The company released its annual report for 17 years, and the income, net profit and non-return net profit were + 22.92%, + 13.78% and + 18.40%, respectively, compared with the same period last year. During the reporting period, the business of traditional Chinese medicine benefited from an increase in the price of medicinal materials, resulting in a substantial increase in income and profits.

The core product Liuwei Dihuang pills has maintained rapid growth, while the production capacity of other proprietary Chinese medicines has grown slowly. The company increases its marketing efforts, and the sales expenses increase rapidly, which affects the profits of the current period. The company's new capacity is about to be released, combined with recent marketing activities, which is expected to boost high performance growth and maintain a "prudent recommendation-A" rating in the future.

The income of traditional Chinese medicine increased rapidly in the second quarter, and the marketing work accelerated and increased expenses. The company's 17Q2 income was 121 million yuan, + 29.38% compared with the same period last year, mainly due to the substantial increase in the income of pharmaceutical subsidiaries. The gross profit margin of 17Q2 is 27.61%, which is lower than that of 16 years and 30% of 17Q1, mainly due to the fact that the gross profit margin of medicine sales is lower than that of proprietary Chinese medicine. During this period, the company made great efforts to strengthen marketing, mainly through the increase of sales staff and ground push activities and other ways. 17Q2 sales expenses are + 45.45% year-on-year, which together with non-operating income are the main factors affecting the profit growth of the current period (17Q2's homing net profit is basically the same as the same period last year).

The profits of Chinese herbal medicine business have increased significantly, and the production capacity restrictions of the plant in the new area will be solved soon. The company's 17H1 income was 222 million yuan, + 22.92% compared with the same period last year; the net profit returned to the mother was 34.5 million yuan, + 13.78% + 25.5 million yuan, and + 23.55% year on year. The traditional Chinese medicine business benefited from the increase in the price of medicinal materials, and the 17H1 income was 38.65 million yuan, + 113.09% compared with the same period last year, contributing more than half of the company's 17H1 revenue increment; the traditional Chinese medicine business 17H1 achieved a net profit of 2 million yuan, which has exceeded the 16-year net profit. The company's core product Liuwei Dihuang pills 17H1 income 50.68 million yuan, year-on-year + 48.49%, continue to maintain a rapid growth momentum; other proprietary Chinese medicines due to capacity constraints, revenue is basically the same as the same period last year. 17H1's overall gross profit margin was 28.86%, a slight decline compared with the same period last year, mainly due to the increase in the proportion of income from traditional Chinese medicine with low gross margin. 17H1 sales expenses + 33.01% year-on-year, mainly due to increased marketing efforts in the first half of the year; management expenses + 16.25% year-on-year, good control. The company's Lanzhou New area plant has entered the stage of equipment installation and commissioning, and is expected to pass the GMP certification and put into production by the end of the 17th, which will solve the long-standing problem of capacity restrictions and boost the rapid growth of income.

Maintain the "prudent recommendation-A rating". It is estimated that the growth rate of the company's homing net profit from 2017 to 2019 is 4%, 17% and 40%, respectively, and the corresponding EBIT growth rate is 39%, 66% and 43%, respectively, and the corresponding EPS is 0.12,0.14 and 0.20 yuan, respectively. We are optimistic about the pull of the company's recent marketing activities on future product sales, look forward to a rapid improvement in the performance brought about by the release of capacity in the new plant, and maintain the "prudent recommendation-A" rating. Risk hint: the progress of GMP certification in the new plant is not up to expectations; the sales of products are not up to expectations.