Main points of investment

Event: according to the 2016 semi-annual report, the company achieved operating income of 408 million yuan, down 16.69% from the same period last year, and realized net profit of 1.8232 million yuan for shareholders of listed companies, down 1.47% from the same period last year.

The gross profit margin of traditional Chinese medicine preparations has rebounded, and children's Shuanghuanglian has been purchased online: in 2015, the company adjusted the variety structure and price system of traditional Chinese medicine oral liquid and other major products to reduce the production and sales of products with low gross profits. increase the market development of new products with high gross margin. After nearly a year of adjustment, the company's sales revenue and gross profit margin of major traditional Chinese medicine preparation products have increased in the first half of 2016. in the first half of 2016, the company's pharmaceutical preparation business achieved sales revenue of 90.3402 million yuan, an increase of 14.76 percent over the same period last year. The gross profit was 40.4077 million yuan, an increase of 55.80% over the same period last year. Among them, the company's key product, Shuanghuanglian, has successfully purchased children's Shuanghuanglian in 11 provinces, and gradually began to form sales, with sales revenue of 16.2057 million yuan in the first half of 2016, an increase of 1310.77 percent over the same period last year.

The continuous development of prepared pieces of traditional Chinese medicine: under the situation of the downward macroeconomic environment of Tongjuntang, a wholly owned subsidiary of the company, and the stricter supervision of the industry, on the one hand, increase the in-depth tapping of the potential of the original market and expand the scope of cooperation with existing customers; on the other hand, expand new business and strengthen the development of new markets. In the first half of 2016, the business of prepared pieces of traditional Chinese medicine realized sales revenue of 215 million yuan, an increase of 11.94% over the same period last year, and a gross profit of 47.4621 million yuan, an increase of 9.77% over the same period last year.

Affected by the policy, the progress of the CRO project has slowed down: with the introduction of a series of national drug review policies since the second half of 2015, the pharmaceutical R & D industry has been greatly affected in the short term. Most clinical trial organizers and clinical trial institutions are carrying out data verification of the original project, resulting in the temporary suspension or slowdown of most clinical research and trial projects in the whole pharmaceutical R & D industry. The progress of the new leading clinical CRO project raised funds has been slower than expected, while the construction of the CRO project has led to a significant increase in related costs.

Circulation business is a drag on overall performance: in the first half of 2016, Taixinlong's business strategy was adjusted, the management team and distribution products were integrated, and the certification of new logistics warehouses and the change of business address were handled, which had a great impact on revenue. Sales revenue reached 4.934 million yuan in the first half of the year, down 95.53% from the same period last year. Hebei Tailong's sales revenue has declined due to the adjustment of some agent drug varieties.

Profit forecast and investment rating: we estimate that the EPS of the company from 2016 to 2018 will be 0.16,0.19,0.21 respectively, and the corresponding PE will be 54.0,45.5,41.1times respectively. Although affected by national policy and other factors, the company's CRO business and circulation performance declined. However, considering that the adjustment of the company's product structure has achieved initial results, and Tongjuntang and Xinqian are still in a period of rapid development, we are still optimistic about the long-term development of the company in the future. Therefore, we maintain the company's "overweight" rating.

Risk tips: industry policy risk; product price fluctuation risk; market risk; R & D failure risk.