Growth was strong in the fourth quarter. The annual results slightly exceeded expectations. On April 25, the company released its 2017 annual report, achieving revenue, net profit, and net non-profit of 265.4 billion yuan, up 22%, 23%, and 22% year on year, and performance growth slightly exceeding our expectations. On a quarterly basis, the fourth quarter achieved revenue and net profit of 69.6 billion yuan and 950 million yuan, an increase of 34% and 27% over the previous year. Considering that the tablet business benefits from the integration of smart pharmacies and the industry, and that the agency business benefits from network expansion, we expect the performance growth rate in 18/19 to be 21%/20%. Referring to comparable company valuations and historical valuations, we gave the 2018 PE valuation 24-28 times, adjusted the target price to 24-28 yuan, and maintained the “increase in holdings” rating. The tablet business grew strongly, with a year-on-year increase of more than 30% year-on-year, Chinese medicine tablet revenue increased 31% year on year in 2017 to 6.2 billion yuan, and gross margin fell 1.37 pct to 34%: 1) The tablet industry is highly fragmented, but due to the concentration of downstream demand and slow integration, the sales model has become the key to integration. The “smart pharmacy” pioneered by the company uses the role of a pharmacy in the city center to seize market share of local hospitals with advantages such as convenient distribution and reduced hospital traffic; 2) As of 2017, smart pharmacies were launched in 7 markets, contributing about 700 million yuan in revenue; we expect to contribute about 700 million yuan in revenue in 2018. This year, the region will expand to more than 15 locations, driving revenue growth in the tablet business by more than 30%. Revenue from Chinese herbal medicine trade increased 1% year on year in 2017 to 5.9 billion yuan, and gross margin increased slightly by 0.35 pct to 24%. The company's downstream partners include Zhongheng, Jumbo Island, etc., and mainly Chinese medicine injections. It is expected that the herbal medicine trade will remain stable in the future. The agency business bloomed in a number of ways in 2017, pharmaceutical trade and device trade revenue increased 31%, 117% to 9.6 billion yuan, 2 billion yuan; 1) The company's business was mainly agents, and is one of the most powerful agents in the channel network in Guangdong Province. In recent years, the company has expanded outside of the province (Northeast, Guangxi, etc.) through the acquisition of hospitals and dealers, thanks to the private enterprise system (faster repayment) and channel dominance, and business development is smooth; 2) The company focuses on distribution business focusing on high-value orthopedic consumables. Currently, the medical device business has covered about 90% of the country. Including high-consumption medical devices such as Jiemai Bangmei, Schlehui, Chuangsheng, and Kanghui; 3) We believe that the stock business has maintained rapid growth. The incremental business (projects in Chongqing, Yunnan and other places) was reflected in 2018. The revenue growth rate of pharmaceutical trade and device trade in 2018 is expected to be 30-40%. Potential increase: Classic recipes and traditional Chinese medicine formula granules The State Administration of Traditional Chinese Medicine issued the first batch of classic formula catalogues on April 16. Considering that the catalogue is mainly based on soups and powders, and still uses traditional Chinese medicine disease names, we believe there are no substantial short-term benefits. We still need to observe how supporting policies are introduced. Considering that Kangmei Pharmaceutical has a first-mover advantage over classic recipes, it is expected that Kangmei Pharmaceutical will benefit from entering substantial implementation, expanding the scope of business, and entering the pharmaceutical field. Chinese medicine formula granules are still pending since a draft for comments was introduced in 2015. We expect them to be implemented in 2018. The company has channel advantages and production capacity advantages, and is expected to contribute considerable revenue after the license is liberalized. Maintaining the “increase in holdings” rating. Considering that the tablet business benefits from the integration of smart pharmacies and the industry, and the agency business benefits from network expansion, we expect the company's net profit in 2018-20 to be 49.7/59.8/6.95 billion yuan, an increase of 21%/20%/16% over the previous year. Referring to comparable companies' PE valuations and historical valuations, the 2018 PE valuation was 24-28 times higher, and the target price was adjusted to 24-28 yuan to maintain the “increase in holdings” rating. Risk warning: The progress of smart pharmacies falls short of expectations, and hospital acquisitions fall short of expectations.