Gaga Foods (002650) announced the 2016 interim report. The main contents are as follows: during the reporting period, the company achieved operating income of 962 million yuan, an increase of 6% over the previous year; realized net profit attributable to the parent company of 97.92 million yuan, a year-on-year decrease of 34%; and realized net profit attributable to the parent company after deduction of 89.4 million yuan, an increase of 9.8% over the previous year. Among them, the 16Q2 company achieved operating income of 456 million yuan, an increase of 1.2% over the previous year; realized net profit attributable to the parent company was 42.94 million yuan, a year-on-year decrease of 54.97%; and realized net profit attributable to the parent company after deduction of deduction of 39.08 million yuan, an increase of 37% over the previous year. Revenue from edible vegetable oil grew well, and revenue from soy sauce and vinegar declined: The company's 16H1 revenue increased 6% year on year, a slowdown from the 8% growth rate in the same period last year. Among them, the growth rate of 16Q2 revenue slowed down, mainly due to 16H1 soy sauce and vinegar revenue falling 2.16% and 1.95% year on year, respectively. By region, the revenue growth rate was good in central China, where the company is based, with a year-on-year increase of 11.53%; the southwest region had the best growth rate, with a year-on-year increase of 15.45%; and the performance of South China, Northeast China, and Northwest China was poor, with a year-on-year decline of 10.39%, 13.07%, and 7.86%, respectively. Although the company's revenue growth rate slowed in the second quarter, we believe that with the sales director serving as the executive president this year, the company's emphasis on the sales market has increased, and we expect the annual revenue growth rate to be better than last year's 4% growth rate. The decline in gross margin and last year's high base investment income dragged down the company's profit performance: 16H1 gross margin fell by 2 pct to 27.8% year on year. On the one hand, the gross margin of soy sauce and edible vegetable oil declined by 1.33 pct and 0.9 pct, respectively; on the other hand, it was due to the low level of gross margin of edible vegetable oil (over 20 pct of gross margin below soy sauce) and the share of revenue increased by 4 pct to 30% year over year. The company's expense ratio for the 16H1 period fell 1.8 pct year on year. Among them, the sales expense rate/management expense rate/financial expense ratio changed year-on-year by -2.5 pct/0.5 pct/0.2 pct, respectively. The decrease in sales expenses was clearly mainly due to the 80% year-on-year decline in advertising expenses (the absolute amount decreased by 24.45 million yuan). When the decline in gross margin and the period expense ratio were basically offset, the company's net interest rate fell 6.2 pct to 10.2% year on year, mainly due to the company's investment income of 88,0418 million yuan in the first half of last year. If non-recurring profit and loss were excluded, the company's profit for the first half of 2016 increased 9.8% year on year. The impact of a high base of investment income in the second half of the year has been eliminated, and the company's year-on-year growth rate is expected to resume in the second half of the year. The increase in employee stock holdings and major shareholders' holdings provides a margin of safety, while being optimistic about future extended expansion: the company completed the employee stock ownership plan in January 2016. The employee cost is 757 yuan (total 317 million yuan), and the current stock price is still inverted. At the same time, the company established an industrial fund as early as 2014 to actively seek opportunities for industrial integration and is optimistic about the company's future expansion opportunities. We expect the company's 2016/2017 EPS to be 0.15/0.19 yuan respectively, maintaining the “buy” rating. Risk warning: competition in the industry intensifies; performance falls short of expectations; extension falls short of expectations.