Core viewpoints

The performance is in line with expectations and the expenses are well controlled. The company released its quarterly report for 2017, with revenue of 1.253 billion yuan in the first three quarters, an increase of 5.02% over the same period last year, and a net profit of 265 million yuan, an increase of 1.76% over the same period last year, corresponding to 0.25 yuan of EPS, which is in line with our and market expectations. The company's gross profit margin in the first three quarters was 81.40%, basically the same as that in the same period last year (81.81%). In terms of expenses, the rate of sales expenses was 48.04%, an increase of 0.43ppm over the same period last year; the rate of administrative expenses was 7.67%, a decrease of 0.88ppm over the same period last year; and the financial expenses were unchanged.

The main products stabilize and grow slowly, and the series will promote the performance growth of the company. Tanreqing injection, the company's main product, declined after 15 years of adjustment and recovered in 2016. at present, sales in the first three quarters remain stable. Tanreqing injection added new restrictions on the use of Tanreqing injection in the adjustment of medical insurance catalogue in 17 years (limited to critically ill patients in secondary and above medical institutions), which may have a certain pressure on future sales. However, Tanreqing injection is undergoing a series of product development, including capsule (already on the market), oral liquid (phase 3 clinical), children's 5ml dosage form (perfect supplementary approval opinions) and atomization research, which will effectively promote the company's performance growth, and we expect Tanreqing to maintain a low growth rate in the future.

Actively build a product echelon, a number of products are in the early stages of listing. In recent years, the company has obtained Youxinding capsule, Dinggui Oil soft capsule, Shufeng Zhitong capsule, Huadan Anshen mixture and other new drugs under research. Among them, Youxinding capsule is in the stage of IIb clinical study, and the other varieties are in Ⅲ stage. In addition, the company also cooperated with Shanghai Yizhong Biology to develop "Paclitaxel Micelle for injection"; to increase investment in Shanghai Goebard Biology, and to obtain the priority purchase right of "laminin for injection". At present, Duranamine is in the data supplement stage of phase III clinical trials, and paclitaxel micelles are in phase III clinical trials. Generally speaking, the company has a number of post-clinical products, which are worth looking forward to.

Financial forecasts and investment suggestions

We expect the company to achieve a net profit of 2.93 million yuan in 2017-2019, corresponding to an EPS of 0.27, 0.29, 0.30 yuan, and a 17-year price-to-earnings ratio of 33 times the average valuation of the comparable company, corresponding to a target price of 8.91 yuan, maintaining the company's "buy" rating.

Risk hint

If the progress of new drug development and approval is not as expected, it will have a negative impact on the long-term development of the company.