Diosgenin prices remained high in 2013, resulting in a sharp decline in the company's performance.

The company released its annual report: in 2013, the operating income was 1.481 billion yuan and the net profit was 37.3 million yuan, down 10.94% and 60.52% respectively from the same period last year, corresponding to deduction of non-post-EPS0.04 yuan. We believe that the continued high price of diosgenin of more than 900000 / ton is the main reason for the sharp decline in the company's performance. In addition, the GMP transformation of downstream preparation enterprises and the increase of intermediate competition enterprises also have a certain adverse impact on the performance of the company.

Process change has led to a decline in production costs, and the company's performance is expected to recover gradually in 2014.

Since the fourth quarter of 2013, the company has begun to adopt more cost-effective sterol routes for corticosteroid production on a large scale. Affected by the decline in the purchase volume of the company, the price of diosgenin also declined rapidly. Considering that the production cycle of corticosteroids lasts as long as three to six months, we expect the performance improvement due to lower costs to begin to show in the second quarter of 2014, and the company's full-year results are expected to gradually recover.

The competition order in the industry has improved, and the company's leading position has been further strengthened.

In 2013, the company's corticosteroid production accounted for 45-50% of the country's total output, and exports accounted for more than 60% of the country's total exports. In the past two years, the price of diosgenin has been high, and the industry leaders are also in a state of small profits. We expect that it will be difficult for some small businesses that lack scale and technological advantages to operate. In the future, with the gradual improvement of the competition order in the industry, the company's profitability is expected to gradually return to a reasonable level.

Valuation: lower the target price to $4.8 and maintain the "buy" rating

In view of the fact that the progress of the integration of the corticosteroid industry is slower than we expected, we have lowered our income and gross profit forecast for 14-16 and lowered our profit forecast to 0.11, 0.14, 0.17 (0.24, 0.31, 0.35). At present, the corticosteroid API industry is in a state of small profit, and some small and medium-sized enterprises that lack the advantages of technology and scale are gradually being eliminated by the market. We believe that in the medium to long term, with the improvement of the industry order, the company's profitability is expected to return to a reasonable level. Therefore, we correspondingly raise the assumptions of long-term income growth and gross profit margin. According to the UBS VCAM model (WACC9.5%), the new target price is 4.80 yuan (originally 5.50 yuan).