Item:

The company released its annual report for 2016 last weekend. During the reporting period, the company achieved operating income of 17.257 billion yuan, an increase of 11.58% over the same period last year, and a net profit of 82.75 million yuan, an increase of 25.50% over the same period last year. Benefiting from factors such as the successful issuance of short-term financing bonds and improved management during the reporting period, the company's performance has increased by a large margin, exceeding our expectations.

Main viewpoints

1. The growth of revenue is stable, and the proportion of expenses has improved significantly during the period.

During the reporting period, the company achieved operating income of 17.257 billion yuan, an increase of 11.58% over the same period last year. As a regional leader in pharmaceutical circulation, the company's revenue growth rate is basically the same as that of the pharmaceutical industry as a whole, which is in line with our expectations. As the company successfully issued short-term financing bonds with a quota of 500 million yuan during the reporting period, the company's financial expenses were restrained to a certain extent, down 1.34% from the same period last year, while the growth rate of management expenses peaked, with an increase of only 6.81% over the same period last year. Benefiting from the improvement in fees during the above period, the company achieved a year-on-year increase of 25.50% during the reporting period, exceeding our expectations.

two。 The growth of drug sales is stable, and equipment sales catch up from behind.

Drug sales remain the company's core source of income, with operating income of 15.864 billion yuan during the reporting period, an increase of 10.75% over the same period last year, accounting for nearly 92%. At the same time, the sales of medical devices developed by the company in recent years have maintained a high growth trend, with an operating income of 810 million yuan, an increase of 30.61% over the same period last year, accounting for nearly 5%. The gross profit of medical device sales is higher, taking the company as an example, it is about twice as much as drug sales (9.26% vs 5.00%). At the same time, the policy restrictions are less and the industry concentration is lower. If the company can give full play to the synergy with drug sales, it is expected to become a new growth point of the company's performance in the future. In addition, the company actively created another business segment, traditional Chinese medicine sales achieved business income of 514 million yuan during the reporting period, an increase of 11.31% over the same period last year, accounting for about 3%, a decline from last year's high growth. The cooperation between traditional Chinese medicine sales and the company's original business is low, and the industry competition is more fierce. Although the gross profit level is high, it is expected that it will take some time to develop into another business pillar of the company. 3. Zhejiang SASAC may be officially in charge, the company ushered in a new situation of development.

Sinochem Group, the actual controller of the company, and Zhejiang SASAC, the controller behind the company's second largest shareholder, are negotiating the transfer of equity in the core assets of the company and its subordinates. if all goes well, Zhejiang SASAC will be upgraded to the actual controller of the company, and the company is expected to usher in a new situation of development. As the leader of regional medicine circulation, the future development of the company is inseparable from the support of the local government. at the same time, Zhejiang Province, as the vanguard of the "mixed reform of state-owned enterprises", is also in full swing. Once the company successfully removes the control of the ownership structure, with the strong support of Zhejiang SASAC, the future great-leap-forward development is worth looking forward to.

4. Investment advice:

We expect the company to achieve operating income of 19.309 billion yuan, 21.814 billion yuan and 24.676 billion yuan from 2016 to 2019, while realizing net profit of 101 million yuan, 122 million yuan and 143 million yuan, corresponding to earnings per share of 0.38 yuan, 0.46 yuan and 0.54 yuan, respectively, and 59 times, 49 times and 42 times of PE, respectively.

5. Risk Tips:

The risk of unsuccessful issuance of subsequent short-term financing bonds and the risk that the equity transfer process does not meet expectations.