000 100,000 40,000 - -

Long-term liabilities 2,029 5,909 36,373 106,632 46,632 6,632 6,632

Total liabilities 69,852 53,628 99,812 181,519 127,637 94,747 102,729

Minority interest 43,529 61,949 66,278 70,206 72,170 74,134 76,098

Commitment and contingencies -

-

SHAREHOLDERS' EQUITY -

Common stock 3 3 3

Paid in capital 48,838 62,252 72,032

Treasury stock (29,594)

Statutory reserves - -

Retained earnings 73,921 119,143 173,745

Accumulated other comprehensive income 12,751 14,072 21,506

Total stockholders' equity 135,512 195,470 237,692 301,548 323,604 383,743 504,028

Total liabilities and equity 248,893 311,047 403,781 551,308 523,411 552,624 682,855


27

Exhibit 31. Cash Flow Statement


Cash Flow (In $000) 2011 2012 2013 2014E 2015E 2016E 2017E

Cash flows from operating activities

Net income 31,383 65,972 76,861 89,562 101,204 114,945 134,111

Adjustments to reconcile net loss to net cash

Depreciation 4,254 5,792 6,097 7,894 9,079 9,986 10,985

Amortization 3,395 3,088 1,366 1,352 1,420 1,491 1,565

(Gain) Loss on disposal of PP&E 167 828 (124) 59 59 59 59

Allow ance / (reversal of allow ance) for doubtful accounts, net 6,603 - - - - -

Write-dow n of obsolete inventories 271 - - - - -

Deferred tax assets (2,595) 1,127 113 (1,262) (1,262) (1,262) (1,262)

Stock-based compensation 4,896 4,545 5,051 4,680 5,429 6,351 7,495

Amortization of discount on convertible notes 3,504 - - - - -

Equity in income of equity method investee (1,858) (2,666) (2,170) (2,501) (2,501) (2,501) (2,501)

Goodw ill impairment loss 18,160 - - - - -

Recovery of bad debt previously reserved (20) (2) 32 - - - -

Allow ance for bad debt (10) 110 65 - - - -

Change in fair value of w arrant liabilities (11,975) (1,769) - - - -

Amortization of deferred note issuance cost 92 - - - - -

Change in other assets and liabilities

Accounts receivable (6,127) 5,690 (5,667) (3,062) (2,720) (3,049) (4,698)

Other receivables 135 - - - -

Inventories (17,079) (3,750) (10,432) (13,722) (18,671) (25,447) (25,185)

Prepayments and deferred expenses (846) (268) (624) - - - -

Accounts payable 432 (2,185) 1,622 286 994 1,356 1,501

Other payables and accrued liabilities 6,098 (3,211) 2,534 7,511 4,236 4,660 5,126

Due to related parties 734 66

Accrued interest-holder of noncontrolling interest - - - - - -

Customer deposits 1,140 (2,034) (38) - - - -

Taxes payable (1,550) (905) (447) 1,345 888 1,094 1,355

Contingent liability - - - - - -

Net cash provided by operating activities 38,470 71,097 74,303 92,142 98,153 107,683 128,551

Cash flows from investing activities

Dividend received 1,210 1,109 565 565 565 565 565

Cash acquired through acquisition - - - - - - -

Refund of deposits related to land use right 2,100

Proceeds from dividend receivable - - - - - - -

Acquisision of PP&E (7,969) (13,886) (20,492) (42,118) (38,000) (34,933) (29,979)

Payments for unconsolidated aff iliate - - - - - - -

Payments made for acquisition (425) (14,059) (1,327) - - - -

Additions to intangible assets - - - - -

Purchase of time deposit (6,609)

Proceeds from sale of equipment 57 83 195 - - - -

Advances on non-current assets - - - - - - -

Net cash used in investing activities (7,127) (26,753) (25,568) (41,553) (37,435) (34,367) (29,413)

Cash flows from financing activities

Proceeds from w arrants conversion - 4,500 - - - - -

Proceeds from issuance of convertible notes - - - - - - -

Repayments of former shareholders loan in acquiring

company - - - - - - -

Proceeds from notes payable - - - - - - -

Proceeds from short term loans- bank 18,595 11,076 9,693 - - - -

Payments on short term loans - bank (10,847) (14,287) (8,014) - - - -

Proceeds from long term loan - - 30,000 70,000 - - -

Payments on long term loans - bank - - - - (60,000) (40,000) -

Repurchase of common shares - - (29,594) (70,000) - - -

Proceeds from stock option exercised 300 727 5,394 - - - -

Repayment of non-controlling shareholder loan - - - - - -

Dividends paid to noncontrolling interest shareholders (10,490) (7,121) (16,931) (16,931) (16,931) (16,931) (16,931)

Contribution from noncontrolling interest 2,891

Purchase of time deposit (30,000)

Payments made for acquiring noncontrolling interest (7,635) (1,964) (1,964) (1,964) (1,964) (1,964)

