Results continued to recover in the second quarter of fiscal year 18. In the first half of 2018, revenue increased by 60.8% to 1.305 billion yuan over the same period last year, of which injection products increased by 70.3%, soft capsule products by 37.1%, granular products by 41.1%, traditional Chinese medicine formula granules by 146.1% year-on-year, and other products by 21.8%. They accounted for 53.6%, 17.3%, 14.6%, 10% and 4.5% of the revenue in the first half, respectively. The proportion of distribution costs rose from 21.7% in the first half of 2017 to 38.4% in the first half of 2018, mainly due to the high impact after the implementation of the "two-vote system", excluding the high impact on distribution costs accounted for about 19%. Due to the development investment of Classic, the R & D expenditure rate increased from 3.2% in the first half of FY17 to 5.6% in the first half of FY18. As a result, net profit rose 40.4 per cent year-on-year to 260 million yuan. Although the influenza outbreak ended in the second quarter, the company maintained strong growth in the second quarter, mainly due to 1) continued recovery in core business and 2) strong growth of traditional Chinese medicine formula particles. Since revenue in the first half of fiscal year 17 accounted for 47% of annual sales, the company's revenue growth in the first half exceeded our and market expectations.

Core business continues to recover. In terms of injections, Qingkailing increased by 96.6% to 250 million yuan, benefiting from 1) higher unit prices of products and 2) sales from primary care increased by 92.7% compared with the same period last year. Since 86% of the revenue of Qingkailing injection is contributed by primary health care institutions, I would expect that this product will benefit from graded diagnosis and treatment and primary health care expansion in the future. Shuxuening and Shenmai injection increased by 86.5% and 30.2% respectively, mainly due to the high opening effect after the implementation of the two-vote system. Excluding the impact of the two-vote system, injection products recorded an increase of more than 10% in the first half of the year. Considering that secondary and tertiary hospitals continue to restrict the use of traditional Chinese medicine injections, we expect low double-digit growth in injection products in the future. Soft capsules and granule products continued to recover, thanks to 1) strong sales in chain pharmacies, with a growth rate of 97.5%. 2) the continuous academic promotion of exclusive products in secondary and tertiary hospitals, recording a growth rate of 36%. We expect soft capsules and granule products to maintain a growth rate of 20% in the future, thanks to 1) increased coverage of primary health care institutions and pharmacies, graded diagnosis and treatment of drug use in the grass-roots market, 2) price increases of some products, and 3) continuous academic promotion of exclusive products in terminal hospitals. We believe that the worst for the company is over and the recovery will continue.

Traditional Chinese medicine formula granule is one of the core growth points. Traditional Chinese medicine formula granules continued explosive growth in the first half of the year, an increase of 146.1% over the same period last year, and the proportion of total income rose to 10%. The company is fully prepared for the upcoming opening of the formula granule market. At present, the production capacity of formula granules has expanded from 600 million bags to 2 billion bags. In addition, the company obtained a pilot license for formula granules in Yunnan Province on August 29, and the Yunnan plant is expected to start production in October 2018, which will increase its production capacity by 1 billion packets. We believe that Shenwei will continue to expand its formula granule business to other provinces, and traditional Chinese medicine formula granule will become one of the core driving forces of the company. We expect that traditional Chinese medicine formula granules will record a compound annual growth rate of 58% in the next three years.

Increase core net profit by 1.9% for fiscal year 18 by 0.4% for fiscal year 19. Taking into account the high impact of the two-vote system, we raised our revenue forecast for fiscal year 19 by 12.1% and 12.1%, as well as the distribution fee ratio. We have also slightly increased the share of R & D spending. We expect revenue in fiscal year 18 to be 37.9% and core net profit to increase by 30.7% and 24.7%, respectively, compared with the same period last year.

Maintain the buy rating with a new target price of HK $17.1 (adjust the RMB exchange rate). Based on the new forecast and adjustment of the latest RMB exchange rate, we get the latest target price of HK $17.10 through the DCF model. We believe that Shenwei will continue to recover under the promotion of the recovery of core products and the strong growth of traditional Chinese medicine formula particles. Shenwei is currently valued at 13.3x/10.7x in fiscal year 2018 (excluding cash on the books and valued at 9.4x/7.5x). Our TP corresponds to the 20.5x/16.5x of fiscal year 19 in 2018, with a potential increase of 54.3%.