Event: The company released its 2018 annual report: annual operating income was 1,618 million yuan, up 38.51% year on year; net profit attributable to shareholders of the parent company was 374 million yuan, up 57.98% year on year; non-net profit attributable to shareholders of the parent company was 376 million yuan, up 81.43% year on year. Achieve an EPS of 1.06 yuan. It is proposed to transfer 4 shares for every 10 shares. Opinion: 1. Revenue continued to grow rapidly throughout the year. The Q4 performance growth rate slowed down due to non-recurrent factors. The company's revenue growth rate for the full year of 2018 was 38.51%, which was significantly faster than the growth rate in 2017; net profit growth in 2018 was 57.98%, a slowdown compared to 92.82% in 2017; net profit growth rate after non-return in 2018 was 81.43%, a slight decrease from 89.43% in 2017. Separately splitting 2018Q4, the company's revenue growth rate was 38.57%, net profit growth rate was 11.20%, and net profit growth rate after deduction was 35.74%; the company's 2018Q4 revenue growth rate was the same as the previous three quarters. The net profit growth rate was significantly lower than the revenue growth rate, mainly due to the high net interest rate of products under the special circumstances of 2017 Q4. 2017Q4, the company's mass sales of premium Chinese medicines in entrepreneurial activities led to extremely high net interest rates. Net interest rates reached 32.60%, while the net interest rate for the full year of 2017 was 21.42%, the net interest rate for 2018Q4 was 26.34%, and 2018Q4 was close to the normal net interest rate of the company's products. In addition, there were many non-recurring profits and losses in 2017-Q4, which led to lower net profit growth in 2018Q4. After deducting non-recurring profit and loss, the growth rate of performance in 2018Q4 was about the same as the revenue growth rate. 2. High-end traditional Chinese medicine grew rapidly. Angong Niuhuang Pill+Niu Qingxin+Health Liquor showed outstanding performance by product sector: pharmaceutical industry revenue was about 1,494 billion yuan, an increase of 37.14%; pharmaceutical commercial revenue was 69 billion yuan, an increase of 34.41%; traditional Chinese medicine revenue was 1,281 billion yuan, an increase of 34.83%, and gross margin decreased by 0.45pp to 83.20%; premium Chinese medicine revenue was 213 million yuan, an increase of 52.93%, gross margin increased by 1.25 pp to 88.49%; health wine revenue was 0.53 billion yuan, an increase of 0.53 million yuan, and health wine revenue of 0.53 billion yuan, It increased by 106.49%, and gross margin increased by 6.93 pp to 68.73%. By product: Ding Kundan's revenue was 528 million yuan, an increase of 62%, and Ding Kundan's (boutique+collection) revenue was 22 million yuan, an increase of 147.55%. Dingkundan Honey Pills has maintained rapid growth, mainly due to the results of the company's early work in expanding terminal coverage, strengthening marketing and store staff training, and continuing to strengthen its brand strength. Dingkundan Boutique was once discontinued in 2017 due to production capacity issues. Sales were relatively good after production capacity was restored in 2018, and is expected to grow rapidly in 2019. Turtle Age Collection's revenue was 407 million yuan, an increase of 4.33%, and Turtle Age Collection (Boutique+Collection) revenue was 119 million yuan, an increase of 37.59%. The growth rate of Gui Ling Ji's regular pack revenue has slowed down. The main reason is that Gui Leng Ji is a prescription drug. Unlike Ding Kundan, which is a double cross variety, there are barriers to publicity, and the cost control value of the hospital side market has affected the sales volume of Gui Ling Ji's regular pack to a certain extent. Gui Leng Market products are mainly sold through their own Chinese medicine centers and Chinese pharmacies, and maintained rapid growth. Angong Niuhuang Pill's revenue was 259 million yuan, an increase of 99.12%, while Gui Ling Ji (Premium Plus Double Natural) revenue was 55 million yuan, an increase of 37.68%. Yasumiya Niuhuang Pills grew at an ultra-high rate for three consecutive years, with a compound growth rate of over 100%, becoming an important growth point for the company. Due to the mature market education of Yasugong Niuhuang pills, promotion is less difficult, and it is expected that the company will continue to grow rapidly under the strengthening of the company's brand power and continuous marketing. Revenue from Niuhuang Qingxin Pills was 87 million yuan, an increase of 153.76%, while Gui Ling Ji (Premium Plus Double Natural) revenue was 17 million yuan, an increase of 342.00%. Niu Qingxin's income is relatively small. In 2018, the overall income exceeded 100 million for the first time. Like Angong Niuhuang Pills, it is expected to maintain rapid growth over the next 3 years. Health wine revenue was 53 million yuan, an increase of 106.49%. Guiling Liquor and Flavored Guiling Liquor is one of the three major growth points designed by the company in 2018. With the launch of a new factory, the release of health wine production capacity, and the continuous expansion of the marketing team in the Yangtze River Delta and Pearl River Delta regional markets, health wine is expected to break 100 million in 2019 and become the company's new growth points. 