The decline in the company's 2019H1 performance is generally in line with expectations; the industrial sector is clearly pressured by volume procurement, and the commercial sector is expected to usher in improvements; under the promotion of an integrated two-wing strategy, the strength of the second and third terminals is worth looking forward to. Continue to recommend and maintain an “increase in holdings” rating.

2019H1's performance declined year over year and was generally in line with expectations. The company achieved revenue, net profit attributable to the mother, and net profit of 16.860 million/688 million/664 million yuan respectively in 2019H1, +16.04%/-17.99%/-13.91% compared with the previous year; net operating cash flow of -949 million yuan. Looking at a single quarter, 2019Q2 achieved revenue, net profit attributable to the mother, and net profit of 8.615 billion/279 million/255 million yuan respectively, +9.45%/-30.54%/-34.76%, respectively, compared with the previous year. The company's 2019H1 performance was under pressure and was basically in line with expectations.

The industrial sector is clearly under pressure, and the commercial sector is expected to usher in improvements. The 2019H1 pharmaceutical industry sector achieved revenue of 2,677 million yuan, a year-on-year decrease of 6.63%; operating profit fell 46.59% year on year to 227 million yuan. The decline in profit was clearly mainly due to Ato and Ruishu being included in the first batch of procurement lists, Q2 sales fell by about 30%, and the company's industrial marketing system reform was still progressing; the decline in sector revenue was less than profit, mainly due to structural adjustments (sales of other generic drug varieties increased by about 16%). The commercial sector achieved revenue of 10.851 billion yuan in 2019H1, an increase of 21.69% over the previous year, and achieved operating profit of 505 million yuan, an increase of 48.85% over the previous year. Considering that Henan and Guangdong provinces implemented a “two-vote system” in June 2018, it is expected that the adjustment factors in the commercial sector transfer business will be completely eliminated in the second half of the year, which will further drive sector performance improvement. The international trade sector achieved revenue of 3,936 million yuan, an increase of 20.72% over the previous year; realized operating profit of 407 million yuan, a decrease of 3.86% over the previous year. Mainly affected by lagging export business execution and changes in business structure, the sector's operating profit is expected to grow positively throughout the year. The company's sales expense ratio decreased by 0.63 PCT to 10.49%, and is expected to improve further with the establishment of the sales system; the management expense ratio (including R&D) and financial expense ratio increased slightly by 0.50/0.23 PCT to 2.69%/0.46% respectively, and it is expected to gradually stabilize as resource integration deepens and business collaboration continues to advance.

The integrated two-wing strategy continues to advance, and it is worth looking forward to the strength of the second and third terminals. The company's integrated two-wing strategy continued to advance during the reporting period. As of 2019H1, the consistency evaluation of 44 product regulations (including injections) has been initiated. Of these, 6 varieties have been accepted and are expected to be implemented within the year. Currently, 66 new products are being developed (including 3 new first-class drugs and 3 traditional Chinese medicines). During the reporting period, the new drug YPS345 entered phase I clinical trials; the recruitment of test subjects for the phase II clinical trial of the new drug TPN7292 has begun. Furthermore, the consistency evaluation of metformin hydrochloride sustained-release tablets has been approved. It is worth looking forward to the accelerated implementation of new varieties (including secondary development) and product structure optimization in the second half of the year. During the reporting period, the company continued to explore off-standard markets and expand medical terminal channel resources. As the second and third terminals continued to gain strength, the decline in sales of the main varieties Ato and Ruishu gradually narrowed to 23%. China Construction Company can promote more than 200 varieties during the reporting period. As the “promotion to hospitals, investment to counties, OTC to stores” strategy accelerates, the company is expected to build a pattern of differentiated advantages, laying a solid foundation for long-term development.

Risk factors: M&A integration falls short of expectations, excessive competition causes gross margin decline, etc.

Profit forecasts and ratings. The company's strategy of refining investment in the industrial sector and strengthening the network connectivity strategy in the commercial sector continues to advance. Profitability is expected to continue to increase in the second half of the year, and revenue is expected to gradually recover. Considering that the collection policy still has an obvious impact on the company's short-term performance, maintain the company's 2019-2021 EPS forecast at 1.43/1.53/1.79 yuan to maintain the “increase in holdings” rating