Main points of investment:
The performance is lower than expected and the overweight rating is maintained. The performance in the first half of the year was lower than we expected, the main business reached the peak, and there were strong expectations of transformation. We lowered the EPS for 2016-18 to 0.05, 0.06 and 0.08 respectively (the previous value was 0.09, 0.15), maintaining the target price of 18.97, and increasing the holding rating.
The main business declined slightly and profits maintained steady growth. 1) 2016H1 realized revenue of 323 million yuan (- 5.22%), and the decline in revenue was due to the increase in the proportion of low-cost exports of finished products. Fee control brings profit growth. H1 makes a profit of 5.2 million yuan (+ 28.13%), and the net profit before and after deducting non-return is 5.07 million yuan (+ 81.65%) and 4.01 million yuan (+ 106.85%) respectively. The difference is mainly due to government subsidies. 2) Q2 realized revenue of 189 million yuan (- 8.5%), operating profit of 3.17 million yuan (- 6.18%) and net profit of 2.19 million yuan (+ 68.77%). Q2 non-operating expenses increased, net profit fell 24% month-on-month.
The cost was properly controlled and the net interest rate rose compared with the same period last year. 1) 2016H1 gross profit margin 12.80% (- 0.34pct), in which bleaching / spinning / printing business gross profit margin increased 0.78/1.30/12.40pct, weaving / dyeing business decreased 3.65/2.37pct 2) the sales expense rate is 2.38% (+ 0.47pct), mainly due to the increase of customs declaration expenses caused by cotton yarn import and finished product export, and the management expense rate of 5.53% (- 1.12pct). The financial expense rate is 0.97% (- 0.75), mainly due to the decrease of interest expenses and the increase of exchange gains and losses. The effectiveness of the company's fee control has been shown, and the net interest rate has risen by 0.75pct to 1.57% over the same period.
Increase the size of the industry investment fund to deposit the expectation of transformation. After investing in Xingfu Fund, the company once again used its own capital of 20 million yuan to invest in Xingfu II Fund in April 2016, focusing on TMT, energy conservation and environmental protection and medical and health industries. It is difficult to break through the traditional main business, and it is expected that the company will continue to explore ways of transformation and seek new performance growth points with the help of equity investment.
Risk tips: the main business continues to deteriorate, the transformation is not up to expectations, and so on.
