Company dynamic events

The company released the third quarter report of 2018.

Comments on matters

The performance is in line with expectations and maintains a relatively rapid growth rate.

In the first three quarters of 2018, the company achieved operating income of 13.164 billion yuan, an increase of 28.78% over the same period last year, and a net profit of 260 million yuan, an increase of 29.86% over the same period last year. From a quarterly point of view, the company's 2018Q3 achieved operating income of 4.644 billion yuan, an increase of 25.99% over the same period last year, and a net profit of 75 million yuan, an increase of 29.94% over the same period last year, continuing the rapid growth of performance in the first half of the year. The company has established the development of the dual structure of "drugs + consumables". On the one hand, as the leader of drug distribution in Beijing, the company benefits from the policies of sunshine procurement and graded diagnosis and treatment, and the hospital pure sale business and base drug distribution business maintain a rapid growth rate; on the other hand, the company continues to promote the layout of pharmaceutical equipment plate, accelerate the integration of regional resources in the out-of-town area and improve management efficiency, driving the company's performance to improve for a long time.

Continue to expand out-of-town business and plan to increase capital in Liaoning Jiashitang

The company held a board meeting to examine and approve the motion on increasing capital to Liaoning Jiashitang Pharmaceutical Co., Ltd., a wholly-owned subsidiary, and proposed to increase capital by 15 million yuan to Liaoning Jiashitang, a wholly-owned subsidiary. Liaoning Jiashitang, formerly known as Liaoning Pharmaceutical Co., Ltd., was acquired by the company in March 2014. its main business is pharmaceutical wholesale, with an operating income of 105 million yuan and a net profit of 2.6298 million yuan in the first three quarters of 2018. After the completion of this capital increase, the registered capital of Liaoning Jiashitang increased to 40 million yuan. This capital increase will help the subsidiary to further expand its business in Liaoning, enhance its business scale and profitability in other areas, and provide financial guarantee for the company's long-term performance and development.

The rate of financial expenses increased slightly over the same period last year.

The company's gross profit margin for sales in the first three quarters of 2018 was 9.93%, up 0.51 percentage points from the same period last year. The company's expense rate during the first three quarters of 2018 was 5.02%, an increase of 0.46% over the same period last year, of which the sales expense rate was 2.93% (+ 0.18%), the sales expense rate was 1.08% (- 0.03%), and the financial expense rate was 1.01% (+ 0.31%). The main reason for the increase in the financial expense rate is that the rapid growth of the company's income scale and the implementation of the two-vote system lead to the increase of upstream suppliers' prepayments and cash payments, which leads to the expansion of the company's capital demand.

Risk hint

The risk of intensified competition in Beijing regional market; drug bidding, health insurance payment and other industry policy risks; GPO business expansion is not as expected risk; expansion outside Beijing is not as expected risk.

Investment suggestion

Maintain a "cautiously overweight" rating for the next six months

It is estimated that the EPS of the whole company in 18 and 19 years will be 1.33,1.64 yuan. Based on the closing price of 14.41 yuan on October 17th, the dynamic PE will be 10.84times and 8.81times respectively. We believe that: 1) as a leading pharmaceutical commercial company in Beijing, taking the implementation of sunshine procurement as an opportunity, the company is expected to expand its market share and strengthen the Beijing market due to industry integration. 2) the company actively promotes the layout of outport business, further improves the national layout of medical device business through the acquisition of Zhejiang Tonghan and Zhejiang Shangyang in 2017, and actively promotes national agency cooperation with Medtronic PLC and Abbott Laboratories on in-heart consumables in the first half of 2018, strengthening the sales network while enriching product categories. Maintain a "cautiously overweight" rating over the next six months.