Net cash used in financing activities (10,077) (5,104) (38,525) (18,895) (78,895) (58,895) (18,895)

Exchange gain on cash and equivalents 3,204 957 4,318 - - - -

Increase in cash and cash equivalents 24,470 40,197 14,529 31,694 (18,176) 14,421 80,242

Cash and cash equivalents at beginning of period 64,941 89,412 129,609 144,138 175,833 157,657 172,077

Cash and cash equivalents at end of period 89,412 129,609 144,138 175,833 157,657 172,077 252,320


28

Investment ThesisChina Biologic Products is the largest non-state-owned fully integrated blood product company in China. In the highlyregulated and shortage industry with high entry barriers and limited competition, we have seen CBPO's advantages in termsof diversified product lines, a rich product pipeline, and significant plasma supply to secure its leadership and grow at 15%in the next three years. The stock is currently trading on very compelling valuation of 12x our FY15 non-GAAP EPS forecastof $3.15, compared with US-listed/China-listed peers’ 18x/33x. We initiate our coverage with an Outperform rating and a$46 target price.

Price Target CalculationWe derive our $46 fair-value estimate for CBPO’s shares by using a discounted cash flow valuation, assuming 3.5% terminalgrowth rate and 11.3% WACC. Compared with peers, CBPO is trading at significantly discount. We believe CBPO’s valuationis attractive, with its stock trading at 13x and 12x our 2014 and 2015 adjusted non-GAAP diluted EPS estimates of $2.76and $3.15. Our price target of $46 implies 15x our FY15 non-GAAP estimate, basically in line with the 15% earnings CAGRfrom 2013 to 2017E.

Key Risks to Price TargetOur price target for CBPO is subject to risks including: (1) Regulatory Risk: the Chinese government overseas the operations, productquality and pricing policies of plasma-based biopharmaceutical companies located in the PRC. Failure to comply with these standards maylead to closure of all or some of the company’s plasma collection facilities. Any changes in the current policies may slow down or disruptproduction as the company adapts to the new regulatory environment; (2) Competitive Risk: imports of most blood-based products arecurrently prohibited in China. Relaxation of the policy may open the market to new competitors potentially putting pressure on CBPO’sproduct pricing; (3) Clinical Trial Risk: CBPO is currently testing several new drugs with one in the later stages of the CDFA (China Foodand Drug Administration) approval process. Failure to receive CFDA approval and commercialize new drugs may limit the company’sfuture growth.

Important Disclosures and CertificationsAnalyst Certification - The author certifies that this research report accurately states his/her personal views about thesubject securities, which are reflected in the ratings as well as in the substance of this report. The author certifies that no partof his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views containedin this research report.Potential Conflicts of Interest:Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firmincluding the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensationbased upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any researchanalyst and any member of his or her household from executing trades in the securities of a company that such researchanalyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an officer,director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in coveredcompanies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long positionof less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options,futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoingarrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.


29

All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer & Co.Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price histories,please write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: Equity Research Department,Business Manager.

Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:

Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.

Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.

Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.

Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential conflictof interest.

Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:

Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments, and/orthe ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.

Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to aperceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than higherrated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy, aggressivetrading accounts might decide to liquidate their positions to employ the funds elsewhere.

Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness perceivedin the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.


30

Distribution of Ratings/IB Services Firmwide

IB Serv/Past 12 Mos.

Rating Count Percent Count Percent

OUTPERFORM [O] 290 47.54 137 47.24

PERFORM [P] 308 50.49 106 34.42

UNDERPERFORM [U] 12 1.97 4 33.33

Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do notcorrelate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assignedbuy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.

Company Specific DisclosuresOppenheimer & Co. Inc. makes a market in the securities of CBPO.

Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3months from CBPO.

Additional Information Available

Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 85 Broad Street, New York, NY 10004, Attention: EquityResearch Department, Business Manager.

Other DisclosuresThis report is issued and approved for distribution by Oppenheimer & Co. Inc. Oppenheimer & Co. Inc transacts Business on all PrincipalExchanges and Member SIPC. This report is provided, for informational purposes only, to institutional and retail investor clients ofOppenheimer & Co. Inc. and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction wheresuch offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This reportdoes not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc.Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investmentrecommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.The analyst writing the report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentionedin the report. Before making an investment decision with respect to any security recommended in this report, the recipient should considerwhether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances.We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the adviceof a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report.Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding futureperformance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce mayfluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, includingthe loss of investment principal. Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information containedin this report, except to the extent that liability may arise under specific statutes or regulations applicable to Oppenheimer & Co. Inc. Allinformation, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable,but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete (with theexception of information contained in the Important Disclosures section of this report provided by Oppenheimer & Co. Inc. or individualresearch analysts), and they should not be relied upon as such. All estimates, opinions and recommendations expressed herein constitutejudgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or taxadvice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed asoffering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consultwith their own independent tax adviser. This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer& Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each suchaddress or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is


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31

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