Incident: The company released its 2016 three-quarter report. In the first three quarters, it achieved operating income of 920 million yuan, an increase of 1.4% over the previous year, and net profit to mother of 29.87 million yuan, a year-on-year decrease of 5.3%. Looking at a single quarter, 2016 Q3 achieved operating income of 310 million yuan, a year-on-year decrease of 3%, and realized net profit to mother of 9.49 million yuan, a year-on-year decrease of 16%. Commerce is generally stable, waiting for the amount of Chinese medicine formula granules to be released. 1) The company's revenue grew steadily in the third quarter, and profits declined slightly, mainly due to the low gross margin of the pharmaceutical wholesale business, which was greatly affected by drug distribution industry policies and market competition; 2) Jingyuetang formula granules have already generated revenue and are expected to gradually increase in the future. It is included in the research project for traditional Chinese medicine formula granules, and licenses are scarce in Zhejiang Province. 1) Jingyuetang's wholly-owned subsidiary Jingyuetang's “Key Process Technology and Quality Research and Clinical Trials” project was included in the Zhejiang Traditional Chinese Medicine Formulation Granule Research Project in December 2015, and is one of the only two enterprises included in the province; 2) Zhejiang was the first province to include traditional Chinese medicine formula granules as independent drugs in the scope of local health insurance, and further policy support is expected in the future; 3) The company's traditional Chinese medicine formula granules have reached more than 600 varieties, which can basically meet the clinical formulation needs of medical institutions. The sales target is medical institutions in the province, all through medical treatment The institution's bidding and procurement are priced and sold. Currently, it has won bids for many medical institutions such as Zhejiang Provincial Hospital of Traditional Chinese Medicine and Xinchang County People's Hospital. It is estimated that the revenue of formula granules will exceed 100 million in 2017. The traditional Chinese medicine formula granules industry has a large space and a good competitive pattern. 1) Compared with traditional Chinese medicine tablets, formula granules have the advantages of controlled ingredients, portability, easy storage, etc., and have broad application prospects, and will partially replace traditional Chinese medicine tablets. Currently, China's Chinese medicine tablet market is about 160 billion, and the Chinese medicine formula market is expected to exceed 30 billion in 2020, and the CAGR is expected to reach 30%; 2) Judging from the domestic competition pattern, six companies including Tianjiang, Red Sun, and China Resources have obtained production approvals, and some provinces are expected to release pilot projects one after another; 3) The “Measures for the Management of Traditional Chinese Medicine Formula Granules (Draft for Comments)” was fed back to the CFDA on March 1, 2016. The core idea is to emphasize raising entry standards and decentralizing the filing of each province. We expect that after a series of consultations, the liberalization of pilot qualifications for traditional Chinese medicine formula granules is the general trend. Increase and expand production capacity to help future development. 1) The company plans to increase 600 million yuan for the construction of 1,000 tons of traditional Chinese medicine formula granules and 10,000 tons of Chinese medicine tablets; 2) Employee stock ownership plans to participate in it, and are optimistic about future development in the long term. Profit forecasting and investment advice. The company's EPS in 2016-2018 is estimated to be 0.37 yuan, 0.80 yuan, and 1.44 yuan, respectively, with corresponding price-earnings ratios of 96 times, 44 times, and 25 times. We believe that the company's traditional main business is steady, and that its new business, traditional Chinese medicine formula granules, is relatively inexpensive compared to similar companies such as Buddha Pharmaceuticals (002644, 87 times valuation in 2017), and was given a “buy” rating for the first time. Risk warning: Pharmaceutical commercial policies may become stricter; the liberalization of traditional Chinese medicine formula granule policies falls short of expectations.