Event: On March 17, 2017, Foci Pharmaceutical released its 2016 annual report. The company achieved revenue of 363 million yuan in 2016, an increase of 10.89% over the previous year; and realized net profit attributable to shareholders of listed companies of 60.93 million yuan, an increase of 41.86% over the previous year. At the same time, a profit distribution plan was announced. It is proposed to distribute a cash dividend of 0.12 yuan (tax included) for every 10 shares. The performance is in line with expectations. Key investment points: Marketing promoted an increase in the gross margin of Ejiao and Liuwei single products, and the company's performance showed restorative growth. During the reporting period, the company's revenue for proprietary Chinese medicine products in 2016 was 360.2953 million yuan (accounting for 99.19% of total revenue), and the revenue for beverage products was 2,9601 million yuan (accounting for 0.81% of total revenue). It is worth mentioning that in 2016, the company strengthened promotion efforts for key varieties such as Ejiao, strengthened channel control, and strengthened brand promotion and advertising investment, so that the gross margin of key Chinese medicine varieties such as Liuwei Dihuang pills and Ejiao achieved a steady increase in gross margin. Among them, the gross margin of Liuwei Dihuang Pills in 2016 was 55.41%, up 9.83 percentage points from 2015; Ejiao's gross margin in 2016 was 22.01%, up 19.67 percentage points from 2015; the annual sales revenue of Liuwei Dihuang Pills was 87.2963 million yuan, up 146.77% year on year; and Ejiao's annual sales revenue was 31.7068 million yuan, up 29.54% year on year, with impressive performance. The dual catalysts of the traditional Chinese medicine formula granule policy and the reform of local state-owned enterprises are poised to unfold. Expectations are strong for the publication of official documents on the management of traditional Chinese medicine formula granules. The company cooperated with the Lanzhou Institute of Chemicals of the Chinese Academy of Sciences to grant the right to use and transfer technical secrets for the preparation and identification of more than 300 kinds of traditional Chinese medicine formula granules, which is expected to obtain the first batch of production qualifications and become the main target beneficiaries of the formula granule policy. At the same time, as one of the leading backbone of traditional Chinese medicine in the western region, the company has successively laid out and built a large-scale base for major Chinese herbal medicines characteristic of Gansu and the Gansu Foci Natural Pharmaceutical Industrial Park. The cost control advantages are obvious, and as an established state-owned enterprise with rich heritage under the Gansu Provincial State-owned Assets Administration Commission, the promotion of local state-owned enterprise reform is expected to promote the release of the company's business vitality and the improvement of management capabilities, thus catalyzing the release of performance. The new production capacity investment guarantees the release of exclusive varieties and core varieties. The company has a rich product line of traditional Chinese medicine formula granules. Among them, there are still many exclusive varieties such as ginseng rong, gubenshuo pills, bamboo leaf pepper tablets, eryi pills, compound astragalus spleen strengthening oral liquid, liver relief pills, Huabai capsules, and Longma Lu Gastric Medicine capsules. However, limited production capacity has limited the release of these exclusive varieties and core varieties. Currently, the sales volume of Liuweidihuang pills, which has the largest sales volume and is the most recognized product by customers, is still not over 100 million, and the market potential has yet to be tapped. Currently, the new Foci plant being promoted by the company in the Lanzhou New Area is expected to achieve a production capacity of 15 billion grains after production is put into operation. It is currently in the equipment installation stage. It is expected that GMP production will be achieved by the end of 2017, and there is a solid guarantee for the release of exclusive varieties and core varieties starting in 2018. The company's financial indicators are stable, and terminal channel development is expected to drive an increase in corporate performance. During the reporting period, the company's sales expense ratio was 8.11%, up 3.02 percentage points year on year, management expense ratio was 11.00%, up 1.14 percentage points year on year, net cash flow from operating activities was 56.901 million yuan, down 11.25% year on year, net cash flow from investment activities was 229.3024 million yuan, up 584.04% year on year, mainly due to the impact of the company's receipt of investment funds from Anning Land in 2016 due to policy relocation and further progress of the Lanzhou New Area project and natural medicine industrial park project The financial indicators are basically stable. Furthermore, by strengthening its brand image, increasing market investment, concentrating resources to standardize terminals in key regions of the Shaangan market, and at the same time broadening terminal marketing channels by increasing the development of key nurturing markets such as Shanghai, Jiangzhe, and Guangdong, etc., the company is expected to drive an increase in the company's overall business level. Profit forecast and investment rating: The company achieved net profit growth of more than 40% in 2016 despite insufficient production capacity and overall policy pressure in the pharmaceutical industry. At the same time, as a double beneficiary target of traditional Chinese medicine formula granules and state-owned enterprise reform, it is strongly influenced by policy catalytic expectations. We continue to be optimistic about the company's high performance growth after expanding production capacity and its potential to become a leader in traditional Chinese medicine in the northwest region. The company's 2017-2019 EPS is expected to be 0.15, 0.18, and 0.22 yuan, corresponding to a price-earnings ratio of 73.37, 61.41, and 50.48 times, covering the first time, giving it a “buy” rating. Risk warning: 1) Production capacity in the new plant area is progressing less than expected, 2) product market development falls short of expectations, 3) state-owned enterprise reform falls short of expectations, and 4) introduction of the Chinese medicine formula granule policy falls short of expectations.