Incident: Qizheng Tibetan Pharmaceutical released its annual report for the third quarter of 2018. In the first three quarters of 2018, the company achieved operating income of 856 million yuan, an increase of 23.82% over the previous year; net profit attributable to shareholders of listed companies was 246 million yuan, an increase of 18.14% over the previous year. Net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 232 million yuan, an increase of 15.07% over the previous year. The achieved EPS was 0.61 yuan. In Q3 2018, the company achieved operating income of 314 million yuan, a year-on-year increase of 34.59%; achieved net profit attributable to shareholders of listed companies of 56 million yuan, an increase of 44.97% over the previous year; net profit attributable to shareholders of listed companies after deducting non-recurring profits and losses, amounted to 53 million yuan, an increase of 40.32% year-on-year. Achieved EPS of 0.14 yuan. The company announced its 2018 operating performance forecast: The net profit due to mother is expected to be 301 million to 391 million yuan for the full year of 2018, an increase of 0-30% over the previous year. Opinion: 1. Steady performance is in line with expectations. Revenue and profit for the third quarter slightly exceeded expectations. The company's revenue for the first three quarters was 856 million yuan, up 23.82% year on year; net profit to mother was 56 million yuan, up 44.97% year on year, after deducting 232 million yuan in non-net profit, up 15.07% year on year. The overall performance was steady and in line with expectations, and the operating conditions were good. The revenue side grew by more than 20%, and was accompanied by good net operating cash flow (+56.24%), which slightly exceeded expectations. Looking at 2018Q1-Q3 by quarter, the company's revenue was 227 million, 315 million, and 313 million respectively, with growth rates of 17.08%, 19.25%, and 34.59% respectively, showing a continuous positive trend. Overall, it has returned to more than 20%, driven by rapid growth brought about by the increased influence of core cream brands and the growth of second-tier varieties. By product line, the core product pain relief paste is growing rapidly (all key provinces and cities across the country have successfully won the bid, the impact of this round of price cuts has basically been reflected, and sales are growing steadily), second-tier new products are growing strongly, and Safflower Ruyi pills are still growing rapidly. In terms of financial indicators, the company's sales expenses ratio in the first three quarters was 48.58%, up 2.82pp from 45.76% in the same period last year (the company's investment in marketing continued to increase). The company's management expense ratio is 7.60%, down 0.20pp from 7.80% in the same period last year, and management expenses are well controlled. The financial costs are low, and the impact is not significant. The overall gross margin remained stable. Looking ahead to the whole year, the company expects net profit of 301 million to 391 million yuan, an increase of 0-30% over the previous year, and Q4 results of 55 million to 145 million. We expect to maintain steady growth at around 100 million. 2. The primary market+retail market made concerted efforts to drive sales growth. 2017 was the end year of the company's three-year strategy. In the past three years, the company carried out related work based on the “one axis, two wings, one support” strategy (pain relief paste as the axis, integrated pain plan, neurological recovery+new gynecology products), and achieved steady growth. 2018 marks the beginning of the company's new strategy. The company formulated a “one axis, two wings, three supports” strategy for the next three years. “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 for pain categories. On the other hand, by focusing on neurological rehabilitation and the gynecology and dermatology markets, “Two Wings” accelerates breakthroughs from a single variety to multiple varieties and multiple gradients, and forms a more reasonable product structure. “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 has never stopped exploring sales mechanisms. New products and channels are being promoted, and the results are beginning to be seen. Grassroots markets 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. The retail market, on the one hand, closely revolves around the integrated pain brand development strategy to increase Qizheng brand building efforts and enhance brand influence; on the other hand, accelerate the pace of new product launches. During the reporting period, the company became the official strategic partner of the 2018 Lanzhou International Marathon, providing professional integrated solutions for skeletal and muscle pain. Strange meridian exercises with Tibetan cultural characteristics were developed for skeletal muscle protection, and further disseminated and promoted among consumers. The Qizheng brand was selected for the first China Independent Brand Fair hosted by the Development and Reform Commission, the China Propaganda Department, the Ministry of Commerce, and the General Administration of Market Supervision and Administration, focusing on showcasing the development history of the Qizheng brand that has taken root in Tibet for 23 years; Qizheng Pain Relief Patch was successfully selected for the “China First OTC Brand Month Promotion Brand” campaign to help the public learn more about the brand drugs around them. At the same time, the company continues to advance preparations for the launch of new integrated pain products, and further increases the coverage of second-tier new products 3. With policy support, traditional Chinese medicine is expected to expand further. Leading Tibetan medicine is expected to rise in February 2017. The 2017 edition of the National Health Insurance Catalogue was launched. The proportion of Western medicine and proprietary Chinese medicines in the catalogue reached 51% and 49% respectively, which is basically the same. Meanwhile, the number of ethnic medicines increased from 47 to 88, an increase of 90%, which is significantly higher than that of other drugs. By the end of 2017, 1 of the company's varieties had entered the national essential drug catalogue, 17 varieties had entered the “National Basic Medical Insurance, Work Injury Insurance and Maternity Insurance Drug Catalogue (2017 Edition)”, 53 products had entered the local provincial medical insurance catalogue, 26 products had entered the local basic drug catalogue, 41 products had entered the urban and rural residents' medical insurance catalogue or the new agricultural cooperation catalogue, 9 products had entered the local low-cost drug catalogue, and 2 products had entered the national emergency (rescue) drug catalogue. On March 5, 2017, the Fifth Session of the 12th National People's Congress opened at the Great Hall of the People in Beijing. Premier **** of the State Council delivered a report on the work of the government on behalf of the State Council to the Fifth Session of the 12th National People's Congress. The report once again emphasized “supporting the development of traditional Chinese medicine and ethnic medicine.” The company is a leader in the Tibetan medicine sector. Ethnic medicine is scarce and has the mission of inheriting Chinese Tibetan medicine culture. In recent years, the company has been committed to the redevelopment of ethnic medicine with the support of evidence-based medicine, which is of great significance. With further policy support, we believe that in the future, more and more good folk medicines can be discovered to help patients. As a leading Tibetan medicine leader and the largest Tibetan medicine manufacturer, the company is expected to further enrich its product line and expand its wealth. Conclusion: We expect net profit to be 336 million yuan 382 million yuan and 439 million yuan respectively in 2018-2020, with increases of 11.48%, 13.84%, and 14.83% respectively. EPS is 0.83 yuan, 0.94 yuan, and 1.08 yuan respectively, and the corresponding PE is 28x, 25x, and 22x, respectively. The company's second-tier varieties, Qingpeng Ointment and White Veil Ointment, continue to gain strength, and the increased profitability of the divestment API business is expected to usher in an inflection point in performance. In the long run, the company vigorously promotes product development and brand building, enriches the product line, and actively seeks opportunities for epitaxial investment. Future development is worth looking forward to. We are optimistic about the company's development and maintain a “recommended” rating. Risk warning: Tender price reduction pressure, new product promotion falls short of expectations