On September 18, we released the 22-page in-depth industry report “Alternative Chinese Medicine Drinks+Favorable Policies Continue to Catalyze, and the Compound Growth Rate of Traditional Chinese Medicine Formulation Granules Is Expected to Exceed 30% in the Next Five Years”. On October 9, Huatong Pharmaceutical first covered the report “An Underrated Leading Enterprise of Traditional Chinese Medicine Formulation Granules in the Region”. Incident: On October 25, the company announced the 2016 three-quarter report, which achieved revenue of 916 million yuan from January to September, up 1.4% year on year, realized net profit of 29.87 million yuan, down 5.28% year on year, and net profit after deduction of net profit was 28.04 million yuan, down 10.23% year on year. Meanwhile, the company expects net profit attributable to shareholders of listed companies for the full year of 2016 to be 3756-51.65 million yuan, an increase of -20% to 10% over the previous year. Comment: The results of the third quarter report are in line with expectations. The original commercial business is relatively stable. In the fourth quarter, it is expected that traditional Chinese medicine formula granules will increase the company's performance. The results of the three-quarter report are within the range of 2681-36.27 million yuan previously announced by the company, in line with expectations. Originally, the company's main business was pharmaceutical wholesale and chain retail. Its main advantage regions were Shaoxing and Hangzhou's Xiaoshan and Yuhang regions. The pace of overseas expansion was slow, and the pharmaceutical commercial business would maintain relatively steady growth in the future. Chinese medicine formula granules is a new business developed by the company in 2016. Currently, it is still in the early stages of market expansion. We expect that starting in the fourth quarter, traditional Chinese medicine formulations will significantly increase the company's performance, and the annual performance is expected to be above the center of the company's performance forecast. The company is expected to grow into a leading Chinese medicine formula granule enterprise in Zhejiang. Stimulated by favorable policies such as the liberalization of medical insurance, the formula granule market in Zhejiang Province will enter a period of rapid growth. We believe that the company's subsidiary, Jingyuetang, will become the leader in the province, and its competitive advantages have been fully demonstrated in terms of the diversity of registered varieties, the acquisition of GMP certificates for drugs, winning bids for hospitals such as Zhejiang Traditional Chinese Medicine Hospital, and the advance layout of production capacity. Profit forecast and valuation: Due to policy uncertainty about the liberalization of the formula granule industry, we only consider the company's original business. The estimated net profit from 2016 to 2018 is 50.7 million, 55.53 million, and 62.74 million, respectively, with corresponding valuations of 88X, 80X, and 71X. Although the current business valuation is high, considering the company's current small market capitalization characteristics and the Chinese medicine formula granules that provide the company with great flexibility, it maintains a “highly recommended” rating. Risk warning: Policy progress falls short of expectations; accelerated competition has led to a decline in product profitability.