Main opinion 1. Core varieties are growing rapidly. The annual performance is in line with expectations, Liuwei Dihuang pills, which is one of the company's core varieties, achieved annual revenue of 87.3 million yuan, an increase of 146.77% over the previous year. It has returned to the sales scale before the channel adjustments, proving that the current senior management team has begun to see initial results in sorting out channels, and that the core varieties have returned to an upward channel of healthy development. At the same time, Ejiao, another major variety newly developed by the company, achieved revenue of 31.17 million yuan, an increase of 29.54% over the previous year, and continued to maintain a rapid growth trend. After the new plant officially reaches delivery, it is expected to become a new growth point for the company's performance. Although limited by capacity bottlenecks in the old factory area, the company's operating income increased by only 10.89% year on year, but through various measures such as exploiting endogenous potential and increasing promotion of key varieties, the company's gross profit increased 4.57 percentage points year on year and returned to a level of about 30%. In addition, interest income increased significantly due to the company's strengthened capital management, and the company achieved an excellent 42% year-on-year increase in net profit during the reporting period. Although the problem of limited production capacity in the old factory area in 2017 still exists, the company has made preparations for upstream and downstream construction and product development. When the new plant is officially put into operation at the end of 2017, the company will usher in another leap forward in history. 2. The new factory area will be put into operation by the end of the year. The company has ushered in a long lost development opportunity. The Lanzhou New Area Foci Pharmaceutical Technology Industrial Park project, which the company has been preparing for a long time, is expected to be officially completed and put into operation by the end of 2017. The new plant is designed to have annual sales revenue of 1,430 billion yuan and annual net profit of 380 million yuan. It is expected that after production, it will become one of the largest modern traditional Chinese medicine production bases in the northwest region with the most advanced process technology facilities; and the main project built by the company to control upstream raw materials has also been fully capped. The project will build first-class Chinese herbal medicines in the province and Tablet production and distribution centers, etc., are designed with annual sales revenue of 450 million yuan and annual net profit of 98 million yuan. As a key enterprise in the traditional Chinese medicine industry in the northwest region with a history of nearly 100 years, the company has been limited by production capacity bottlenecks in the old factory area for many years. Although it has 345 pharmaceutical production approvals and 10 exclusive varieties, it has not achieved performance in line with its status and reputation; with the official commissioning of new plants and other projects, we expect the company to usher in a long lost development opportunity, and it is just before it takes off. 3. There are many industry benefits. It is worth looking forward to the traditional Chinese medicine formula granule reserves owned by the company. In addition to the “Healthy China 2030” Plan Outline, which clearly states that the unique advantages of traditional Chinese medicine should be fully exploited, the “13th Five-Year Plan for the Development of Traditional Chinese Medicine” was also officially implemented at the end of August 2016, putting forward a series of goals and requirements for the overall development and inheritance and innovation of the industry over the next five years. At the same time, the “Management Measures for Traditional Chinese Medicine Formulation Granules (Draft for Comments)” was also disclosed to the public in early 2016. A series of policies for R&D, production, and distribution have also been introduced one after another. As a leader in traditional Chinese medicine companies, the company will surely benefit from the successive implementation of support policies for the traditional Chinese medicine industry. The company's preparation and identification technology for 300 kinds of traditional Chinese medicine formula purchased from Lanzhou Chemical of the Chinese Academy of Sciences is also expected to become a new performance growth point for the company after policy liberalization in the northwest region. 4. Investment recommendations: We expect the company to achieve operating income of 429 million yuan, 600 million yuan and 840 million yuan in 2017-2019, net profit of 74 million yuan, 96 million yuan and 118 million yuan, corresponding earnings per share of 0.15 yuan, 0.19 yuan and 0.23 yuan respectively, and corresponding PE of 79 times, 61 times and 50 times respectively, and continue to maintain the “recommended” rating. 5. Risk warning: New plant construction falls short of expectations; marketing promotion falls short of expectations.