Profit increased 38% in the second quarter. The company achieved revenue of 660 million yuan in the first half of the year, up 5.6% year on year; net profit of 49.66 million yuan, up 6.9% year on year; EPS was 0.21 yuan, in line with our expectations. Among them, revenue for the second quarter was 370 million yuan, up 19.7% year on year; net profit was 26.36 million yuan, up 37.7% year on year, and EPS was 0.11 yuan. What is behind the consistent growth rate of profit and revenue is offset by a simultaneous rise in gross margin and period expense ratio. The increase in gross margin is mainly due to product structure optimization, and the impact of cost reduction is expected to show that the company's gross margin for the first half of the year was 25.9%, up from 24.0% in the same period last year. The gross margin of the three categories of the company's four products declined slightly year-on-year. However, the gross margin of filter stick paper increased from 17.4% to 24.8%, and due to its revenue increase of 20.9% and the increase in its share to 26.7%, we determined that the improvement in the product structure caused by the sharp increase in sales of high-margin high-permeability molded paper was the core reason for the increase in the company's overall gross margin. However, the decline in gross margin in the second quarter compared to the previous quarter may be related to the product sales structure; this short-term fluctuation has occurred from time to time in the past. In terms of cost, the company adopted a long-term cooperative supply method with large international pulp mills, and the price of such pulp mills was significantly higher than that of other importers in the early stages. As a result, the company's costs have not been significantly reduced. Starting in August, large-scale pulping mills drastically lowered prices, which indicates that the company's gross margin will rise in the coming quarter. Based on the analysis of global wood pulp supply and demand, we are bearish on pulp prices in the next two years, and the increase in the company's profitability is sustainable. The cost ratio increased, and operating efficiency declined. The cost rate during the first half of the year was 14.8%, compared to 12.8% in the same period last year. Among them, the management and finance expenses ratio both increased by 1.1 percentage points, and the sales expense ratio decreased slightly. Inventory turnover increased from 93 days in the same period last year to 120 days, and accounts receivable turnover increased from 56 days to 63 days. In addition to increased competition in the original product market, the decline in operating efficiency may also be related to the increase in raw material reserves and product trial sales in the 17,000-ton dictionary paper production line that was put into operation in the second quarter. Risks suggest that the relationship between supply and demand for wood pulp does not meet our expectations; market demand for high-permeability molded paper has changed adversely; price competition is intense due to the implementation of tenders in the cigarette industry; the sales prospects of new product dictionary paper need to be observed. Lowering profit expectations and maintaining the future profit growth of “recommended” rated companies is mainly driven by falling pulp prices and the expansion of the scale of high-permeable molded paper. Based on half-year results in line with expectations and relatively stable downstream demand, we maintained the 2012-2014 EPS forecast of 0.44/0.71/0.81 yuan (all convertible bonds were diluted to 0.34/0.55/0.63 yuan). The growth rate was 15%/62%/15%, and P/E was 15/9/8X, maintaining the “recommended” rating.