3. The intermediate expense ratio has declined markedly, and accounts receivable and cash flow are awaiting improvement in three expense ratios: sales expense ratio, management expense ratio (including R&D expenses), and financial expense ratio are 38.83%, 9.55%, and 0.88%, respectively, compared to the same period last year, -5.31, -2.92, and +0.53 pp, respectively. The company's median expense ratio has declined markedly, and the sales expense ratio has declined rapidly. We judge that the main reason for the decline in the sales expense ratio is that with the increase in brand power, the company optimized its advertising strategy, stopped pursuing the high-profile advertising strategy of the CCTV platform, and instead strengthened media with a higher penetration rate among potential consumers, such as local TV, online media, and mass media, etc., and reduced advertising expenses on the premise of guaranteeing the effectiveness of advertising. The reason for the reduction in the management expense ratio is that the revenue side maintained a high growth rate. Expenses other than R&D expenses did not increase significantly, and the cost rate declined after the scale effect became apparent. The main reason for the increase in the financial expense ratio is the increase in interest expenses due to short-term loans from Guangyu, Shanxi. However, the overall change was small, and there was no obvious impact on the company's expense ratio. Accounts receivable and notes receivable: The company's accounts receivable and notes receivable at the end of 2018 were $244 million and $1,338 million respectively. Compared with the 2018 Q3 data, there was an increase of $60 million and $271 million respectively. The company's accounts receivable and notes receivable continued to increase slightly. On a quarterly basis, the ratio of the company's accounts receivable to operating income in 2018Q4 was 45.39%, comparable to 2018Q1 and higher than 2018Q2 and Q3 (32.62% and 20.62%, respectively). Previously, we have analyzed the reasons for the increase in the company's accounts receivable many times (1) As a second-time enterprise, during the brand start-up period, the company's bargaining power was weak. In order to speed up the expansion of sales terminals, it gave customers a certain account period, causing accounts receivable to accumulate (2) The products currently produced by the company mainly include the four major products, Dingkundan, Gui Lingji, Angong Niuhuang pills, and Niuhuang Qingxin pills. The unit price of the four major single products is high. During the promotion period, even a small amount of bottomed goods will cause the company to expand its business rapidly (3) Faster, causing new partners to constantly need to replicate previous developments , preparation of goods, payment period, training, significant increase in sales volume, smooth payment, and the process of purchasing goods a second time. We judge that for long-term development and the advancement of the company's strategy, the company will continue to vigorously promote Guiling Liquor in 2019, resume production of classic Chinese medicines and refined tablets, and strengthen drug account management to achieve a balance between company development and financial data health in 2019. PS: From a set of data, we can see the rapid development of the company's channels: in 2016, it developed more than 400 pharmacy chains nationwide, 39,336 OTC terminal stores, and developed a total of 734 hospitals throughout the year. The number of hospitals developed exceeded the total development of the previous five years. The number of OTC terminal stores was 1.97 times the total of the previous 10 years; in 2017, 1,953 new hospital terminals were added, and about 600 pharmacy chains were added. By the end of 2017, the company had cooperated with more than 1,000 pharmacy chains, managed nearly 30,000 pharmacies, and covered nearly 100,000 terminals. In 2018, it covered 150,000 pharmacies, managed more than 40,000, and added more than 1,200 new hospital terminals. Cash flow: The company's cash flow at the end of the period was 125 million yuan, with a net increase of -156 million yuan. Among them, net cash flow from operating activities was -298 million yuan, a decrease of 114 million yuan over the same period last year. The main reason for the negative operating cash flow and the decrease compared to last year was determined by the special period in which the company was developing and the development strategy chosen by the company: (1) As a second-time enterprise, in order to resume production and brand, the company invested a lot in brand promotion in the early stages, and the cash flow was tight. (2) Payments made by the company's commercial customers in the form of acceptance bills of exchange also have a certain impact on the company's cash flow and operating cash flow (3) During the period of rapid development, the company required more expenses for market expansion, further increasing cash expenses for operating activities (4) The construction of the company's new traditional Chinese medicine industrial park has led to a certain increase in cash expenses.With the continuous improvement of the company's brand strength and the smooth progress of terminal expansion, and the commencement of production of the new factory area, the company's account period is expected to be shortened, acceptance bills collected will gradually decrease, marketing expenses will gradually stabilize, other expenses will decrease, and operating cash flow is expected to improve markedly in '19. 