Matters: The company released its 2016 annual report, and also announced the second draft employee stock ownership plan. In 2016, the company achieved operating income of 313 million yuan, a year-on-year increase of 38.3%; operating profit of 58.29 million yuan, a year-on-year decrease of 5.43%; total profit of 77.4 million yuan, a year-on-year increase of 4.30%; net profit of the parent company of 65.37 million yuan, an increase of 3.16% over the previous year; and net profit of 49.01 million yuan, a year-on-year decrease of 8.15%. EPS is 0.26 yuan. The dividend plan is 0.80 yuan per 10 shares (tax included). Main opinion 1. In August 2016, the company completed the merger and acquisition of 100% of the shares of Zhuhai Xiangle. According to the performance promise, net profit should not be less than 40 million yuan, 52 million yuan and 67.6 million yuan respectively. The announcement revealed that in 2016, Zhuhai Xiangle actually achieved net profit of 52.1 million yuan, completed the performance promise as scheduled, and the actual consolidated net profit was 21.05 million yuan. 2. The sharp rise in investment, mergers and acquisitions and investment in new products dragged down the company's performance excluding the impact of the Zhuhai Xiangle Merger Report. In 2016, Guanhao Biotech's net profit was 44.32 million yuan, down 30% from the previous year. This growth rate was lower than our previous expectations. Judging from the factors that have led to a large decline in the company's original business profits, the financial expenses arising from major asset restructuring, as well as the expansion of losses on the business and technology platforms of the listed company due to sudden policies and increased investment in new product layouts, etc., are the main reasons that have dragged down the performance of listed companies. Among them, the company's overall financial expenses increased by about 10 million yuan in the same period last year due to the high financial costs associated with mergers and acquisitions of assets such as Xiangle in Zhuhai and related funds. Innovative enterprises and technology platforms invested by the company have lost a lot. For example, the company's cell business platform, was affected by the Wei Zexi incident in 2016. Wuhan Beidu Biotech lost 3.68 million yuan throughout the year. Including this company, the company's holdings and joint venture innovative technology platform subsidiaries lost a total of 17.1 million yuan throughout the year, an increase of 7 million yuan in losses over the previous year. At the same time, the company's original main product, the dura film industry, is relatively stable, and the new product, artificial cornea, has not been significantly released. We have noticed that the gross margin of the parent company of the listed company fell 2.33 percentage points year-on-year. The combination of these factors led to a sharp decline in the net profit of Guanhao Biotech's original business in 2016. 3. The banner of innovative biotechnology companies is still standing. It needs the help of cash cow assets to develop Guanhao Biotech, based on regenerative medicine materials, has built the most advanced biomaterial technology platform in China, and has developed a series of products such as dura mater, breast repair, and artificial corneas. At the same time, the company has actively expanded its layout in the field of cell technology, which has a synergistic effect with biomaterials in the future, and built a cell business platform. We believe the company is a biotech company that is in line with the future direction of the industry. As a domestic company that has always been deeply involved in biomaterials and implanted medical devices, since the domestic industry itself is in an early stage of development, the company's size is small, and the release of the major product artificial cornea requires a certain period of time, the company's active expansion layout in the field of new technology has been affected by industry policy changes (a process that the emergence of new medical technology will experience), thus putting a heavy burden on its already modest performance. The decline in performance in 2016 is reflected. Therefore, according to the current stage of development of the company, we believe it is necessary for the company to acquire an asset that can provide rich performance returns and high growth in order to enhance Guanhao's ability as a biotechnology company to confront financial expenses and R&D risks while focusing on the original R&D field. 