In 2018, H1 had excellent performance, and the business scale continued to expand, and the company released the 2018 semi-annual report. In 2018, H1 achieved revenue of 8.52 billion yuan, an increase of 30.36% over the previous year, net profit of 185 million yuan, an increase of 29.82% over the previous year, and net profit of 182 million yuan after deduction, an increase of 23.53% over the previous year. On a quarterly basis, in the Q2 quarter of 2018, the company achieved revenue of 5.732 billion yuan, an increase of 106% over the previous year, net profit of 97 million yuan, an increase of 10.23% over the previous year, and net profit after deduction of 95 million yuan in the Q2 quarter, an increase of 9.2% over the previous year. Overall, in the Q2 quarter of 2018, the company's business scale continued to expand, and growth was obvious. At the same time, the company's business structure and product structure were actively adjusted, and accounts receivable from downstream medical institutions increased accordingly. Judging from the H1 situation in 2018, the impact of sunshine procurement in Beijing and the two-ticket system gradually declined in 2017, and management adjustments were gradually put in place to cope with changes in the industry and market, and performance is expected to continue to improve. The impact of the policy is gradually weakening. Looking at the steady implementation of specific sub-projects across the country, H1's pharmaceutical wholesale business revenue in 2018 was 8.375 billion yuan (+30.74%), accounting for 98.30% of revenue, which is still the company's main source of revenue; the pharmaceutical chain and pharmaceutical distribution revenue was 77 million yuan and 69 million yuan, up 15.7% and 7.03% from the previous year. In 2018, the company's pharmaceutical wholesale business revenue was as the leading drug distribution provider for primary medical institutions in Beijing. Under the influence of policies such as the “two ticket system” and “tender price limit”, the company actively optimized business layout, supplier and product structure. In 2018, the company's revenue in Beijing was 4.135 billion yuan (+32.63%), revenue from other regions was mainly 4.385 billion yuan (+28.28%), and the revenue share of the Beijing region and other regions was 49.53% and 51.47% respectively. The company is gradually developing into a leading pharmaceutical distribution enterprise in the country 。 During the reporting period, the company adhered to the policy of developing the distribution of pharmaceuticals and consumables at the same time, and continued to expand its business areas. The pharmaceutical and device sectors achieved good growth. Gross margin declined slightly, and comprehensive management and operation capabilities increased H1's net cash flow from operating activities in 2018 to -320 million yuan, mainly due to a corresponding increase in inventory while the company's business scale expanded, payments from upstream industrial enterprises increased, and accounts receivable from downstream medical institutions increased accordingly; accounts receivable from 2018H1 companies were 6 billion yuan, an increase of 23.6% over the previous year. In 2018, H1's gross sales margin and net sales margin were 9.93% and 3.63% respectively, which is a slight decrease from H1 in 2017. We expect the main reason for the increase in sales of pharmaceuticals with lower gross margins due to the impact of lower consumables bidding prices and the increase in sales of pharmaceuticals with lower gross margins. In 2018, H1 had a sales expense ratio of 2.77%, an administrative expense ratio of 1.08%, and a financial expense ratio of 0.96%. Among them, the sales expense ratio and management fee rate have declined slightly. Due to the expansion of the company's business scale, the company's demand for capital has increased, and the increase in short-term loans has led to a slight increase in financial rates. Valuation and ratings As the leading drug distribution leader in Beijing, the company is expected to benefit from industry integration brought about by the two-ticket system and the expansion of business scale brought about by hierarchical diagnosis and treatment. According to the 2017 annual report (revenue of 14.24 billion (+29.78%), net profit of 260 million yuan (+18.17%)) and the semi-annual report revenue and performance disclosure, there is a gap between the impact of the tender price limit and the two-vote system on the company in 2017 and previous expectations; therefore, we adjusted the company's profit forecast. The original forecast for 2018-2019 was 397/487 million yuan in net profit. The net profit for 2018-2020 is now adjusted to 3.4/43/53 million yuan, corresponding to PE 16X/13X/10X, maintaining the “hold” rating. Risk warning: policy risks, bid price cuts continue to affect the decline in gross margin, business expansion in other provinces falls short of expectations, further increase in capital costs, weakening solvency, etc.