China Pharmaceutical's 2018 interim report revenue, net profit, and net profit after deducting non-net profit increased by 0.41%, 26.41%, and 20.52% year-on-year respectively, with an EPS of 0.79 yuan, which resumed relatively rapid growth, in line with our expectations. The company's low revenue growth rate in the first half of the year was mainly hampered by the reduction in the scale of the allocation business, but the rapid growth in the high-margin pharmaceutical business and the hospital net sales business greatly increased the company's profit level. We forecast that the company's 2018-2020 EPS will be 1.36/1.66/1.98 yuan, respectively, maintaining the “Highly Recommended - A” rating. The company's revenue, net profit, and net profit for the first half of the year increased by 0.41%, 26.41%, and 20.52%, respectively, and EPS of 0.79 yuan. The increase in performance was in line with the 20% year-on-year increase in non-net profit that we predicted in the interim report performance forecast. This year, the company completed the acquisition of 51% shares of Great Wall Pharmaceutical and 26.61% of Shanghai Xinxing's shares under the same controller. Therefore, the 2017 performance was adjusted retroactively, but the scale of the adjustments was small and did not have a substantial impact on the performance growth rate. There was almost no year-on-year increase in the company's revenue in the first half of the year. The main reason was that due to the impact of the two-vote system policy, the company's commercial sector was downgraded and the scale of business was drastically reduced. The net profit growth rate is much higher than the revenue growth rate. The main reason is that the high gross margin pharmaceutical business and the hospital net sales business are growing rapidly, which has greatly increased the company's profit level. The company's gross profit margin during the reporting period was 22.58%, up 9.65 percentage points from the previous year. Net operating cash flow was -1.48 billion yuan, which continued to expand from -718 million yuan in the same period last year. Mainly, the share of pure sales business in traditional Chinese hospitals in the commercial sector increased significantly. Due to the generally long repayment period in hospitals, capital consumption increased. The sales rate increased by 7.71 percentage points over the same period last year. Mainly in the pharmaceutical industry sector, in response to the two-ticket system, the ex-factory price “changed from lower to higher”. Furthermore, the rapid increase in pharmaceutical sales in the first half of the year also contributed to an increase in sales expenses. The receivable turnover rate was 1.59 times, down 0.32 times from the previous year; the inventory turnover rate was 2.34 times, down 0.35 times from the previous year; the increase in accounts receivable was mainly related to the increase in the share of pure sales business, and the increase in inventory was mainly due to the increase in the scale of the pharmaceutical business. Looking at a single quarter, 18Q2 revenue increased 1.78% yoy, net profit increased 23.64% yoy, and net profit after deducting non-net profit increased 26.03% yoy. Referring to Q1 revenue, net profit from net income, and net profit from net income after deducting net income growth rates of -1.20%, 29.22%, and 15.33%, respectively. Q2 Revenue returned to growth, mainly driven by the pharmaceutical business; the growth rate of net profit declined, but the year-on-year growth rate of net profit after deducting non-attributable net profit increased markedly compared to Q1. Mainly, in the first quarter, the company sold its subsidiary Shanghai Pukang Investment to confirm one-time investment income, increasing profits for the quarter. Excluding this part of the impact, the company's Q2 performance improved markedly compared to Q1. The management expense rate for the second quarter was 2.23%, up 0.49 percentage points from the previous year; the financial expenses rate was 0.19%, which was basically the same as the previous year. Net operating cash flow was -$33 million, a significant improvement from -$1,447 million in the first quarter. Q2 The year-on-year changes in various financial indicators in a single quarter were basically in line with the overall situation in the first half of the year, confirming our previous judgment that the company's performance for this year was low, then high, and rising quarter by quarter. The overall revenue of the pharmaceutical industry sector was 2,835 billion yuan, up 70.03% year on year; net profit was 368 million yuan, up 33.39% year on year; and gross profit margin was 67.15%, up 21.89 percentage points year on year. Among them, pharmaceutical business revenue was 2.04 billion yuan, a sharp increase of 124.09% year on year, gross margin increased 18.56 percentage points year on year; API business revenue was 582 million yuan, down 11.11% year on year, and gross margin decreased 0.85 percentage points year on year. The growth in the pharmaceutical industry sector comes entirely from the pharmaceutical business. Apart from the low turnover and high opening factors caused by the two-ticket system, after the official operation of Zhongjian Company in the first half of the year, the company's ability to integrate production and marketing increased, increasing sales and promotion of high-margin pharmaceutical products. At the same time, coverage of empty markets was strengthened, and sales of core industrial products and generic drugs increased rapidly. Sales of atorvastatin, rosvastatin, acetylspiramycin tablets, and nimergoline capsules increased by 21.54%, 6.98%, 43.55%, and 31.74%, respectively. The main reason for the year-on-year decline in the API business was the GMP transformation of some APIs in the first quarter and were not put into production, and the company implemented certain marketing control measures to maintain product prices. Since all of Zhongjian's newly established institutional expenses have been confirmed in Q1, the first quarter should be the lowest point in the annual net profit growth rate of the industrial sector, and it is expected to rise quarterly in subsequent quarters. Commercial sector revenue was 8.86 billion yuan, down 7.24% year on year; net profit was 260 million yuan, up 18.77% year on year; and gross profit margin was 8.67%, up 2.0 percentage points year on year. Revenue in the commercial sector declined but profits increased. The main reason was that the scale of the company's allocation business was drastically reduced due to multiple policy factors such as the “two-ticket system,” medical insurance fee control, and reduction in the share of drugs, which led the company to change its business structure, gradually divest the allocation business, increase the proportion of pure hospital sales business, and expand market coverage through external mergers and acquisitions, and actively strengthen retail business. Beginning at the end of last year, the pace of the company's commercial mergers and acquisitions has clearly accelerated. This year, it has successively acquired Shenyang Zhuying and Hebei Jinlun to enter the markets of Liaoning and Hebei, and the “Point Strength Network” strategy has progressed smoothly. In the future, even if all of the allocation business is divested, regional expansion and structural transformation will continue to drive the company's commercial sector to maintain relatively rapid growth under the company's continued commercial mergers and acquisitions. The international trade sector's revenue was 3.26 billion yuan, down 5.91% year on year; net profit was 429 million yuan, up 43.56% year on year; and gross profit margin was 16.86%, up 2.19 percentage points year on year. The decline on the revenue side is mainly due to the fact that the medical device agency business of the subsidiary China Technical Service is in an alternation stage between old and new products. Agents for some old products have been terminated, resulting in a 9.1% year-on-year decline in operating income in the first half of the year. However, net profit increased 73.58% year on year after new products with high margin were replaced. Maintain a “Highly Recommended - A” rating. We predict that the company's net profit from 2018 to 2020 will increase 15%/22%/20% year on year, and the EPS will be 1.36/1.66/1.98 yuan respectively. The current stock price corresponds to 12.6 times PE in 2018, and the valuation level is low. We continue to be optimistic about the company's endogenous improvement in epitaxial expansion. Refined investment agents are in line with the two-vote system trend. Valuation is expected to improve and maintain the “Highly Recommended - A” rating. Risk warning: Sales of major products fell short of expectations; the effects of extended mergers and acquisitions were not as effective as expected; and overseas projects experienced many bad debts.