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The company released its 2017 annual report on the evening of August 25. During the reporting period, the company achieved operating income of 9.189 billion yuan, an increase of 10.03% over the same period last year; at the same time, it realized a net profit of 42.19 million yuan, an increase of 4.97% over the same period last year; if the impact of non-recurrent profit and loss was taken into account, the company's non-recurrent net profit was 41.37 million yuan, an increase of 4.71% over the same period last year. The growth rate of the company's net profit was slightly lower than the market expected.

Main viewpoints

1. The rapid growth of sales expenses lowers the growth rate of net profit

During the reporting period, the company achieved operating income of 9.189 billion yuan, an increase of 10.03% over the same period last year, and the comprehensive gross profit margin was basically the same as that of last year, but the sales expenses increased too fast as high as 160 million yuan, an increase of 34.70% over the same period last year, which dragged down the company's net profit of returning home to only 42.19 million yuan, an increase of 4.97% over the same period last year. From the breakdown of sales expenses, the rapid growth of transportation and miscellaneous fees and insurance premiums is the main reason for the high sales costs. We believe that the rapid growth of sales expenses is mainly due to the fact that the company's two major logistics centers, Jinhua and Wenzhou, were officially put into use in the first half of this year. The two large logistics centers are still in the early running-in stage, which poses great pressure on the company's net profit growth, but the company already has operational experience in Hangzhou and Ningbo logistics centers, plus Jinhua and Wenzhou. At present, the total storage area of the logistics center with modern logistics equipment has reached 220000 square meters, and the distribution network covers Zhejiang province and its surrounding areas. When the operation of the new logistics center is mature and running at full capacity, it will provide a strong support for the company to maintain its leading position in medicine business in Zhejiang province, and the decline in net profit growth should be only a temporary phenomenon.

two。 The performance of Intel Pharmaceutical Co., Ltd. is bright, and the growth of subdivided sectors is stable.

During the reporting period, Intel Pharmaceutical, the core subsidiary of which the company has a 50% stake, achieved operating income of 6.588 billion yuan and net profit of 68.06 million yuan respectively, an increase of 9.25% and 20.80% over the same period last year. In terms of subdivision, sales income of pharmaceuticals, traditional Chinese medicine and medical devices reached 8.433 billion yuan, 300 million yuan and 421 million yuan respectively, an increase of 9.41%, 16.39% and 18.03% over the same period last year. Traditional Chinese medicine began to accelerate, the growth rate of medical devices slowed down, and the gross profit margin of each sector remained stable except for traditional Chinese medicine. We expect that the decline in gross profit margin in the traditional Chinese medicine sector is mainly due to the rise in the price of traditional Chinese medicine raw materials in the first half of this year.

3. The dust of the actual controller has settled, and the future development is worth looking forward to.

The problem of the actual controller that has plagued the company for many years has been settled. The company announced on July 29 that Sinochem Group, the actual controller of the company, intends to transfer 28.08% of the shares of the company held through its subsidiaries to Zhejiang Zhejiang International Trade Group Co., Ltd., which is owned by Zhejiang SASAC. If all goes well, Zhejiang SASAC will become the actual controller of the company, with a shareholding ratio of 54.65%. As a leading pharmaceutical business enterprise in Zhejiang Province, the change of the actual controller will be of great help to the company in implementing strategic planning, improving management structure and better developing business in the province. The future development of the company is worth looking forward to.

4. Investment advice:

Regardless of the impact of the company's full control of Intel Pharmaceutical, we expect the company to achieve operating income of 19.01 billion yuan, 21.038 billion yuan and 23.293 billion yuan from 2017 to 2019, and return net profit of 99 million yuan, 119 million yuan and 140 million yuan, corresponding to earnings per share of 0.37 yuan, 0.45 yuan and 0.53 yuan, respectively, and corresponding PE of 54 times, 45 times and 38 times, respectively. We continue to maintain the "recommended" rating.

5. Risk Tips:

The risk that the cost of sales continues to grow too fast; the risk that the change of the actual controller is slower than expected.