1. Incident: The company released its 2018 semi-annual report. 18H1 achieved operating income of 542 million yuan, an increase of 18.33%; achieved net profit attributable to shareholders of listed companies of 190 million yuan, an increase of 12.07% over the previous year; realized net profit without deduction of 179 million yuan, an increase of 9.21% over the previous year; and achieved EPS of 0.4683 yuan. Among them, in the second quarter, the company achieved operating income of 315 million yuan, a year-on-year increase of 19.25%; achieved net profit attributable to shareholders of listed companies of 113 million yuan, an increase of 12.67% over the previous year; realized net profit without deduction of 102 million yuan, an increase of 8.62% over the previous year; and achieved EPS of 0.2784 yuan. In terms of expenses, sales expenses were 231 million yuan, up 25.30% year on year; management expenses were 38.233 million yuan, up 13.47% year on year; financial expenses were 5.4027 million yuan, up 396.00% year on year, mainly due to an increase in short-term loans during the reporting period and an increase in interest expenses on bank loans; net operating cash flow increased 26.80% year on year; net investment cash flow decreased by 220.48% year on year, mainly due to the increase in the company's investment expenses for purchasing wealth management products. The company released a performance forecast for January-September 2018, and is expected to achieve net profit of 208 million yuan to 270 million yuan, an increase of 0% to 30% over the previous year. 2. Our analysis and judgment (1) The three major terminals work together to help the overall steady growth of Tier 1 and 2 products and maintain steady growth in the pharmaceutical business as a whole. Based on consumer demand, the company adheres to academic leadership, expands grassroots investment, explores new product launch models, enriches the category structure, and continues to promote the “Integrated Pain Product+Tibetan Medicine Special Program”. In the first half of 2018, the company achieved revenue of 540.5 million yuan for paste+ointments and pills, with a year-on-year growth rate of 18.20%. Among them, first-line pastes maintained relatively rapid growth through multi-channel layout. Sales revenue of the pillar product, paste, was 417 million yuan, up 20.82% year on year, and gross margin increased 0.71 pp. We believe that the main reason is that marketing channels are sinking, increasing market penetration in public hospitals and primary medical institutions. In particular, county-level hospitals and community health service centers (stations) are growing well. At the same time, the company has explored overseas market channels. Among second-tier varieties, pills have maintained rapid growth. During the reporting period, the company achieved a total revenue of 123 million yuan for second-tier ointments and pills, an increase of 10.11% over the previous year. Among them, pills achieved revenue of 356.392 million yuan, a year-on-year increase of 64.50%, and gross margin increased by 6.85 pp; ointment achieved revenue of 87.4548 million yuan, a year-on-year decrease of 2.97%, and gross margin decreased by 0.44pp. We believe that the main reason the company's pharmaceutical business has maintained steady growth is due to continued efforts in hospitals, primary care, and pharmacy terminals. In the major hospital market, adhere to brand-driven academic marketing strategies, increase academic marketing efforts, and continue to promote enterprises and product brands. On the one hand, we are continuously improving high-level evidence-based medical evidence, promoting the clinical value of products in the treatment of related diseases, and providing customers with better clinical solutions; on the other hand, increasing the launch of new products and completing preparations for multiple new product launches, laying the foundation for rapid coverage of new products. In the grassroots market, adhere to academic leadership, accumulate product research evidence, and support sales promotion and product development. Continue to expand terminal coverage and promote further sales growth. In the retail market, on the one hand, it closely focuses on the integrated pain brand development strategy to increase Qizheng brand building efforts and enhance brand influence; on the other hand, speed up the pace of new product launches. At the same time, the company continues to advance preparations for the launch of new pain-integrated products, enrich the category structure reserves, and further increase the coverage rate of second-tier new products. (2) A new strategy of “one axis, two wings, three supports” begins, and continues to strengthen core competitiveness 2018 was the beginning of the company's new “one axis, two wings, three supports” strategy, and the company continues to strengthen its core competitiveness in all areas. 2018 is the beginning of the company's new strategy. The company's operations are closely centered around the strategic initiative of “one axis, two wings and three supports”. “One axis” means strengthening pain relief patches, and achieving continuous growth in pain relief patches through major hospitals, basic drugs, and retail three-wheel drives. On the one hand, “Two Wings” provides patients with clinically valuable specialty treatments and classic prescription product portfolios through a rich product line in pain categories, and on the other hand, by focusing on neurological rehabilitation, gynecology, and dermatology markets. “Three supports” refers to marketing model innovation, capital operation, and the construction of an EMU model organization including data, information, operation, talent, and mechanism construction. The company focuses on the pharmaceutical business and continuously strengthens its established core competencies such as brand advantages, product advantages, marketing advantages, R&D advantages, and resource advantages: In terms of category layout, the company cultivates new strategic varieties through a “two-wing” layout, which is expected to accelerate breakthroughs from a single variety to multiple varieties and multiple gradients, and form a more reasonable product structure. In terms of marketing layout, the commercial zero channel will be more patient-centered and enhance the customer experience. Strengthen interaction and communication with key customers, increase customer stickiness, and make the category structure more stable with the help of increased delivery rates. The investment channel uses cities (prefecture-level city/county-level cities) as the unit, and uses medical terminals as the smallest unit to carry out endpoint investment, focusing on cities, focusing on varieties, and focusing on areas of dominant diseases to achieve terminal coverage. In the investment promotion market, academic marketing has been further promoted through diversification of investment forms, and the growth trend has been maintained by rationally coordinating omnichannel development and multi-channel collaboration. In terms of research and development, during the reporting period, the company invested 19.731 million yuan in R&D, an increase of 4.79% over the previous year. It continued to be guided by market demand, promote clinical research and research on specialty medication methods for the core product pain relief paste in orthopedic treatment, carry out research on external treatment techniques and drug combinations in Tibetan medicine, and continue to promote standard research on key Tibetan medicinal herbs in terms of resources. 3. Investment recommendation The company is a leading Tibetan medicine company. Looking forward to the future, first-tier pain-relieving patches are expected to maintain a rapid growth rate with a perfect sales channel layout; second-tier ointments and pills are expected to continue to gain strength, and achieve rapid growth in performance through the three drivers of major hospitals, basic drugs, and retail. In addition, the company vigorously promotes brand building and enriches the product category structure, and future development is worth looking forward to. The estimated net profit for 2018-2020 is 329/3.69/427 million yuan, the corresponding EPS is 0.81/0.91/1.05 yuan, and the corresponding PE is 33/30/26 times, respectively. Maintain a “Cautious Recommendation” rating. 4. Risk indicates the risk of drug price reduction, and new product marketing progress falls short of expectations