Cao Jinghua broken wall pieces supported the company's performance growth in the first half of 2017. In the first half of 2017, the company's revenue increased by 20.2% to 431 million yuan, mainly benefiting from the high growth of Cao Jinghua series products. The pharmaceutical sector grew 36.7 per cent to 225 million yuan, accounting for 52.2 per cent of total revenue. In the pharmaceutical sector, the Cao Jinghua series rose 67.8 per cent year-on-year to 157 million yuan, while proprietary Chinese medicine products fell 4.5 per cent to 67.8 million yuan. Cao Jinghua's income accounted for 36.4% of the total income (compared with 26.1% in the first half of 2016), accounting for a significant increase. The business of self-operated chain pharmacies grew 6.3 per cent year-on-year to 206 million yuan, accounting for 47.8 per cent of total revenue. The company's gross profit margin increased by 6.3% in the first half of 2016, from 55.1% in the first half of 2016 to 58.7% in the first half of 2017, benefiting from the increase in sales of high-Maori Jinghua products (gross profit margin is about 80%). The sales expense rate increased to 38.8% (compared with 37.4% in the first half of 2016). The management said that the sales expense rate would be kept below 40%, and the management expense rate would be stable at around 7%. In the end, the company's net profit rose 20.4% year-on-year to 38.5 million yuan.

Cao Jinghua-potential blockbuster product. Caojinghua, known as traditional Chinese medicine wall-breaking decoction, is a new type of traditional Chinese medicine using cell wall-breaking technology. There are four channels for the company to sell Cao Jinghua, including third-party cooperation chain pharmacies (such as ordinary people, Yixintang, etc.), self-operated chain pharmacies (Zhongzhi University pharmacy), hospitals, e-commerce platforms (Tmall, JD.com, Zhongzhi online pharmacy, Jianke, Kangaiduo, etc.), these four platforms contributed revenue of 68%, 15%, 12% and 5% respectively in the first half of 2017. So far, the company has 500 cooperative distributors and a 521-member Cao Jinghua sales team, covering 31 provinces, 23000 retail pharmacies and 557 hospitals. In the first half of the year, the company worked hard to expand Cao Jinghua's distribution network and set up 108 offices across the country to assist sales in various districts. Management said that the company will focus on Cao Jinghua business in the future, and the company aims to turn Cao Jinghua into a broken-wall consumer product with annual sales of more than 10 billion yuan. Management expects Caojinghua series products to record higher sales growth in the second half of 2017, as more cooperative chain pharmacies will participate in distribution in the second half of the year (Dashenlin), which has been the peak sales season and the multiplication of e-commerce channels in the past second half. According to Zhongkang data, the market size of new prepared slices in retail channels was about 894 million yuan in the first quarter of 2017, of which brand prepared slices Cao Jinghua topped the list with a market share of 4.5%. Cao Jinghua maintained a compound annual growth rate of 71.4% from 2012 to 2016, far exceeding the growth rate of competitors in the same industry, traditional Chinese medicine slices and traditional Chinese medicine formula particles. We believe that Cao Jinghua will continue to expand its market share in the new prepared slices market in retail channels, and will maintain the current state of rapid growth. We believe that Cao Jinghua will be the main growth driver of the company in the future, and the company is expected to record higher revenue and net profit growth in the second half of the year.

The shrinking business of proprietary Chinese medicine. The management explained that the decline in proprietary Chinese medicine business was mainly due to the shift of the company's focus to Cao Jinghua business. The company's proprietary Chinese medicine products are sold through the two brands of "Zhongzhi" and "Liumian". The management said that the proprietary Chinese medicine business will maintain a higher growth rate than the industry average, but we think it will be difficult for the company's proprietary Chinese medicine sector to grow in the future.

The number of self-operated chain pharmacies has increased steadily. Chain pharmacies recorded revenue of 206 million yuan, up 6.3% from a year earlier, accounting for 47.8% of total revenue (down from 54.1% in 2016). The gross profit margin of the chain pharmacy business increased by 1.43%, from 45.7% in the first half of 2016 to 47.8% in the first half of 2017, mainly due to the increase in the proportion of sales of private brand products, which was higher than that of third-party products. Up to now, the company operates a total of 247 chain pharmacies in Zhongshan (a total of 10 new pharmacies were opened in the first half of the year).

Cao Jinghua series of new products will be sold on a trial basis in self-owned pharmacies, and the company will collect customer feedback and formulate sales strategies for new products based on these feedback. The self-operated pharmacy also provides sales training for Cao Jinghua, and the sales staff of the partner will go to the company's self-operated pharmacy to study, visit and participate in the training. The management said that the company's own pharmacy will maintain a steady growth rate, and the main purpose in the future is to assist the development and growth of Cao Jinghua's business.

Potential acquisition of Cao Jinghua upstream and downstream industrial chain. The company intends to expand the upstream and downstream industrial chains of Cao Jinghua's business, and will consider acquiring upstream and downstream industrial chains in the future, such as upstream plantation or slice research and development, as well as downstream retail pharmacies. As of June 30, 2017, the company has a total cash balance of 215 million yuan, and we believe that the company will prefer small acquisitions to large businesses in the future.