4. The acquisition of Whitdison adds impetus to the company's sustainable development. The domestic resistance restriction policy has indeed led to a decline in the industry in previous years. So far, the overall growth rate of the antibiotic industry is lower than the growth rate of the pharmaceutical industry. The antibiotic industry has also become one of the most affected pharmaceutical segments in the minds of investors and the least active investment in the primary market. However, the antibiotic industry has undergone very noteworthy structural changes over the years of implementation of anti-drug policies. First, antibiotics are still the largest type of drug used clinically, and are clinically necessary drugs. Judging from major policy trends in the pharmaceutical industry, the risk of clinical drug use is relatively small. Second, there have been cases of misuse of antibiotics in the past, which has also led to the current three generations and within three generations of cephalosporin antibiotics being resistant to about 60% of drug resistance in the fight against nosocomial infections. Therefore, high-grade antibiotics (which are basically specially managed antibiotics with the strictest regulations) have shown a rapid growth trend in recent years (such as penemic antibiotics) due to their good bacteriostatic effects. Third, as the last line of defense, penemic antibiotics should not be used as first-line anti-infective drugs, so cephalosporin/oxycephalosporin antibiotics with low drug resistance and good safety have good clinical requirements. Therefore, if we look at future growth space and profit returns, we are optimistic about the investment value of Whitdison that the company plans to acquire. In 2014, 2015, and 2016, H1 Hudison's operating income was 86.28 million yuan, 253 million yuan, and 242 million yuan, respectively, and net profit was 6.8 million yuan, 80.89 million yuan, and 73.91 million yuan respectively. Performance was growing rapidly; the market share of Hudison laoxycephosporin also increased rapidly from 15.87% in 2014 to 41.85% in 2016 H1, and its market share is expected to surpass Hainan Lingkang in the future. In 2016, for the first time, H1 Whitdison entered IMS Health's top 200 sales in a single product category in mainland China, ranking 120, ranking first in growth rate. Compared with conventional 1-3 generation cephalosporin antibiotics, laxithrosporin is more targeted against infection and has fewer side effects. Lachycephalosporin is a category B type of medical insurance. There are restrictions on its use in the new medical insurance catalogue in 2017 — limited drug sensitivity test evidence. We believe this has little impact on Whitdison's product sales because the company has always used drug sensitivity test strips in academic promotion. According to Whitdison's performance promise, in 2016-2017, its profit will not be less than 120 million yuan and 160 million yuan respectively, which can provide generous profit and cash protection for listed companies. 5. The core business is gradually forming a “3+1" pattern. 2016 was the first year of the company's “3+1" strategy. At present, it has basically formed a strategic pattern of materials, cells, pharmaceuticals, and incubation platforms. In the company's biomaterials sector, sales of the company's self-produced products increased 5.54% year on year in 2016, and revenue from meningue products declined slightly year over year. We think this is related to the company's ongoing use of bovine meninges to replace porcine meninges. The cell business sector was affected by industry policies in 2016, and performance fell short of expectations. Currently, the country has gradually clarified the immune cell regulatory system. In the long run, this is still an area with important clinical application value in the future. At the same time, stem cell technology and regenerative medicine materials also have some synergy. The pharmaceutical sector will become an important source of performance for the company in the future as the acquisition of Whitdison progresses, and will have a significant positive effect on the company in terms of performance growth and sales system. The Science Park subsidiary is Guanhao's incubation platform. Using the “park+fund” mode of operation, 41 incubation projects were realized in 2016, which is a strong support for Guanhao's materials, cells and pharmaceutical sectors. 6. Profit forecasts and investment recommendations Since the company resumed trading at the end of October 2016, there has been a cumulative decline of 36%. Regardless of market factors, the decline in the company's stock price is mainly due to the market's negative feelings about the antibiotic industry and distribution plans. However, we believe that after the decline, the company's stock price has now been basically adjusted. From a profit perspective, Whitdison promised a net profit of no less than 160 million yuan in 2017, and Zhuhai Xile promised a net profit of 67.6 million yuan. Listed companies are expected to narrow their technology platform losses significantly through equity and business sorting, and the elimination of financial costs associated with investment, mergers and acquisitions. Coupled with the natural growth in the original business and the initial release of artificial corneas, we expect the performance level of listed companies to be between 28-30 million yuan in 2017. The company's previous high valuation situation will be effectively addressed in the future. At the same time, the company announced the second phase of the employee stock ownership plan, which also injected confidence into the market. Without considering the impact of Whitdison yet, we expect that in 2017-2018, the net profit of listed companies will be 136 million yuan and 165 million yuan respectively (Zhuhai Xile began full-year consolidation), corresponding to EPS of 0.50 yuan and 0.61 yuan, respectively, and dynamic PE corresponding to current stock prices of 61 times and 51 times, respectively. Continue to give the company a “Highly Recommended” rating. 7. Risk warning: The release of new products falls short of expectations.