Investment recommendations Recently, we have communicated with company executives and investigated smart pharmacies. We have a deeper understanding of the development of smart pharmacies. We believe that with the B-side as an entry point, the company is expected to gradually advance to the C-side and seize the big opportunities for consumption upgrading. Reason Smart Pharmacy: A New Model for Traditional Chinese Pharmacy. In June 2015, the company pioneered a new model of Chinese medicine pharmacies - smart pharmacy. It uses a “one-to-many” central pharmacy network in the city center to provide modern upgrade services for outpatient pharmacies of many traditional Chinese medicine hospitals in Guangzhou. Since its development, the company's smart pharmacy has covered cities such as Guangzhou, Shenzhen, Chengdu, Beijing, Shanghai, Chongqing, Puning, Kunming, Guiyang, etc., and has also expanded from traditional Chinese medicine hospitals to general hospitals, etc., serving more than 1.3 million patients, gradually establishing a leading brand image in the Chinese medicine tablet industry on the C side (traditional Chinese medicine tablets supplied to hospitals are similar to agricultural products, low concentration, making it difficult to establish a brand. In recent years, the company has used smart pharmacies to build a “Kangmei” brand). Behind the success is years of accumulation, and the wide moat. Smart pharmacies have been able to develop rapidly, not only based on model innovation, but also on the company's long-term resource accumulation and continuous construction of a moat, which has strong replicable and expandable power. Quality advantage: Quality is the lifeline of Chinese medicine companies. The company strictly controls quality in all aspects from the origin of medicinal herbs to procurement, production, packaging, storage, and distribution; at the same time, it has actively become a standard setter and has taken the lead in drafting the “Smart Chinese Pharmacy” local industry standard, which has been officially released in Shenzhen, and is expected to be declared a national standard. Network advantages: The company has a full industry chain layout, with 5 major Chinese herbal medicine markets, 17 regional service centers for medicinal herbs, more than 380 secondary service outlets covering the main production areas of medicinal herbs in the country, and more than 30 modern pharmaceutical warehousing and logistics centers. It has established decisive network advantages throughout the country. Scale advantage: The company can produce more than 1000 types of tablets and more than 20,000 quality standards to meet the needs of hospitals at different levels. In 2016, the revenue from drinks was close to 5 billion dollars, showing its dominance, and its bargaining power is getting stronger. Replication and expansion is ongoing, and the prototype of the C-side platform has already appeared. Over the years, the company's business has mainly targeted B-end customers such as hospitals, while Cordyceps sinensis, ginseng, and other medicinal herbs similar to medicinal food have targeted the C-side health market. The company has found a B2B2C industrial path through smart pharmacies, and is expected to integrate various business segments and explore the big health market in the future. More efficiency. The company has strong innovation, continuously upgrades and improves smart pharmacy systems, increases the level of automation, increases capacity utilization, reduces operating costs, and actively achieves greater profitability with higher efficiency. A better experience. Currently, smart pharmacies mainly provide services such as traditional Chinese medicine substitutes and door-to-door drug delivery. In the future, it is expected to improve the level of professional pharmaceutical services and meet personalized medication needs (providing diversified dosage forms such as creams). More expectations. With the rapid accumulation of prescriptions obtained by smart pharmacies (currently close to 4 million), the company has a large amount of C-side data. In the future, it is expected that various internal business segments will be integrated to accurately develop consumers. Profit forecast and valuation We kept our 2017/2018 EPS unchanged at $0.81/0.98, respectively. Currently, the company's stock price corresponds to 2018 P/E 23x. Considering that the company is actively improving its “consumer attributes” brand power and further opening up C-side growth space, it is expected to benefit from the general trend of consumption upgrading in the future, we maintain the recommended rating and raise the target price by 3.7% to 28 yuan, which is 26.5% higher than the current stock price, corresponding to P/E 29X in 2018. The expansion of risk smart pharmacies fell short of expectations; the results of implementing strategic cooperation fell short of expectations.