Company News The company released the 2018 semi-annual report. Project review revenue maintained a high growth rate, achieving revenue of 15.507 billion yuan in 2018 H1, an increase of 49.21% over the previous year. The company covered more than 98% and 96% of public hospitals and primary medical institutions above the size of Shandong Province, and built direct sales platforms for pharmaceuticals and medical devices in all provinces across the country, replicating Shandong's direct sales model. Currently, more than 200 subsidiaries have been set up in 31 provinces and municipalities directly under the Central Government, serving more than 40,000 medical institutions at all levels across the country to achieve the company's national direct sales channel construction. By business, the pharmaceutical sector achieved revenue of 9.692 billion yuan, an increase of 21.92% over the previous year; the device sector achieved revenue of 5.774 billion yuan, an increase of 139.67% over the previous year. Among them, the inspection business, intervention business, general consumption distribution business, and other product line business segments achieved revenue of 2,905 billion yuan, 1,345 billion yuan, 465 million yuan, and 1,059 billion yuan. Looking at the subregion, the business in Shandong Province achieved revenue of 7.081 billion yuan, a year-on-year increase of 6.47%, and gross sales margin of 6.47%, an increase of 1.03 percentage points over the previous year. The device business maintained a high growth rate but the drug revenue growth rate slowed, mainly affected by the full implementation of the “two-ticket system” in Shandong Province; the business outside Shandong Province achieved revenue of 8.410 billion yuan, accounting for 54.29% of revenue, up 12.84 percentage points from the previous year, achieving rapid growth in the medical device and medical consumables business. Considering that the company's business outside Shandong Province is in a period of rapid expansion, it has completed national direct sales channels Due to construction and other factors, we expect the company's share of business revenue outside Shandong Province to expand further. As a result of the product restructuring, the company's overall gross margin level increased, and the company achieved net profit attributable to the parent company of 580 million yuan in 2018 H1, an increase of 12.88% over the previous year. Excluding the one-time impact factors brought about by the 2017 H1 adjusted accounts receivable age analysis method, the year-on-year increase was 43.55%. The company's gross sales margin for 2018 H1 was 19.48%, an increase of 2.38 percentage points over the previous year. Among them, the gross sales margins of the pharmaceutical sector and the device sector were 11.95% and 32.17%, respectively, down 0.43 percentage points and 0.56 percentage points from the previous year. The gross margin level of the device sector was higher and the revenue growth rate was higher than that of the pharmaceutical sector, leading to changes in the company's product structure and an increase in overall gross margin level. The company's expense ratio for the 2018 H1 period was 11.73%, up 1.33 percentage points from the previous year. Among them, the sales expense ratio, and the financial expense ratio were 6.57%, 4.05%, and 1.11%, respectively, down 0.08 percentage points, up 0.88 percentage points, and 0.53 percentage points from the previous year. The main reason for the slight increase in management expenses and financial expenses was the increase in management personnel and external financing due to the company's business expansion. Launching the SAP system to achieve digital transformation The company began launching the SAP system in October 2017, implementing systematic management in terms of systems, processes, models, and systems, and digitally transforming business processes. By the end of June 2018, the company's SAP system had launched 178 subsidiaries. It is expected that all subsidiaries will launch the SAP system within 2018 to achieve integrated management of logistics, capital flow, information flow, and commercial flow. Through the launch of SAP information management, the company has refined and informationalized management of the different sales models of various pharmaceutical and medical device product lines, dynamically understood the real-time business development status and capital trends of each sub-branch and business line, effectively strengthened the internal control and management of sub-branches, and achieved sales network linkage in 31 provinces and municipalities directly under the Central Government, improving the company's operation management capabilities and profitability in the long run. The risk suggests that the implementation of the two-vote system falls short of expectations; the speed of mergers and acquisitions is not as good as expected; the risk of falling gross margin levels due to intense competition in the regional market suggests maintaining the “increase in holdings” rating for the next six months, combined with the 2018 semi-annual report, we adjusted the company's EPS for the 18th and 19th to 0.87 and 1.09 yuan. Based on the closing price of 11.70 yuan on August 23, dynamic PE was 13.46 times and 10.71 times, respectively. We believe that the company has completed the construction of direct sales channels in 31 provinces and municipalities directly under the Central Government. Improving operational capacity and profitability through digital transformation is expected to maintain rapid growth in the equipment business and maintain the “increase in holdings” rating.