Event: The company released its 2016 three-quarter report. The first three quarters achieved operating income of 920 million yuan, a year-on-year increase of 1.4%, and net profit of 29.87 million yuan, a year-on-year decrease of 5.3%. Looking at a single quarter, 2016 Q3 achieved operating income of 310 million yuan, a year-on-year decrease of 3%, and net profit of 9.49 million yuan, a year-on-year decrease of 16%. The business is basically stable, so let's wait and see how many traditional Chinese medicine formula granules are released. 1) The company's operating income grew steadily in the third quarter, and profit declined slightly, mainly due to the low gross margin of the pharmaceutical wholesale business, which was greatly affected by drug distribution industry policies and market competition; 2) Jingyuetang formula granules have already generated revenue, and it is expected that they will gradually increase in volume in the future. It is included as a special research project for traditional Chinese medicine formula granules, and licenses are scarce in Zhejiang Province. 1) The “Key Process Technology and Quality Research and Clinical Trial of Formulation Granules” project of the wholly-owned subsidiary, Jingyuetang, was included in the Zhejiang Traditional Chinese Medicine Formulation Granule Research Project in December 2015, and is one of only two enterprises in the province included in this project; 2) Zhejiang is the first province to include traditional Chinese medicine formula granules as independent drugs in the scope of local health insurance, and it is expected that there will be further policy support in the future; 3) The company's traditional Chinese medicine formula granule research and production records have reached more than 600 varieties, which can basically meet the clinical formulation needs of medical institutions. The sales targets are medical institutions in the province, all of which have passed medical treatment Agencies' bidding purchases are priced and sold. Currently, many medical institutions such as Zhejiang Hospital of Traditional Chinese Medicine and Xinchang County People's Hospital have won bids. It is estimated that the revenue from formula granules is expected to exceed 100 million yuan in 2017. The traditional Chinese medicine formula granule industry has a lot of space and a good competitive pattern. 1) Compared with traditional Chinese medicine tablets, formula granules have the advantages of controllable composition, portability, easy storage, etc., and have broad application prospects, and will partially replace traditional Chinese medicine tablets. Currently, the market size of Chinese medicine tablets in China is about 160 billion, and the market size of traditional Chinese medicine formula granules in 2015 is about 8 billion, and the CAGR is expected to exceed 30 billion in 2020, with a CAGR of 30%; 2) Judging from the domestic competition pattern, six companies including Tianjiang, Hongri, and China Resources have obtained production approvals, and some provinces are expected to release pilot projects one after another; 3) The “Management Measures for Traditional Chinese Medicine Formula Granules (Draft for Comments)” was fed back to the CFDA on March 1, 2016. The core idea is to emphasize raising entry standards and decentralizing the filing of all provinces. We expect that after a series of comments, the liberalization of pilot qualifications for traditional Chinese medicine formula granules will be the general trend. Increase production capacity in a fixed manner to help future development. 1) The company plans to increase 600 million yuan for the construction of 1,000 tons of traditional Chinese medicine formula granules and 10,000 tons of Chinese medicine tablets; 2) The employee shareholding plan is participating, and is optimistic about future development over the long term. Profit forecasts and investment advice. The company's 2016-2018 EPS is expected to be 0.37 yuan, 0.80 yuan, and 1.44 yuan, respectively, and the corresponding price-earnings ratios are 96 times, 44 times, and 25 times. We believe that the company's traditional main business is steady, and the new business of traditional Chinese medicine formulations has strong explosive power. Compared with the similar company Foci Pharmaceutical (002644, 87 times valuation in 2017), the valuation is cheaper than that of similar companies, Foci Pharmaceuticals (002644, 87 times valuation in 2017). For the first time, it was covered by a “buy” rating. Risk warning: Pharmaceutical commercial policies may become stricter; traditional Chinese medicine formula granule policies are progressing or falling short of expectations.