Core business remained steady; revenue fell 33.95% on subsidiary exclusion.
   
H116 operating revenue decreased 33.95% to Rmb871m, mainly as Jiangxi JointownPharmaceutical, a subsidiary sold at end-2015, was no longer included in Jiangzhong'sfinancial statements. Excluding that, Jiangzhong's core business increased steadily, asdrug manufacturing revenue rose 0.48% (including Rmb757m of OTC drug revenue,up 4.93% YoY). Healthcare product revenue decreased 22.24% YoY to Rmb110m andthe liquor segment posted revenue of Rmb1.48m.
   
Gross margin improved moderately after Jiangxi Jointown was sold.
   
H116 gross margin increased 23ppts, mainly because the low-margin drug distributionbusiness was sold. Drug manufacturing gross margin rose 0.84ppt, mainly boosted byOTC drug gross margin, which rose 1.98 ppts in H116. Gross margin of the healthcareproduct segment decreased 11.46ppts.
   
Expenses decreased; net profit rose substantially.
   
H116 expenses declined, with selling/administrative/financial expenses down 15%/8%/96% YoY, as Jiangxi Jointown was no longer consolidated in Jiangzhong's financialstatements and Jiangzhong changed its sales strategy, marketing its products with anon-advertising-based sales model that reduced Rmb40m in advertising expenses inH116. H116 financial expenses fell Rmb15.08m YoY due to a corporate bondredemption in 2015. Net profit increased 41% YoY to Rmb197m in H116, with EPS atRmb0.66, due to lower expenses.
   
Valuation: Price target of Rmb44.56; maintain Buy.
   
The company is exploring a non-advertising-based sales model to adapt to a changingenvironment, which we think is more effective and likely to save a large amount ofexpenses. In addition, we view prices of Jiangzhong's OTC products have potential andit is likely to lift OTC drug prices steadily on brand advantages. Our 2016-18E EPS areRmb1.43/1.85/2.23. We derive our price target of Rmb44.56 using DCF-basedmethodology (6.7% WACC) and maintain our Buy rating.