Key points 1. Marketing network construction continued to be strengthened. During the reporting period, sales expenses temporarily increased rapidly. In order to better adapt to many major changes such as the rise of retail sales in the domestic pharmaceutical market, medical insurance bidding, and the two-ticket system, the company actively promoted the marketing of OTC and prescription drugs, and the revenue growth rate was more than 20%, driven by OTC granules. At present, the company has covered more than 80% of retail terminals and signed up to more than 65,000 VIP customers; at the same time, the company has developed more than 3,800 hospitals above level 2, including more than 1,300 level 3 hospitals, with a coverage rate close to 60%. Furthermore, in order to respond positively to the development trend of hierarchical diagnosis and treatment, the company has also actively deployed sales channels to primary medical institutions, and the number of newly developed clinics has reached about 40,000. A marketing system with strong execution has always been one of the company's core competitiveness sources. The company's continuous strengthening of marketing network construction is also expected to have a positive effect on the company's future development, but at the same time, it also caused the company's sales expenses to increase by 47.95% year-on-year during the reporting period, which greatly exceeded the increase in revenue, thus inhibiting the growth in the company's net profit from its parent. We believe that it is an inevitable step for the company to increase the cultivation and consolidation of core competitiveness in order to adapt to changes in the industry environment. Although it will have a certain impact on the company's performance in the short term, it will definitely bring positive changes to the company's future development in the long run. 2. Gross margin increased steadily. During the reporting period, R&D investment blossomed. During the reporting period, the company's overall gross profit margin was 61.96%, up 1.55 percentage points from the same period last year. Among them, the gross margin of proprietary Chinese medicines reached 63.07%, an increase of 1.68 percentage points over the same period last year. Furthermore, the company continued to increase its investment in R&D, with R&D expenses growing at a year-on-year rate of 77.32%. In addition to more than a dozen ongoing research projects, such as the existing anti-HBV treatment tefentaide project, diabetes treatment, anti-tumor treatment BL02 project, kidney turbidization particle project, and peony tablet project, the company has also introduced the ice lotus root tablet project for antidepressant treatment and the purine-N-hydroxypyrimidine formamide derivative project for anti-hematologic tumor treatment; at the same time, the company also officially reached relevant agreements with Guangdong Provincial Hospital of Traditional Chinese Medicine in the cooperative development of Tongluo capsules in the form of cooperative development and overseas Signed by a Japanese CRO company An agreement to carry out clinical trials locally; in addition, the company will become the second largest shareholder of Yunnan Phytopharmaceuticals, forming a “win-win” collaborative development. The company uses multi-party cooperation to blossom more in product development, and the many varieties under development are expected to become new growth drivers for the company in the future. 3. Medical services grew rapidly, and industrial chain integration was gradually taking shape. During the reporting period, the company's two traditional Chinese medicine diabetes hospitals in Guiyang and Changsha received more than 19,000 patients, and the medical service sector achieved a total sales revenue of 36.49 million yuan, an increase of more than 116% over the previous year. At the same time, the exploration and cooperation between the company and the Guizhou Provincial Health Planning Commission and Tencent in the field of chronic disease management and telemedicine also developed rapidly. It is expected to become a new growth point for the company's performance in the future. 4. Investment suggestions: We expect the company to achieve operating income of 2,603 billion yuan, 3,063 billion yuan and 3,590 billion yuan in 2017-2019. At the same time, net profit of 559 million yuan, 629 million yuan and 772 million yuan, corresponding to earnings per share of 0.40 yuan, 0.45 yuan and 0.55 yuan, corresponding to PE 42 times, 38 times and 31 times, and maintain the “recommended” rating. 5. Risk warning: the risk of price reduction in tenders for core varieties; the risk that the promotion of Dung Ning Tongluo capsules is not as good as expected.