Profit is predicted to increase 12-17% year over year

We expect the company's net profit for the full year of 2018 to increase 12-17% year over year.

Key points of interest

Operations are expected to be better in the second half of the year than in the first half, mainly due to an increase in the share of net sales business. In the first half of 2018, China Control Guangdong's revenue fell 7% year on year, and net profit fell 25% year on year; mainly due to the implementation of Guangdong's two-vote system in the second quarter of '18, the transfer business declined significantly; China Control Guangxi's revenue increased 0.6% year on year, and net profit increased 8% year on year. Net sales revenue increased 4-5% year-on-year in the first half of 2018. In the 1st-3rd quarter of 2018, the company's transfer business revenue accounted for less than 20% of the company's distribution business. We expect the full year of 2018 transfer business revenue to decrease by about 2 billion dollars. Furthermore, the company has been restructuring its distribution business within its equity. The company plans to place second-tier subsidiaries in the Liangguang region on two provincial platforms: Guogong Guangdong and Guogong Guangxi.

We expect retail revenue growth of 7-10%. In the first half of 2018, retail revenue grew 7%, and we expect this trend to continue throughout the year, mainly due to endogenous growth within the company. In the first half of 2018, the net profit margin of the retail business was 2.7%, an increase of 0.6 percentage points over the previous year, mainly due to the increase in gross margin and the recovery of minority shareholders' shares in subsidiaries. The company officially introduced Wobble Union as a strategic shareholder in June 2018, and the company's shareholding ratio in Guoda Pharmacy dropped from 100% to 60%. We believe that in the long run, the company is expected to draw on the advantages of foreign investment, achieve innovative development of technology, management and business models, and build a leading retail characteristic system in the industry.

We, Hyundai Pharmaceuticals, anticipate a 38% increase in investment income over the same period last year. According to Hyundai Pharmaceutical's performance report announcement, Hyundai Pharmaceutical is expected to achieve net profit of 711 million yuan to its mother in 2018, and we expect Hyundai Pharmaceutical to contribute 111 million yuan in investment income (vs. 80 million yuan in 2017).

Valuation and advice

The 2018/2019 earnings forecast of 2.80/3.10 yuan per share was maintained, and the 2020 earnings forecast of 3.54 yuan per share was introduced, corresponding to the compound increase of 13% in 2017-2020.

The current stock price corresponds to the 2019/2020 P/E of 14x/12x. Considering the company's steady business, maintaining the recommended rating, maintaining our target price of 56.6 yuan, corresponding to the 2019/2020 P/E of 18x/16x, there is still room for 29% growth.

risks

Price reduction pressure for volume procurement, new business expansion falls short of expectations