First, the substantial growth in performance in the first three quarters is in line with expectations. In the first three quarters of 2010, the company achieved operating income of 1.617 billion yuan, an increase of 13% over the same period last year, and net profit of 103 million yuan, an increase of 614.42% EPS0.18 yuan over the same period last year, in line with expectations. In the third quarter, the operating income was 509 million yuan, an increase of 3.51% over the same period last year, and the net profit was 21.32 million yuan, an increase of 400.95% EPS0.04 yuan over the same period last year. In the first three quarters, the gross profit margin was 21.04%, up 7.2 percentage points from the same period last year; the expense rate during the period was 13.61%, up 1.14 percentage points from the same period last year.

Second, attach equal importance to the development of APIs and preparations. In the first half of the year, the revenue of semi-synthetic antibiotic raw materials was 250 million, an increase of 43.36% over the same period last year, and that of preparations was 530 million, an increase of 23.19% over the same period last year. The company has 21 preparations listed in the National essential drugs Catalog, accounting for more than 70% of preparation revenue. The release of demand for primary health care is the main driver of the substantial growth of antibiotic business. As an important antibiotic production base in China, the company will continue to benefit from the rapid development of primary health care institutions and the gradual implementation of the basic drug system, and the performance growth is expected to continue.

Third, the adjustment of product structure will give full play to its benefits. The company's main API products include 7-ACA, spectinomycin and semisynthetic penicillin. In the second half of 2009, the company's 7-ACA enzymatic pass-through process was carried out, which greatly reduced the cost of 7-ACA. In the first half of this year, the price of 7-ACA remained at a high level of 950yuan / kg, which was higher than that of the same period last year (700yuan / kg). The gross profit margin of antibiotic raw materials in the first half of the year increased by 15.47 percentage points compared with the same period last year. At the same time, the company optimized the product structure of semi-synthetic antibiotic raw materials, limited the production of low gross margin products, and increased the sales proportion of extended-spectrum penicillin such as mezlocillin and azlocillin. In the first half of the year, the gross profit margin of semi-synthetic antibiotic raw materials increased by 22.96 percentage points compared with the same period last year.

Fourth, the emergence of superbug cases in China, the strengthening of prevention and control is good for leading antibiotic enterprises. Recently, the Chinese Centers for Disease Control and Prevention announced that three strains of NDM-1 gene positive bacteria (superbugs) have been detected in China. At present, the Ministry of Health is organizing China's drug resistance surveillance network and infectious disease laboratory surveillance network to carry out relevant investigations, and will study and formulate relevant policies to further strengthen the prevention and control of bacteria carrying NDM-1 drug resistance gene as soon as possible according to the survey data.

The antibiotics recommended in the guidelines for the diagnosis and treatment of superbugs issued by the Ministry of Health include polymyxin, tegacycline, carbapenem, aminoglycosides, fluoroquinolones and fosfomycin. We believe that the company, as a leading antibiotic enterprise in China, will benefit from the strengthening of superbug prevention and control.

Investment advice: recommend (maintain). As we enter the peak antibiotic sales season in the fourth quarter, we believe that 7-ACA prices will continue to strengthen, and the company's fourth-quarter results are expected to maintain strong growth and maintain its profit forecasts for 2010-2012 EPS0.33, 0.44 and 0.53 yuan, corresponding to PE of 31x, 24x and 19x, respectively, maintaining a "recommended" rating.