Incidents: China Pharmaceutical disclosed its 2018 three-quarter report. In the first three quarters, the company achieved operating income of 22.197 billion yuan, an increase of 2.71% over the previous year; net profit of 1,244 billion yuan, an increase of 23.08%; and deducted non-net profit of 1,092 billion yuan, an increase of 14.13% over the previous year. The third quarter achieved operating income of 7.668 billion yuan, an increase of 7.39% over the previous year, net profit of 401 million yuan, an increase of 16.63% over the previous year; net profit after deducting 321 million yuan, an increase of 1.22% over the previous year. The pharmaceutical industry is still in a painful period of marketing integration, and the decline in the volume and price of APIs is affecting growth. The pharmaceutical industry's revenue growth in the first three quarters is estimated to be about 50%, and total profit increased by about 12%. The high growth in industrial income is mainly due to low development and high development and growth in major pharmaceutical varieties. Sales of atorvastatin in pharmaceutical products maintained an increase of about 15%, while GM's compound antibiotic sales declined due to industry policies. The decline in API revenue by more than 10% and the decline in gross margin affected the growth rate of industrial profits. The company's industrial marketing system is still in a period of transformation. Factors such as the link between production and marketing have affected the increase in revenue from pharmaceutical products. Zhongjian Company has officially operated since the end of 2017, and has reorganized the marketing systems of various subsidiary divisions. As Zhongjian continues to operate smoothly, the company's refined investment level and terminal promotion capabilities are expected to improve. The impact of pharmaceutical commercial transfers is clear, and Dianqiang Netcom is progressing smoothly. In the first three quarters, pharmaceutical business revenue fell by about 4%, and total profit increased by about 16%. The revenue growth rate was better than in the first half of the year (-7.05%), and it is estimated that the revenue for the third quarter was basically the same as the previous year. The decline in allocation business caused by the two-vote system was almost entirely clear; the pure sales business developed rapidly, with endogenous growth of about 15%. Following the mergers and acquisitions of Zhuying Pharmaceutical in the top five in Liaoning Province and Jinlun Pharmaceutical in the top three in Hebei Province in the first half of the year, networking work continued to advance in the third quarter, and a number of local and municipal commercial subsidiaries were set up successively in the third quarter. International trade has maintained steady growth. International trade sector revenue for the first three quarters is estimated to be the same as last year, with total profit increasing by about 10%. Pharmaceutical imports and exports have maintained relatively rapid growth; since some businesses are in the stage of alternating between old and new varieties, the revenue of the medical device business, which has low profitability, has declined significantly. The decline in gross margin and the increase in the management expense ratio affected performance growth. The company's gross margin for the third quarter was 20.93%, down 1.38pp from the second quarter; the period expense ratio was 13.81%, up 0.50pp from the previous quarter. The month-on-month decline in gross margin and the increase in the period expense ratio are the reasons why the company's revenue-side growth rate increased month-on-month while the profit growth rate declined month-on-month; it is related to the increase in the company's pharmaceutical business ratio and the increase in management expenses. Among them, the sales expense ratio was 10.72%, down 0.17pp from the second quarter; the cumulative management and R&D expense ratio was 2.78%, up 0.55pp from the second quarter; and the financial expense ratio was 0.32%, up 0.13pp from the second quarter. Build a national platform for specialized drug promotion and refined investment, and collaborate in industry and trade to create a unique competitive advantage. Zhongjian Company was established to integrate the sales of nine industrial subsidiaries, build a national platform for specialized drug promotion and refined investment, open up empty markets, increase terminal coverage, effectively enhance the profitability of the industrial sector, and ensure that the industrial sector continues to grow rapidly in the next few years. The commercial sector has implemented a strong point-to-point network strategy, accelerated the development of blank areas, and provided support for the national specialized promotion of pharmaceuticals and a refined investment platform. In addition to its own industrial products, in the future, a large number of imported pharmaceuticals and devices from the national general agency in the trade sector will be sold on this platform; in the future, the product range will be enriched by purchasing varieties and acting as agents for other products. Profit forecast and valuation: The company is expected to achieve revenue of 31.4 billion yuan, 36.1 billion yuan and 41.2 billion yuan in 2018-2020; increase by 4.32%, 14.91% and 14.15%, respectively, and achieve net profit of 1,606 billion yuan, 1,959 billion yuan and 2,371 billion yuan; year-on-year increases of 23.66%, 22.03% and 21.03%, respectively. Currently, the company's stock price is 10 times, 8 times, and 7 times PE corresponding to 2018-2020. Maintain your “buy” rating! Risk warning: risk of drug price reduction, risk of unsuccessful integration of extended mergers and acquisitions, risk of unrecoverable accounts receivable