Key investment events: The company announced that 2017 H1 operating income and net profit after deduction were 220 million yuan and 35 million yuan respectively, with year-on-year growth rates of 22.9% and 18.4% respectively; 2017Q2 operating income and net profit after deduction were 120 million yuan and 121 million yuan respectively, with year-on-year growth rates of 29.4% and 7.4% respectively; at the same time, the net profit growth rate for January to September 2017 was predicted to be about 10%-30%. Sales investment increased in a single quarter, leading to a slowdown in net profit growth. The revenue of 2017H1 company increased by about 23% year on year. The main reason is that during the period, the company strengthened the construction of terminals such as Dalian and hospitals, and continued to increase the promotion of products such as Liuwei Dihuang pills and Ejiao. Among them, the revenue of Liuwei Dihuang pills was about 500 million yuan, an increase of about 48.5% over the previous year. The growth rate of 2017H1 after deducting non-net profit was about 18.4%, which is about 4.5 percentage points lower than the revenue growth rate. The main reasons are as follows: 1) The decline in gross margin is as follows. The company's overall gross margin was about 28.9%, a decrease of about 0.5 percentage points. There are two specific reasons: a. The share of revenue from the herbal medicine business increased, leading to a decline in gross margin due to changes in the company's revenue structure. b. The rise in raw material prices led to a decline in the gross margin of varieties such as Liuwei Dihuang pills and Ejiao. Among them, the gross margin of Liuwei Dihuang pills was about 54.9%, down about 0.84 percentage points from the previous year; 2) Sales expenses increased. The fee rate for the period was about 9.2%, an increase of about 0.7 percentage points. Mainly to increase investment in Dalian and hospital terminals, sales expenses increased rapidly, exceeding revenue growth by about 10 percentage points. Judging from the situation in a single quarter, the 2017Q2 operating income and net profit after net profit were 120 million yuan and 121 million yuan respectively, with year-on-year growth rates of 29.4% and 7.4% respectively. Rapid growth on the revenue side continues, but due to rising costs and increased cost investment, the net profit growth rate is clearly slowing down. We believe that the company's product base is low, sales expenses are clearly driving revenue, and the driving effect of scale effects on net profit will also gradually be reflected. The company's net profit is expected to increase by more than 30% in 2017. The dividend for low-cost drugs continues, and the traditional Chinese medicine formula granule policy benefits the target. 1) The effect of increasing the price of low-priced drugs is gradually showing, and structural optimization has raised the level of profitability. We believe that the trend of optimizing the company's profitability still exists, and will continue to benefit from the policy dividends of market-based price adjustments; 2) There is a high probability that the Chinese medicine formula granule policy will be liberalized, and the company will be the first to benefit. The solicitation of comments on the management measures for traditional Chinese medicine formula granules has ended, and there are strong expectations that an official document will be issued. After Zhejiang Province and Jiangxi Province, there have been new developments in the Chinese medicine formula granule policy in Guangdong Province. We believe that the liberalization of pilot qualifications for traditional Chinese medicine formula granules is the general trend. The company cooperated with the Lanzhou Chemical Institute of the Chinese Academy of Sciences to transfer the right to use and transfer technical secrets for the preparation and identification of traditional Chinese medicine formula granules. It can produce more than 400 kinds of formula granules, which are expected to obtain the first batch of production qualifications and occupy market opportunities; 3) Strengthen the production layout of authentic Chinese herbal medicines and cultivate new perspectives. The company is building a standardized and large-scale base for major medicinal herbs of Longyao and Gansu Foci Natural Medicine Industrial Park, fully relying on the resource advantages of Gansu's characteristic bulk Chinese herbal medicines, promoting the integration of the entire industry chain of cultivation, storage, processing, distribution and management of specialty Chinese herbal medicines, enhancing the company's comprehensive competitiveness and sustainable development capabilities, and creating new profit growth points. Profit forecasts and investment advice. The 2017-2019 EPS is expected to be 0.16 yuan, 0.20 yuan, and 0.25 yuan respectively, and the corresponding PE is 58 times, 46 times, and 37 times, respectively. We believe that the company has brand value, that the gradual increase in the revenue share of Liuwei Dihuang pills will optimize the profit structure, and will also share the dividends of the rapid growth in the traditional Chinese medicine formula granule market and the major health sector. The prospects are worth looking forward to and maintaining the “increase in holdings” rating. Risk warning: Risk of raw material price fluctuations, construction of new production capacity or failure to meet expectations.