Main points of investment:

The prosperity of the industry has warmed up, and there are broad prospects for the future. In recent years, with the change of macroeconomic environment at home and abroad and other factors, the development of Chinese wine industry has been hindered, and the prosperity of the industry has declined. Since 2015, the cumulative growth rate of the quantity and amount of imported wine in China has rebounded compared with the same period last year. Under the background of consumption upgrading and healthy drinking, we believe that the future space of the wine industry is broad and the industry still has the attribute of growth. The development of the company's wine business is stable. The company's operating income in the first half of 2016 was 107 million yuan, down 20.10% from the same period last year. Among them, the income of the wine industry reached 97.0328 million yuan, a decrease of 15.55% over the same period last year. The company takes Gansu as the core market and gradually develops to the market outside the province. In the future, the company will continue to expand the peripheral market and strengthen the fineness of the marketing network, and the market outside the province is expected to become the focus of growth. At the same time, the company continues to adjust its marketing model on the basis of stable development.

Drugs have declined under the influence of policy. The company's pharmaceutical business is a franchise, the main products are compound licorice tablets, licorice extract, etc., due to the national production of fewer enterprises, so the gross profit margin has remained relatively stable in recent years. However, this year, due to the national promotion of the "two-vote system" this year, and the company's drugs are mainly agent sales model, the drug circulation link has been restricted, and the stock of dealers and their intermediate circulation links has been reduced, resulting in a serious decline in drug revenue.

The layout of e-commerce opens the space for development. In recent years, the company has accelerated the pace of expanding e-commerce sales platform and constantly expanding e-commerce sales channels. Not only a special e-commerce department has been set up to strengthen the management and monitoring of the national network sales platform. Also set up a Mogao wine flagship store in Tmall, actively carry out micro-marketing, expand community marketing, micro-country marketing and other new media marketing methods, so that e-commerce has become an important sales channel of the company.

Investment suggestion: as a local brand, the company can achieve better competitiveness by improving product quality, accurate product positioning and adjusting product performance-to-price ratio, while making use of the advantage of controlling local channels to maintain the good development trend of wine. We estimate that the company's EPS in 2016 and 2017 will be 0.07 yuan and 0.10 yuan, corresponding to 195,137 times of PE, giving the company a "cautious recommendation" rating.