Investment Summary

• Robust results in third quarter with improving profit margin;
• Share-based incentive plan demonstrates strong management confidence;
• Strategic cooperation relation with BGI underpins future development;
• Smart pharmacy and acquisition of Guangdong Hengyuan further consolidate the leading position in TCM decoction pieces market.

Business Overview

Strong results in 17Q3. As up to the end of September, Kangmei Pharma recorded revenue/net profit of RMB19.5bn/3.15bn (+18.59%/+21.58% YoY), and net operating cash flow rose by 130.65% reporting RMB1.5bn due to sales hike. Gross profit margin increased by 1.4ppt compared with that in 16Q3 and net profit margin increased by 0.71ppt. We attribute expanding profit margin to improving weights of three segments which have higher GPM (namely TCM decoction, drug trade and medical instruments). We expect that GPM continues to improve with controlling segments with lower profit margin and accelerating the development of businesses including TCM decoction.