4. In the future, the company looks forward to the new plant being put into operation and breaking through the bottleneck in production capacity. Full release in 2019: The company's new plant has obtained pharmaceutical GMP certification on August 31, 2019. The company's approved GMP workshop has a production capacity of 100 million hard capsules (Guiling Group, etc.), 5,000 bottles of pills (Dingkundan honey pills, etc.), 80 million pills (Dingkundan honey pills, Angong Niuhuang pills, Niuhuang Qingxin pills, etc.), 30 million bottles of oral liquid (Dingkundan oral liquid, etc.), and 6.5 million bottles of alcohol (flavored with Guiling Liquor). According to data disclosed in the company's annual report, Gui Ling Ji's production capacity is about 2.5 times that of now, the pill production capacity of Dingkundan, Angong Niuhuang pills, and Niuhuang Qingxin pills is about 2 times that of now, the production capacity of Gui Ling Jiu Liquor is about 10 times that of now, and the production capacity of Ding Kundan's oral liquid is about 100 times that of before production was discontinued. After the commissioning and run-in phase in the second half of 2018, production capacity will be completely released in 2019, and there will be no capacity bottlenecks in the short to medium term. The company's strategic development will enter the second stage: from the end of 2018 to 2020, the company will resume production of six series of more than 40 classic Chinese medicines; in 2018, it will resume the middle-aged and elderly life extension series (flavored with turtle age), chronic disease series (such as manlu thirst quenching capsules), children's medication series (such as pediatric cough suppressant oral liquid, cold and fever-clearing granules, baby supplements), and in 2019, the heat-clearing and detoxification series (including ox yellow detoxification tablets, quenching the stomach, and xihuang pills), and in 2020, reviving the middle-aged and elderly life extension series (Rokumi Dihuang Pills, Chibai Dihuang Pills, etc.), Qing The Hot Detox series (Yinqiao Detox Pills, etc.) and Agastache Zhengqi capsules provide new impetus for the company's business growth, achieving a rich product line and balanced development between classic Chinese medicine, premium traditional Chinese medicine, health wine, and premium drink business segments. Health alcohol is expected to explode: the company's Guiling Liquor and Flavored Guiling Liquor are the main products of health wine, one of the company's three engines. Gui Ling Ji Liquor focuses on the high-end restaurant market, adding that Gui Ling Ji Liquor focuses on the hospital pharmacy market. After the company completed the health wine marketing team update in 2017, health wine rapidly expanded the regional markets of Jiangsu, Zhejiang, and Pearl River Delta in 2018. After the new factory is put into operation, health wine will release a production capacity of about 1 billion dollars, completely solving the problem of production capacity bottlenecks. The health wine sector may experience a major explosion in the second half of 2018. In the next 3-5 years, the health wine sector is expected to become an important growth point for the company's profits. The 2018 edition of the base drug catalogue adjustments brings opportunities: in the 2018 edition of the basic drug catalogue issued by the Health and Health Commission, the company's Ding Kundan (honey pills, big honey pills), Xihuang pills, and dendrobium noctilucent pills have newly entered the catalogue. The adjustment of the basic drug catalogue may enable the company's Dingkundan to further develop sales channels and enhance terminal coverage in the primary drug market. Furthermore, it is expected that the company will resume production of Xihuang pills in 2019. The inclusion of Xihuang pills in the national basic drug catalogue will help the company speed up the promotion of Xihuang pills. Conclusion: We estimate that the company's net profit in 2019-2021 will be 493 million yuan, 680 million yuan and 928 million yuan respectively, with an increase of 31.71%, 38.17%, and 36.35%, respectively. The EPS is 1.40 yuan, 1.93 yuan, and 2.63 yuan respectively, and the corresponding PE is 24x, 17x, and 13x respectively. We believe that the company is a major potential stock in Chinese medicine consumer goods. The company's moat is strong, and the absolute competitive advantage of the four major single products can guarantee the company's long-term competitive barriers. With the resumption of growth in the company's premium traditional Chinese medicines, the release of production capacity for health alcohol, the resumption of production of classic Chinese medicines, and the introduction of premium tablets, the company is expected to continue its rapid growth in the early stages. As the company's brand power and bargaining power increase, the company's financial position will also improve. We maintain a “Highly Recommended” rating based on our optimism about the company's prospects. Risk warning: The growth rate of traditional Chinese medicine is slowing down, health alcohol promotion falls short of expectations, and cash flow cannot be improved in a short period of time.