Recently, we have had in-depth exchanges with the management of the company, and the main points are as follows:

Divest loss-making assets and focus on pharmaceuticals, and performance reverses: the company has gradually divested its loss-making business since the sale of 46% stake in Zhongguancun Software in June 2012, and sold 90% stake in Zhongguancun Construction in 2014. In 2015, the company sold 100% of its stake in Zhongke Xiaoyun, and in April 2016, the company announced the sale of the remaining 4% of Zhongguancun Construction. It can be predicted that the company will accelerate the divestiture of existing deposited assets and non-pharmaceutical business, focusing on expanding and strengthening the main health business of pharmaceuticals. With the gradual completion of the disposal of loss-making business and the gradual increase in the proportion of pharmaceutical business, the company is expected to usher in a performance inflection point in 2016.

Set to increase the size of medicine, to create its high-quality pharmaceutical platform Huasu Pharmaceutical. (1) Huasu Pharmaceutical, relying on the Academy of military Sciences, continues to introduce new drugs, and currently has 19 new drugs, including 2 national first-class new drugs and 5 second-class new drugs; (2) in January 2013, Huasu Pharmaceutical and Huaxia Pharmaceutical jointly established Shandong Huasu. Huasu Pharmaceutical accounted for 80% of the equity, and in September of the same year, Huaxu Pharmaceutical purchased Benidipine Hydrochloride tablets (Yuanzhi) and Glipizide (Yuantan) owned by Huaxia Pharmaceuticals for 100 million yuan. (3) the company plans to raise an additional 710 million yuan in 2015 (the issue price is 8.57 yuan per share, and the controlling shareholder Gome Holdings subscribes for 400 million lock for three years). Of this, about 360 million will be used for Huasu Pharmaceutical and the Institute of Toxicology and Pharmaceuticals of the Academy of military Sciences to build a drug metabolism platform, to acquire 20% minority shareholders in Shandong Huasu, to build production lines for Shandong Huasu raw materials and solid oral preparations, and to build Huasu pharmaceutical brands. This will significantly enhance Huasu's R & D strength and enhance the endogenous growth power of the pharmaceutical sector. The fixed increase plan has been approved by the CSRC in late February 2016, and the issuance work is being carried out in an orderly manner.

The acquisition of Duoduo Pharmaceutical Co., Ltd., channel complementary business coordination to improve the layout. The main results are as follows: (1) Duoduo Pharmaceutical Co., Ltd. has 119 drug approval numbers, including 38 varieties of over-the-counter drugs, 35 varieties of base drugs and 72 varieties of medical insurance. Nerve analgesia and gynecological products are the two core categories of Duoduo Pharmaceutical Co., Ltd. (2) among them, tramadol hydrochloride raw material drug, only four companies in the country have production approval documents, Duoduo Pharmaceutical has a market share of about 40%, in a leading position. One of its main products, lactobacillus tablets, is used for intestinal abnormal fermentation, indigestion, enteritis and infantile diarrhea health products. In 15 years, about 1 billion tablets (equivalent to 0.4g / tablet specifications) have been sold, with a market share of about 35%. At present, the product is in the stage of simultaneous rise in quantity and price, and the trend is good. The company will integrate the sales channels of lactobacillus tablets in the future and actively expand to gain more market share. After the completion of the internal integration in the later stage, the complementary effects of products and brands and channels between the two sides will be highlighted. (3) in March 2016, the company transferred 27.82% equity to the management of Duoduo Pharmaceutical to achieve management shareholding to mobilize the enthusiasm of employees, which is conducive to its long-term and steady development.

Huasu Yuchuang toothpaste is expected to contribute to the second take-off of performance. (1) the echelon layout of the products is perfect, the Bosu tablets, Huasu tablets and Fasele of the three star products Huasu Pharmaceutical ensure the steady growth of the pharmaceutical business sector, and acquire Duoduo Pharmaceutical and join hands with the Academy of military Sciences to build a research and development platform. (2) Huasu Yuchuang toothpaste has signed a sales contract of more than 100 million yuan by the end of April 2016. The annual revenue in 16 years is expected to exceed 150 million, and it is expected to double in 17 years.

Independent research and development into the harvest season, to help the company's long-term development Huasu Pharmaceutical relies on the strong research and development strength of the Academy of military Medical Sciences, through independent research and development, entrust research and development, purchase patents, approvals and cooperate to establish a metabolic platform to continuously strengthen research and development investment. since the beginning of this year, independent research and development has continuously obtained four clinical approvals and one invention patent, and the effect of early ploughing research and development has gradually begun to show. As of February 18, 2016, CFDA website shows that there is no approved production unit for metoprolol succinate sustained-release tablets in China, and the number of families that declare clinical diseases and obtain clinical approval is very small. Huasu Pharmaceutical has advantages in large-scale production process and has a broad market prospect in the field of cardiovascular therapy in the future.

Profit forecast: excluding the income from the divestiture of the company's remaining assets of about 1.5 billion for the time being, it is estimated that the corresponding EPS of the company from 2016 to 2018 will be 0.07,0.11,0.15 yuan, and the corresponding share price PE will be 111x, 73x and 51x respectively. Taking into account the company's strong determination to transform the pharmaceutical health industry, maintain the "highly recommended" rating, the target price is 11 yuan.

Risk hint: the promotion of Huasu Yuchuang toothpaste is not as expected, and the integration of Duoduo Pharmaceutical Industry is not as expected.