3Q18 deducted non-net profit increased by 23% over the same period last year.

On October 28, the company announced that it realized income, return net profit and deducted non-net profit of 254.3,38.5 and 3.81 billion yuan, up 30.3%, 22.1% and 21.1% over the same period last year, and the performance growth was in line with expectations. On a quarterly basis, 3Q18 revenue grew by 35.5% year-on-year, net profit by 24.3%, and non-net profit by 22.8%. We estimate that the company's 2018-20 return net profit will be 59.8 billion yuan and 1.20 billion yuan for EPS, up 21% and 16% over the same period last year, with reference to the comparable company valuation (19-year PE average 19x) and a high performance growth premium. PE will be valued 18-20 times in 2019, with a target price of 21. 6-24. 0 yuan (previous value 24-28 yuan), maintaining the "overweight" rating.

Prepared slices have benefited from industry integration and smart pharmacies, and trade in medicinal materials has rebounded.

1) We expect the revenue of prepared pieces of traditional Chinese medicine to grow by more than 40% year on year: after three years of operation, the company plans to invest 7.7 billion yuan to promote "wisdom pharmacy" at full speed, which has been implemented in Guangzhou, Shenzhen, Beijing, Shanghai, Chengdu, Puning, Kunming, Chongqing, Guiyang, while actively starting the construction of Xiamen, Meihekou and other places, which is expected to cover more than 15 places this year. Accelerate the business of prepared slices (revenue growth for the whole year is expected to sprint 50%) 2) We expect the trade income of Chinese medicinal materials to grow by more than 20% year-on-year, which is the first rebound after three consecutive years of decline in 14-16 years and 17 years of stability. Taking into account downstream demand and self-use demand, we maintain the forecast of steady income growth for the whole year.

Drug agency is stable, equipment circulation expands agent pipeline.

1) We expect drug trade 1-3Q18 revenue to grow by 10% year on year: drug agents, originally strong in Guangdong Province, have achieved output outside the province in recent years by means of hospital acquisition, dealer acquisition, pharmacy trusteeship and so on. We believe that depending on the arrival of trusteeship in the province and the cooperation of governments outside the province, the annual revenue growth of drug trade is expected to rise. 2) We expect 1-3Q18 revenue to grow by more than 50% compared with the same period last year: the company's equipment circulation focuses on orthopaedic, surgical, facial features, diagnostics and other high-value consumables and small and medium-sized equipment, which now covers about 90% of the country, and the agency products include Jaime Bangmei, Xerox, Chuangsheng, Kanghui and other brands. the company plans to expand to non-orthopaedic brands and domestic brands to enrich the agency pipeline.

The operating index is stable

1) sales expenses 1-3Q18 increased by more than 60% compared with the same period last year. We expect that the adjustment of accounting treatment after the two-vote system (the apparent income and the sales promotion service fee increase at the same time) will have little impact on the net profit margin. 2) the cash flow performance is good, the cash-to-cash ratio of 1-3Q18 is about 100%, and the net cash flow is lower than the net profit, mainly due to the growth of inventory and operating receivables, which we think is related to the business model of circulation. 3) accounts receivable has maintained rapid growth since 4Q17, which we expect to be related to the extension of the account period caused by the expansion of equipment circulation.

The strategic vision is becoming clearer.

As its business is different from that of most listed Chinese medicine companies (proprietary Chinese medicine industry), the company has explored the business ecology suitable for Chinese medicine enterprises, that is, the wisdom pharmacy centered on prepared slices, the industry of Chinese herbal medicines explored upstream, the hospital supply chain extended from the channels of prepared slices, the government medical projects extended by Chinese herbal medicines, and sufficient funds for this strategic reserve (as of 3Q18, the monetary funds reached 37.7 billion yuan). We have observed that the company has a relatively clear investment plan for the next three years, and most of these projects have been carried out prudently through pilot practice. We think that the company may stand at a new strategic starting point, where opportunities and pressures coexist.

Risk hint: the promotion of the wisdom pharmacy does not meet the expectations, and the hospital trusteeship does not meet the expectations.