Events:

Jinling Pharmaceutical released its semi-annual report for 2017: the company's operating income in the first half of the year was 1.711 billion yuan, down 5.38% from the same period last year; its net profit was 101 million yuan, down 8.35% from the same period last year, and its EPS per share was 0.20 yuan, slightly lower than expected.

Main points of investment:

Medical services grew steadily, and Mailuoning's income declined less than expected.

In terms of medical services, the company achieved an income of 461 million yuan in the first half of the year, an increase of 14.77% over the same period last year. The main contribution came from Suqian people's Hospital, which increased by 15.41%; Yizheng Hospital increased by 16.85%; and Anqing Hospital increased by 11.97%. The company's income from traditional Chinese medicine products reached 325 million yuan in the first half of the year, down 15.45% from the same period last year, mainly related to the decline of Mailuoning injection, and is expected to be related to the policy tightening of traditional Chinese medicine injection and the impact of price reduction through bidding. In addition, the revenue from chemical drug sales in the first half of the year was 848 million yuan, down 9.27% from the same period last year, which may be related to the impact of product bidding and price reduction, but the company's dominant variety ferrous succinate tablets had a big increase in sales and profits in the first half of the year.

The year-on-year decline in gross profit margin further lowered the company's performance.

In the first half of 2017, the company's overall gross profit margin was 21.26%, down 0.52% from the same period last year, of which medical services, traditional Chinese medicine and chemicals decreased by 1.68%, 2.64% and 0.50% respectively compared with the same period last year. We believe that it is mainly related to the increase in the number of key specialties in the three hospitals and the increase in the price of raw materials for traditional Chinese medicine. In terms of the period expense rate, it was 12.82% in the first half of 2017, a decrease of 0.30 percentage points compared with the same period last year, of which the sales expense rate increased by 0.50% compared with the same period last year, mainly due to the 73.90% increase in sales promotion expenses over the same period last year, while the management expense rate decreased by 0.82%. It is mainly due to the 25.28% decrease in staff and workers' salary compared with the same period last year.

Medical services are expected to continue to improve, and the product structure is expected to be further optimized.

Among the company's three hospitals, Suqian Hospital will mainly improve software and expert resources in the future, while Yizheng and Anqing Hospital are still in the hardware upgrading stage. at present, the net profits of the three hospitals in the first half of the year are 9.61%, 7.59% and 6.90%. We think there is still room for improvement. with the continuous investment of software and hardware, the performance of medical services is expected to continue to grow. While Mailuoning, the original main product, may be subject to pressure and decline due to the policy of traditional Chinese medicine injection, but we think that the company has strengthened the construction of marketing team in recent years and continuously strengthened the sales management of core products. With the rapid growth of other superior products, the product structure is expected to be further optimized.

Maintain the "cautious recommendation" rating.

We downgrade our revenue forecast and estimate that the company's EPS will be 0.34,0.41 and 0.45 yuan respectively from 2017 to 2019, and PE will be 31 times, 26 times and 24 times respectively. Taking into account the steady growth of medical services and the expectation of state-owned enterprise reform, we maintain a "cautious recommendation" rating.

Risk hint

The market development is slower than expected; the gross profit margin is lower than expected; the period cost is higher than expected, etc.