The company released three quarterly reports for 17 years, and the revenue, net profit and non-return net profit in the first three quarters were + 21.25%, + 10.95% and + 11.40%, respectively, compared with the same period last year. The core product Liuwei Dihuang pills maintained a high growth rate, while other proprietary Chinese medicine varieties grew steadily. The company continues to strengthen marketing, and sales expenses continue to grow at a high level over the same period last year, which has become the main factor affecting the profits of the current period. The company's increased sales expenses and reduced interest income affect short-term profits, while capacity release leads to improved performance in the long run, maintaining the "prudent recommendation-A" rating.

The income of traditional Chinese medicine has maintained rapid growth, and the marketing of proprietary Chinese medicine has continued to strengthen. The 17Q3 parent company's income was 90.7 million yuan, + 11.30% year-on-year, and the growth rate increased for two consecutive quarters; the gross profit margin was 31.37%, which was basically the same as the previous year and month-on-month; we judged that the growth rate of Liuwei Dihuang pills in the third quarter was slower than that in the first half of the year due to seasonal weather, but it is expected to return to high growth rate after entering winter, and the production capacity growth of other proprietary Chinese medicines is limited. The income of the company's 17Q3 consolidated statement is 102 million yuan, which is + 17.78% compared with the same period last year. The growth rate of the consolidated statement income is significantly higher than that of the parent company's main division is caused by the substantial increase in the income of the pharmaceutical subsidiary. We estimate that the company's traditional Chinese medicine business still maintains a year-on-year revenue growth rate of about 100%, but we estimate that gross profit margin fluctuates due to purchase prices and other reasons. 17Q3 consolidated statement sales expenses compared with the same period last year + 27.84%, significantly higher than the revenue growth rate, we judge that the company is still continuing to strengthen marketing investment, mainly by increasing advertising investment and sales team building and other ways. The management fee of 17Q3 consolidated statement is + 7.24% compared with the same period last year, and the rate of management expense decreases by 0.57% compared with the same period last year. The interest income of the 17Q3 consolidated statement was 7.88 million yuan, down 8% from the same period last year. Together with the increase in sales expenses, it became the main factor affecting the profits of the current period. 17Q3 consolidated statement home net profit + 5.74%, deducting non-home net profit-1.47% year-on-year.

The company forecasts a full-year net profit growth rate of 0% per cent for 17 years. The company's consolidated income in the first three quarters of 17 years was + 21.25% compared with the same period last year, of which the parent company's proprietary Chinese medicine products and Chinese herbal medicines respectively contributed about 50% of the increment; due to the low gross profit margin of traditional Chinese medicine sales, the gross profit margin in the first three quarters of 17 years was 28.81%, down 0.96% from the same period last year; sales expenses in the first three quarters were + 31.43% year on year, and we expect to maintain a high growth rate for the whole year. With the construction of the plant in the new area, the company's cash will gradually decrease, and the interest income generated by the purchase and financial management will also be reduced. In the short term, the company's profits will be affected to a certain extent, but in the long run, marketing investment will open up the market demand for the company's products and cooperate with the release of production capacity in the new area will greatly improve future performance.

At the end of the year, the plant in the new area is expected to be certified by GMP, and the granules of traditional Chinese medicine formula will continue to be released. We expect that the plant in the new area has basically completed the equipment installation and other work, is preparing for commissioning, and is expected to carry out GMP certification before the end of the year. At present, various provinces have awarded local production qualifications of traditional Chinese medicine formula granules with scientific research and technological reform projects. Zhejiang, Henan, Heilongjiang, Jiangxi, Guangdong and other places have issued local policies and awarded local enterprises production and sales qualifications. The company has been assigned to Lanzhou Institute of Physicochemistry and Chemistry for the preparation process, product inspection and testing methods of 300 kinds of traditional Chinese medicine formula granules, and the progress is smooth. Once the regional production qualification in Gansu is liberalized, the company will become a strong competitor for the production and sales of local traditional Chinese medicine formula granules.

Maintain the "prudent recommendation-A" rating. It is estimated that the growth rate of the company's homing net profit from 2017 to 2019 is 9%, 24% and 33%, respectively, and the corresponding EBIT growth rate is 31%, 70% and 42%, respectively, and the corresponding EPS is 0.13,0.16 and 0.21 yuan, respectively. We are optimistic about the pull of the company's recent marketing activities on future product sales, look forward to a rapid improvement in the performance brought about by the release of capacity in the new plant, and maintain the "prudent recommendation-A" rating.

Risk hint: the effect of marketing activities is not as expected; the sales of products are not as expected.