Main points of investment

Event: the company's operating income and deducted non-net profit in 2016 were about 950 million yuan and-910000 yuan respectively, with a year-on-year growth rate of-6.3% and-123% respectively. The operating income and non-net profit deducted from 2016 Q4 were about 300 million yuan and-415000 yuan respectively, and the revenue growth rate was about 3.6% over the same period last year, while deducting non-profit was a loss.

The income grows steadily, and the expense affects the profit of the enterprise. The company's operating revenue in 2016 was about 950 million yuan, down about 6.3% from the same period last year, mainly due to the 2016 revenue decline caused by the change of the business premises of Taixinlong, a circulation company. Among them, the revenue growth rate of pharmaceutical manufacturing, pharmaceutical circulation and drug R & D business was 8.4%,-43.1%, respectively. In the sector of oral preparations of traditional Chinese medicine, the income of Shuanghuanglian oral liquid (children's type) has exceeded 40 million yuan and has become a new profit growth point of the company. In the field of pharmaceutical circulation, although the business came to a standstill due to the certification of the company's logistics warehouse, changes in business address and related licenses during the period, it gradually tended to be normal in the third to fourth quarters of 2016, and the change in the equity interest of Taixinlong optimized the company's agent variety and business model, and revenue and profits were expected to increase in 2017. In the pharmaceutical R & D services sector, the volume of business has gradually increased and the profitability has improved. In 2016, the company deducted non-net profit of about-910000 yuan, down about 123% from the same period last year, mainly due to the increase in expenses during the period, in which sales expenses and management expenses increased by about 6.6% and 30% respectively over the same period, both of which were higher than the growth rate of income in the same period. Among them, the company terminated the heat-clearing and detoxification granules and the capitalization of tanshinone, and the total investment in R & D was about 18 million yuan, which led to an increase in the growth rate due to the transfer of management expenses. We expect that the rate of management expenses will decline in 2017. For example, from the perspective of subsidiaries, the income and deduction of non-net profit of Tongjuntang Pharmaceutical Industry are about 570 million yuan and 40 million yuan respectively, an increase of about 9.6% and-6.7% over the same period last year. It is expected that the completion of the distribution center of fried medicine and prepared slices will lead to an increase in income and net profit. The new leading income and deducted non-net profit are about 96 million yuan and 100 million yuan respectively, an increase of about 29.1% and 23.6% over the same period last year. As the policy details of clinical trials become clearer, the volume of CRO business is expected to gradually begin to grow. Heluo Tai long Pharmaceutical is still in a state of suspension, with a net profit of-38 million yuan during the period, which is expected to promote GMP certification this year, so as to invigorate assets and reduce losses.

The profit point of the company is gradually clear, and sentient industrial stocks may usher in new development. 1) 45% of the shares of Zhongsheng Industries, a major shareholder of the company, are transferred to Shanghai Landu Health, and the optimization of shareholder structure is conducive to the long-term development of the enterprise; 2) the policy is good for the advantages of children's drugs in the field of price and bidding. The company's exclusive product, children's Shuanghuanglian, is a double-span variety of medical insurance base drugs, in which the price is stable. OTC Class A product children's compound chicken inner gold is an exclusive dosage form, which is expected to achieve product volume through the synergistic effect of marketing channels and other children's drugs. 3) Tongjuntang layout of traditional Chinese medicine preparation industry, optimistic about its traditional Chinese medicine formula granule prospect, the subsidiary Tongjuntang's net profit in 2017 is expected to exceed 10,000. 4) the CRO industry has obvious opportunities, and the new leader has the advantages of technology, R & D and management, and is optimistic about its opportunities in the current round of CRO industry reversal. It is estimated that the net profit of the new leader of subsidiaries may exceed 40 million in 2017.

Earnings forecast and rating: we estimate that the EPS from 2017 to 2019 will be 0.12yuan, 0.20yuan and yuan respectively, and the corresponding price-to-earnings ratio will be 62 times, 39 times and 30 times respectively. We believe that the company's short-term suspension of production and termination of research and development will lead to an increase in the rate of expenses, but in the long run, the company's shareholder structure and product structure have been optimized, and Tongjuntang and Xinqiao have good growth, and their performance may exceed expectations. However, taking into account the current high valuation of the company, for the first time to cover the "overweight" rating.

Risk tips: raw material prices may fluctuate sharply, product sales may not meet expectations.