Incidents: 1) On October 31, the company released its three-quarter report for 2023. The company achieved revenue of 861 million yuan (+23.21%) in the first three quarters, net profit of 59 million yuan (+11.80%), net profit of 59 million yuan (+11.80%), and net profit deducted from non-return mother of 48 million yuan (+13.94%). Among them, Q3 achieved revenue of 251 million yuan (+6.28%), net profit of 0.02 billion yuan (+25.94%), net profit of net income of 0.2 billion yuan (+24.56 percent) after deducting non-treasury net profit (+24.56 percent). 2) On November 3, the company issued the “Notice Concerning Gansu State-owned Assets Investment Group Co., Ltd.'s Offer to Acquire the Company's Shares and Complete the Transfer”. The purchaser, Gansu State Investment, issued a comprehensive offer to acquire listed and traded common shares (A shares) held by all shareholders of the company except Lanzhou Foci Pharmaceutical Industry Development Group Co., Ltd. As of the disclosure date of this announcement, the liquidation and transfer procedures for the shares involved in this tender offer have been completed. Gansu SDIC held a total of 318,797,536 shares of the company through direct and indirect means, accounting for 62.43% of the company's total share capital.

Q3 Net profit is under pressure in the short term, and I am optimistic about the company's long-term development. The sales expense ratio, management expense ratio, and financial expense ratio for the first three quarters of 2023 were 12.42%/6.86%/-0.50%, respectively, up 0.24/0.27/0.26pct year-on-year. Among them, Q3 operating costs accounted for a relatively high level of 77.18%, net profit margin of 0.82%, a decrease of 8.99pct over the previous month, mainly due to the increase in raw material prices and the company's current increase in market development and advertising of key products. We believe that, judging from Q3 alone, the company continues to increase the decline and expansion of markets inside and outside the province, and is in a period of transition between operations and management. There is a lot of room for marginal improvement in future gross margin and net profit margin in the future. Judging from the first three quarters, the company's performance is in line with expectations and continues to improve, and the company has gained new vitality.

The tender acquisition is officially completed, and Gansu State Investment is expected to help the company develop. Gansu SDIC issued a comprehensive offer to acquire listed and tradable common shares (A shares) held by all shareholders of the company except Lanzhou Foci Pharmaceutical Industry Development Group Co., Ltd. As of November 3, the liquidation and transfer procedures for the shares involved in this tender offer have been completed. According to the research activity information announcement issued by the company on November 1, after Gansu SDIC completed its acquisition of Foci Group, it is currently in a management transition period. In the future, Gansu SDIC will have a positive effect on the company's development in terms of policies, capital, and mechanisms.

Located in the western province with large resources for traditional Chinese medicine, there is still a long way to go in revitalizing Longyao. On August 24, the 4th China (Gansu) Traditional Chinese Medicine Fair opened. Among the signed projects, the contract amount for traditional Chinese medicine processing and traditional Chinese medicine health care increased dramatically, up 279.00%/465.44% respectively from the previous Pharmaceutical Fair. According to data from the Gansu Provincial Commission of Industry and Information Technology, the cultivation area of Chinese herbal medicines in Gansu reached more than 4 million mu, with an output of 1.1 million tons, ranking among the highest in the country. The unique geographical location and climatic conditions make medicinal herbs produced in Gansu excellent quality. Among them, commonly used medicinal herbs such as angelica, astragalus, ginseng, and rhubarb are famous throughout the country. However, there are currently many small and medium-sized enterprises in the province, few large enterprises, and scattered distribution, and there is a shortage of leading enterprises with annual sales revenue of 2 billion yuan or more. Most enterprises have not yet formed a marketing network covering the whole country. Proprietary Chinese medicines have a low market share outside of the province, and most products are sold only in or around the province. As the vanguard of Longyao, Buddha Ci has a long way to go to revitalize Longyao's work. We believe that the change in the actual controller of the company reflects the importance that Gansu Province attaches to the traditional Chinese medicine industry and its confidence in the long-term development of the traditional Chinese medicine industry. Using the platform of Foci's time-honored Chinese brand, innovation drives the development and integration of traditional Chinese medicine resources and forms a new pattern of industrial development.

Investment suggestion: Foci Pharmaceutical is a high-quality, time-honored Chinese brand. It first proposed the “Western system of traditional Chinese medicine” and pioneered the industrialization of traditional Chinese medicine production. The company focuses on the development strategy of traditional Chinese medicine plus big health, and will continue to benefit from the aging population and the trend of consumption upgrading. We are optimistic that the company is deeply involved in the five major markets of Northwest China, Southwest China, East China, South China, and the international market, continuously refining the management level, and polishing the gold medal of Longyao. The company is expected to achieve revenue of 1,256/15.65/1,958 billion yuan in 2023-2025, an increase of 23%/25%/25%, respectively; achieve net profit of 1.24/1.55/199 million yuan, an increase of 17%/24%/29%, respectively; corresponding PE valuations are 42/34/26X, respectively, maintaining the “increased holdings” rating.

Risk warning: the risk of industry policy changes, the risk of raw material price fluctuations, product promotion and sales falling short of expectations, and the new plant area falling short of expectations.