Growth driven by TCM granules and new businessesWe are initiating coverage of Chase Sun with a Buy rating. We believe it will leverageits first-mover advantage to achieve above-industry growth in its TCM granules, whileXuebijing should resume growth in 2017 after distribution channel destocking. Inaddition, its new businesses could become growth drivers. With its current valuation atthe low end of the historical range, we believe the market is overly pessimistic on: 1）fierce competition in the TCM granules industry after market liberalisation; 2） Xuebijinginjection's growth.

    　　Rapid TCM granule market expansion may ease competitive pressureThe market for TCM granules should grow sharply after market liberalisation, driven byquicker inclusion in provincial medical insurance programs and removal of usagerestrictions. We estimate the TCM granule market will see a CAGR of 21.9% in 2016-21E, reaching Rmb25bn. As one of the six pilot TCM granule manufacturers, Tcmageswill participate in setting quality standards. As such, we think Chase Sun can achievefaster-than-industry growth, with revenue CAGR of 24% over the next three years.

    　　Xuebijing growth to turn positive in 2017 with contribution from new businessWe believe Xuebijing sales declined sharply in H116 mainly due to distribution channeldestocking. IMS data suggest that end-market demand for Xuebijing is still increasing.

    　　We estimate Xuebijing's revenue contribution will increase 10%/5% YoY in 2017/18after the completion of distribution channel destocking and adjustment, reversing thedowntrend. Chase Sun has entered the healthcare service and upstreampharmaceutical sectors via M&A, seeking new growth drivers. We estimate the newbusiness segment will contribute 13% of net profit in 2018.

    　　Valuation: Initiating coverage with Buy rating and PT of Rmb8.56We derive a DCF-based PT （WACC=6.4%） of Rmb8.56, implying 32x 2017E PE. ChaseSun's current valuation is lower than the historical average and on par with that of itspeers. We see re-rating potential, as we believe the market is overly concerned aboutits TCM injection segment and the future competitiveness of its TCM granules.