Event: the company released its 2016 three-quarter report, with revenue and deduction of non-net profit of 1.33 billion yuan and 57.76 million yuan respectively in the first three quarters, a year-on-year growth rate of 21.6% and-56.2%, respectively. 2016Q3 realized revenue and deducted non-net profit of 510 million yuan and 9.32 million yuan respectively, a year-on-year growth rate of 51% and-79.7% respectively.
The reform of the sales model has highlighted the problem of destocking, and short-term performance has continued to be under pressure. In order to cooperate with the "two-vote system", the company continues to strengthen the reform of the sales model of proprietary Chinese medicine, increasing the proportion of self-management, resulting in increased pressure of de-storage and digestion in the short term. The company's operating income in the first three quarters of 2016 increased by 21.6% year-on-year, while non-net profit fell 56.2% year-on-year, mainly due to great changes in revenue structure. According to the company's 2016H1 data analysis, the proprietary Chinese medicine business with higher gross profit margin declined significantly in the first three quarters, while the pharmaceutical circulation business with low gross profit increased rapidly; the revenue of proprietary Chinese medicine business is expected to decline by about 35% for the whole year; the revenue of the core product antiviral oral liquid ranks first, which is the main reason for the decline of the whole proprietary Chinese medicine business. The income structure of 2016Q3 is more distinct than that of semi-annual report. The revenue and deduction of non-net profit in the third quarter were 510 million yuan and 9.32 million yuan respectively, and the proportion of pharmaceutical circulation income further increased. During the period, the growth of expenses remained stable, with expenses of about 330 million yuan in the first three quarters, an increase of 11% over the same period last year, which was lower than the growth rate of income.
The policy of granulation of traditional Chinese medicine formula is about to be liberalized, and the company is actively laying out ahead of time. The company actively distributes the upstream industry of formula granules, and the company actively acquires traditional Chinese medicine enterprises in the upstream industry. The company has successively acquired 55% of the shares of Anhui Hudong Pharmaceutical Co., Ltd., Hubei Tianji traditional Chinese Medicine Co., Ltd., and the integration of source resources provides raw material guarantee for the company's prepared slices business. it also provides sufficient resource reserves that meet the quality requirements for the layout of traditional Chinese medicine formula granule market. The company has as many as 400 kinds of formula granule reserve varieties, and the newly built base in Longde, Ningxia, is built in accordance with the requirements of formula granule production standards, which can meet the requirements of 500 tons / year production. At the same time, the company has made relevant preparations for the new national standards. Once the policy is liberalized, the company can put into production formula granule products that meet the new standards within one year.
Profit forecast and investment advice. Affected by the reform of the sales model, the company's short-term performance has declined significantly. It is estimated that the EPS from 2016 to 2018 is 0.15,0.21,0.31 yuan respectively (the original forecast is 0.44,0.54,0.69 yuan), corresponding to PE is 94 times, 70 times, 46 times. The reform of the sales channel of proprietary Chinese medicine has put continuous pressure on the company's performance in the short term, and it is expected to gradually recover from 2017, and we will temporarily downgrade the company to "overweight" rating.
Risk tips: slow sales channel reform, formulation granule policy lower than expected, OTC promotion is not as expected and other risks.