Events:

The company released its 2018 semi-annual report: operating income in the first half of the year was 2.688 billion yuan, an increase of 11.83% over the same period last year; net profit was 123 million yuan, up 15.54% over the same period last year; net profit after deducting non-return was 120 million yuan, an increase of 37.75% over the same period last year; and EPS per share was 0.26 yuan.

Main points of investment:

The main business grew steadily, with the growth rate of six strategic products exceeding 50%.

According to categories, the income of APIs in the first half of the year was 1.174 billion yuan, an increase of 11.79% over the same period last year, of which foreign exchange earnings from exports reached US $128 million, an increase of 21.96% over the same period last year. The revenue of the preparation business reached 1.183 billion yuan, an increase of 10.80 percent over the same period last year, of which the preparation industry achieved income of 725 million yuan, an increase of 18.54 percent over the same period last year, while six strategic varieties, such as Shutaide, Jiahoruo, achieved sales of 148 million yuan, an increase of 52 percent over the same period last year. In addition, the income of pharmaceutical intermediates reached 331 million yuan in the first half of the year, an increase of 15.89 percent over the same period last year.

The gross profit margin has increased, and the efficiency of fee control has continued.

The overall gross profit margin in the first half of 2018 was 27.86%, an increase of 0.40% over the same period last year, mainly related to the 7.25% increase in gross profit margin in the preparation business. During the period, the expense rate was 17.45%, a decrease of 3.6% over the same period last year, and the sales expense rate, management expense rate and financial expense rate were 12.51%, 4.19% and 0.75%, respectively, of which the management expense rate decreased by 4.36% compared with the same period last year. This is mainly due to the reduction of business hospitality expenses, office expenses and differential expenses, which reflects the effectiveness of fee control after the reform of state-owned enterprises.

The consistency evaluation is going well.

In the first half of the year, the company has 7 products and 10 document numbers passed BE, of which 3 product materials have been submitted to the Drug Review Center for review, and are expected to be successfully declared to the State Drug Review Center in the second half of the year.

Maintain the recommended rating.

According to the latest equity, we expect EPS to be 0.40,0.49 and 0.60 yuan from 2018 to 2020, and the current valuation level is low, taking into account the continuous promotion of the company's large preparation strategy and internationalization strategy, as well as the continuous promotion of consistency evaluation. Maintain the "recommended" rating.

Risk tips: API boom downward; unfavorable market sales; cost growth faster than expected, etc.