Main points of investment

Event: the company achieved income of 40.209 million yuan in the first three quarters of the announcement,-53.48% of the same period last year; net profit of 2.913 million yuan, 83.17% of the same period last year; deduction of non-return net profit of 2.663 million yuan, 116.35% of the same period last year; net operating cash flow of-28.2 million yuan, year-on-year-291.37%.

The decline in revenue continues to narrow, and the successful turnround of Q3 performance indicates that the performance inflection point is obvious. The company achieved revenue of 40.21 million yuan in the first three quarters, including 17.54 million yuan in clinical research and 17.41 million yuan in preclinical research, that is, nearly 7 million of the company's Q3 clinical research business, better than 10.88 million yuan in the first half of the year. With the clarity of clinical trial data standards and rising order prices, we believe that the CRO industry is gradually picking up. From the revenue side, the company's Q1, Q2 and Q3 revenue growth rates in 2016 were-64.36%,-60.75% and-31.77%, respectively, and the decline continued to narrow. From the profit side, the company reversed losses in the third quarter to achieve a net profit of 4.59 million yuan, deducting non-net profit of 106000 yuan, obvious signs of performance inflection point.

The filing system of clinical trial institutions is about to emerge, the capacity bottleneck of CRO industry is expected to be alleviated, and the certainty of policy catalyst is strong. At present, the shortage of clinical resources in CRO industry is serious, the main reasons are: 1) stock: about 4 times the number of clinical trial approvals since October 2015 flocked to pharmaceutical companies; 2) Increment: there are 3000 varieties and 60,000 approvals for oral chemical preparations that need to be evaluated for generic drug consistency. Judging from the current filing of reference preparations, the demand for BE clinical trials is very high. 3) Clinical resource bottleneck: at present, there are 475 clinical drug trial institutions qualified by the General Administration, and they are concentrated in Grade 3A Hospital, which is far from meeting the needs of the industry.

At the same time, after the verification of clinical trial data, the power of tertiary hospitals is weak, but under the current certification management methods of clinical trial institutions, it can not effectively release the production capacity of clinical trial resources of hospitals below the top three with strong power. The certification of clinical trial institutions is about to be put on record. CFDA made a detailed interpretation of the policy on the consistency evaluation of the quality and efficacy of generic drugs for the first time on September 14, in which the shortage of resources for clinical trials was clearly explained: the General Administration has communicated with the National Health and Family Planning Commission to consider adjusting the qualification to record management, has drafted a notice and is soliciting the opinions of relevant departments. We believe that the certainty of the industry policy catalyst is high, and the contradiction of the shortage of clinical trial resources can be alleviated after the implementation of record management.

Profit forecast and investment advice. We expect the company's revenue and net profit to grow at a compound rate of 77% and 81% from 2016 to 2018. We believe that positive changes are taking place in the CRO industry, the inflection point of the industry is clear, the low point of the company's performance has passed, and the company still has international expectations, and we maintain a "buy" rating in view of the company's high performance growth and small market capitalization premium.

Risk hints: the risk that the lack of implementation of policies such as the liberalization of certification of clinical trial institutions and consistency evaluation will lead to the company's performance or fall short of expectations; the industry regulation is more stringent than expected, and the CRO industry or company is subject to administrative penalties or lead to the risk of downward valuation.