Main points of investment:

The company is in a period of internal integration, with both revenue and profits declining. The company released its semi-annual report for 2015, with operating income of 490 million yuan, down 21.18% from the same period last year. The deduction of non-net profit was 1.267 million yuan, down 90.27% from the same period last year, and the net operating cash flow was-92.82 million yuan, down 503.76% from the same period last year. EPS is 0.003 yuan, which is lower than we expected. During the reporting period, industrial income was 287 million yuan, down 28.39 percent from the same period last year, and commercial income was 172 million yuan, down 22.19 percent from the same period last year. On the one hand, the decline in corporate performance is related to the overall environment of the industry, but also affected by the internal adjustment of the company itself.

The revenue of each business sector has declined to varying degrees, and the gross profit margin has risen steadily. During the reporting period, the income of the pharmaceutical industry reached 287 million yuan, down 26.13 percent from the same period last year, of which the income from the prepared slices business was about 200 million, down 10.64 percent from the same period last year, and that of traditional Chinese medicine oral liquid was 84.64 million yuan, down 38.21 percent from the same period last year. The revenue of pharmaceutical circulation was 172 million yuan, down 22.19% from the same period last year, of which Henan Taixinlong's revenue fell 28.38% to 111 million yuan, and Hebei Tailong's revenue dropped 32.52% to 24.74 million yuan. The new leading operating income is 29.16 million yuan, an increase of 46.41% over the same period last year. It is the only business sector that has achieved positive growth. In the first half of the year, due to the delay of bidding and the second price negotiation and other adverse factors, some of the company's prescription drugs and double-span varieties are difficult to achieve effective sales. In addition, the consolidation of high-profit business also provides the company with an opportunity for internal integration. The company has adjusted its product structure to reduce sales of products with low and negative gross margins, and the overall gross profit margin has increased by 5.37 percentage points. As the management and financial expenses both increased by more than 40% year-on-year, and the absolute amount increased by more than 10 million, the company's net interest rate was relatively low.

CRO and the business of prepared pieces of traditional Chinese medicine are the main endogenous growth points, and the epitaxial development strategy will continue. At the same time, the company announced that it intends to use 116 million of the funds raised to increase the capital of Tongjuntang, which is mainly used for the construction of Zhengzhou decoction and distribution center, Tonglu decoction and distribution center, logistics warehouse and Henan marketing network. It is proposed to use 20 million of the funds raised to increase the new leader's capital for the construction of the Deep Blue Sea Pharmaceutical CRO project, to set up a clinical trial technical service platform and data management center, and to improve the new leading industry chain. Other businesses will tend to streamline and shrink. In terms of extension, with the help of the M & A fund platform, the company will continue to expand to areas that meet the needs of the industry and market development around the core strategy.

Maintain the overweight rating. Taking into account the industry operating environment and the entire time period within the company, we lowered the 15-year profit forecast and maintained the 16-and 17-year profit forecast. The company's EPS for 15-17 years is expected to be 0.13 (the previous value is 0.19 yuan), 0.16 and 0.20 yuan, an increase of 134.1%, 25.3% and 20.2% over the same period last year, and the corresponding PE is 52, 42 and 34 times. Give the company the performance flexibility and extension expectations brought about by the efficiency improvement after endogenous integration, and maintain the overweight rating.

Risk hint: inefficient assets drag down performance risk, internal integration risk.