Main points of investment:

In the first three quarters of 2014, the company achieved operating income of 1.054 billion yuan, down 9.17% from the same period last year; the net profit attributable to shareholders of listed companies was 59 million yuan, up 11.17% from the same period last year; after deduction, the net profit belonging to shareholders of listed companies was 37 million yuan, down 12.89% from the same period last year; and basic earnings per share was 0.06 yuan. The company's comprehensive gross profit margin increased by 0.38pp to 15.51% compared with the same period last year. In the third quarter, the company achieved revenue of 340 million yuan, an increase of 2.52% over the same period last year, achieving positive growth in quarterly revenue for the first time since 2013; net profit belonging to shareholders of listed companies was 24 million yuan, up 47.47% from the same period last year; and the gross profit margin in the third quarter reached 20.40%, the highest level in a single quarter since 2012. In terms of the three expenses, the sales expense rate in the first three quarters was 1.61%, which was basically the same as that in the same period last year; the management expense rate rose to 7.92%; and the financial expense rate fell to 1.13% by 0.75pp. Overall, the company's third-quarter performance improved more than we expected, and we judged that the increase in the proportion of products using sterol process and the price adjustment of some products were the main factors for the significant improvement in the company's third-quarter performance.

The company is expected to fully benefit from the recent announcement of the restructuring of Tianjin Pharmaceutical Group and Jinyao Group. Tianjin SASAC intends to transfer all the equity of Jinyao Group, the indirect controlling shareholder of Tianjin Bohai State-owned assets Management Co., Ltd., to Tianjin Pharmaceutical Group free of charge. The company is expected to fully benefit from the restructuring of Tianjin Pharmaceutical Group and Jinyao Group: first of all, the company has a clear position in the group and is the integration platform for hormone and amino acid APIs and preparations of the group, and is expected to benefit from the integration of relevant assets inside and outside the group; secondly, the company is expected to realize the sales of preparation products at home and abroad with the help of the group's strong sales platform, and the deficiency of the company's preparation sales channel will be made up. Thirdly, after this reorganization, the company is expected to share the R & D advantages of Tianjin Pharmaceutical Group; in addition, the company is expected to be in line with the group in terms of remuneration, and with the promotion of the reform of Tianjin state-owned enterprises, a more flexible incentive mechanism is also expected to be launched, which is conducive to further stimulating the vitality of the company, and operating efficiency is expected to be further improved.

The pace of transformation and upgrading of the company is expected to speed up the company is actively transforming to the preparation, as the company is incorporated into the pharmaceutical group, the determination of transformation will be stronger, and the pace of transformation is expected to be further accelerated. The company is also actively seeking new profit growth points, acquiring the amino acid API assets of the controlling shareholder through a non-public offering in 2013. In addition, the company's paper cash of more than 600 million also provides room for the company's future business expansion.

Profit forecast and investment suggestion

In view of the fact that the company's profitability has improved beyond our previous expectations, we have raised our profit forecast and expect to achieve net profits of 76 million yuan, 74 million yuan and 83 million yuan belonging to shareholders of listed companies from 2014 to 2016, an increase of 46.25%,-2.14% and 11.87% respectively over the same period last year. The EPS corresponding to full dilution is 0.08,0.08 and 0.09 yuan respectively. The valuation of the company is relatively high from the perspective of PE, but relatively reasonable from the perspective of PB and EV/EBITDA. Taking into account the company's leading position in the corticosteroid API industry, and the company is in a period of preparation transition, coupled with the expectations of internal and external integration and state-owned enterprise reform that may be brought about by Tianjin Pharmaceutical Group, maintain the company's "increased" investment rating.