Incident: The company announced its 2016 annual report, with annual revenue of 313 million yuan, up 1.28% year on year; net profit attributable to shareholders of listed companies was 66 million yuan, down 35.83% year on year, corresponding to EPS of 0.47 yuan. The company announced a full-year profit distribution plan and plans to distribute a cash dividend of 2.5 yuan for every 10 shares to all shareholders. In addition to this, the company also announced a performance forecast for the first quarter of 2017, which expects net profit attributable to shareholders of listed companies to fall by 0-30% year-on-year in the first quarter of 2017. The core view is that the annual report is in line with expectations, and the first-quarter results were greatly affected by R&D expenses. In 2016, the winning bid price of entecavir, the company's main revenue variety, dropped sharply in the Fujian region. Since the Fujian region is the main region for the company's product sales (about 25%), the price reduction had a great impact on the company's performance, which is also the main factor in the decline in the company's performance this year. On the other hand, the increase in the level of expenses in 2016 also affected the performance throughout the year to a certain extent. Among them, the company's management expense ratio in 2016 was 29.22%, an increase of 13.23pp over the previous year. The reason for the sharp increase in management expenses was that the company further increased R&D investment. The ratio of the company's R&D investment to revenue in 2016 was 21.80%, an increase of 13.3 pp over last year. At the same time, higher R&D investment also had a great impact on the first quarter's performance. According to the company's disclosure, R&D expenses in the first quarter of 2017 increased by about 6 million yuan over the same period last year. Excluding the impact of the increase in R&D expenses, the profit range of the company's first-quarter results was -9%-21%, maintaining a normal level. The proportion of direct sales is gradually increasing, waiting for the approval of the heavyweight variety of tenofovir ester. During the reporting period, the company further strengthened the construction of a marketing network and continued to step up the development of direct sales terminals. By the end of 2016, the share of the company's direct sales revenue had increased from 43.03% last year to 46.85%. Currently, the company has established its own direct sales teams in Beijing, Shanghai, Fujian, Zhejiang, Shandong, Guangxi, Hebei, Anhui and other places. We believe that the construction of the company's direct sales team will lay a solid foundation for the rapid release of the company's major variety of tenofovir ester in the future. The company's tenofovir ester has now entered the three-in-one on-site inspection stage and is expected to be approved in April. Considering that Guangshengtang is likely to be the first company to obtain approval for the trial of tenofovir, we estimate that this variety may quickly enter the provincial market through supplementary bidding and other means, forming an important support for the company's performance in the second half of the year. Closely laying out other fields of liver disease, we continue to be optimistic about the company's future potential. In terms of research and development, the company also has a tight layout. During the reporting period, the company obtained four clinical approvals for sofosbuvir, sofosbuvir tablets, sildenafil citrate, and sildenafil citrate tablets. At the same time, the company also cooperated with Shanghai Pharmaceutical Kangde New Drug Development Company to develop 2 new first-class drugs for hepatitis B, 1 innovative drug for fatty liver disease, and 1 innovative drug against liver cancer. We believe that continuous investment in R&D is a guarantee for the company's future development, and we continue to be optimistic about the company's future development. Financial forecasts and investment recommendations Due to the company's high R&D expenses in the first quarter, we slightly lowered the company's profit forecasts for the year 17 and 18. We expect the company's earnings per share in 2017-2019 to be 0.77, 1.32, and 1.94 yuan, maintaining the company's valuation 49 times that of 2018, and the corresponding target price of 64.68 yuan, giving it a buying rating. Risk warning If the company's tenofovir ester is not approved in a timely manner, it may affect the company's sales in 2017 and 2018; if the company's engandine is too affected by the bidding, its sales situation may not meet expectations.