中国生物制药(01177) 　　SBP reported revenue/core EPS of HKD4.3bn/0.07 in 3Q16, representing YoYgrowth of 7%/4% on a reported basis, or 13%/10% on a constant RMB basis,respectively. The better-than-expected results were primarily driven by 21%YoY organic growth of Runzhong. We continue to expect growth to deceleratein 4Q due to the exit in Guangdong. However, we think that pricing andvolume pressure in the next few quarters are already reflected in consensus.Additionally, positive catalysts including potential NRDL inclusion of keyproducts and clinical updates should serve as the key stock’s drivers in thecoming quarters. 　　Solid growth delivered for Runzhong and Kaifen 　　In addition to Runzhong, we ascribe the strength in 3Q16 to growthacceleration of key drugs Yilunping, Tuotuo and Ganping, which exhibited20%/42%/6% organic growth in 3Q16, vs. 18%/37%/1% in 1H16. On RMBbasis, Runzhong, Ganmei, Kaishi, Kaifen, and Tiance delivered YoY growth of21%/-5%/-7%/36%/-8% in 3Q16, vs. 17%/1%/1%/18%/8% in 1H16. The growthdeceleration of several major products is ascribed to price erosion form drugtenders. We continue to expect growth moderation for flagship products, whilepotential NRDL inclusion of 9 drugs might mitigate part of the risks. 　　Margin improvement due to product mix 　　We highlight the top line strength was not achieved through increasedsales/marketing efforts, as two expense items reached 44.4% of sales in 3Q16,vs. 49.2% in 3Q15. GM improved to 80.0% in 3Q16 from 77.7% in 3Q15, drivenby a better product mix as new products accounted for 11.3% of sales in 3Q16vs. 8.8% in 3Q15. R&D expenses surged to 9.0% of sales in 3Q16 from 3.9% in3Q15. On YTD basis, R&D spending accounted for 12% of sales in 9m16 vs.10% in 9m15. We believe the increase is mainly due to several ongoing latestage trials and cost inflation resulted from regulatory policy changes. 　　Increasing target price to HKD6.5 from HKD6.2; risks 　　Our TP is based on 21x 2018E EPS vs. 20x we used previously due to sector rerating.We think it is justified as its peers are trading at 15x with 13% growth in2019E (vs. 16% for SBP). We believe SBP deserves a premium for the superior therapeutic value of its existing products, one of the strongest pipelines inChina, and imminent entry to the global market. Downside risks are price cutsand slow product ramp-up.