Incident Company publishes 2016 Annual Report and First Quarter Report. In 2016, the company achieved operating income of 3.739 billion yuan, an increase of 7.52% over the previous year; operating profit of 485 million yuan, an increase of 25.21% over the previous year; and net profit of 394 million yuan, an increase of 33.80% over the previous year. Among them, 2016 Q4 achieved operating income of 1,014 million yuan, an increase of 18.29% over the previous year; realized operating profit of 183 million yuan, an increase of 16.78%; and realized net profit of 158 million yuan, an increase of 78.50% over the previous year. 2017Q1 achieved operating income of 889 million yuan, an increase of 1.72% over the previous year; realized operating profit of 73.4088 million yuan, a year-on-year decrease of 5.84%; and realized net profit of 593.3445 million yuan, an increase of 2.87% over the previous year. Net profit after deducting non-return to the mother was 37.3019 million yuan, a year-on-year decrease of 11.30%. Based on 324 million shares, the company distributed cash dividends of 3.00 yuan (tax included) to all shareholders for every 10 shares. A total cash dividend of 97.11 million yuan was distributed, accounting for 24.62% of the mother's net profit. The company expects net profit from net profit of 133 million to 162 million yuan in 2017 H1, an increase of -10% to 10% over the previous year, and a steady decline in export sales. The depreciation of the RMB and the narrowing of domestic and foreign cotton prices boosted gross profit margins, but the sharp rise in coal prices dragged down Q1 performance. (1) Export demand from the US and Japan declined significantly, and revenue from various businesses increased steadily in 2016, but 2017 Q1 export orders were flat and the main business revenue was under pressure. Throughout 2016, the company's revenue increased steadily, with a year-on-year increase of 7.52%. By category, yarn-dyed fabrics contributed 1,781 million yuan, down 0.35% year on year, printed and dyed fabrics contributed 563 million yuan, up 1.65% year on year, shirts contributed 504 million yuan, up 7.73% year on year, while cotton yarn, electricity, steam, and sewage treatment business revenue increased 93.58% and 4.69% respectively. In addition, the calico business contributed an increase of 7.081 million yuan in revenue. Looking at the subregion, overall export revenue increased 4.15% to 2,242 billion yuan, but among them, Japan's export revenue fell sharply by 41.39%, and the US also fell 8.77%; while the domestic sales business benefited from a sharp increase in the cotton yarn business, which increased 25.59% year over year to 607 million yuan. In January-January 2017, due to a year-on-year decline in export orders, the company's main business revenue for yarn-dyed fabrics, and shirts declined slightly year-on-year. Overall revenue increased by only 1.72%. With the gradual recovery of orders in March, Q2 revenue is expected to rise steadily. (2) The depreciation of foreign exchange and the narrowing of domestic and foreign cotton price spreads boosted the composite gross profit margin in 2016, but high coal prices dragged down the decline in gross margin in Q1 2017. The company's overall gross profit margin in 2016 was 21.90%, up 1.29 pct year on year. On the one hand, this is due to the fact that the spot exchange rate of RMB against the US dollar in 2016 increased from 6.52 at the beginning of the year to 6.95 at the end of the year, leading to a steady increase in the gross margin of export products. On the other hand, the company's product price is linked to the price of foreign cotton, while the cost is linked to internal prices. The narrowing of the domestic and external cotton price difference is beneficial to boosting the gross margin level. The cotton 328 index for the full year of 2016 was 2843.03 yuan with CotLooka and the price difference between 2015 728.80 yuan/ton, promoting a steady increase in cotton spinning business. However, since coal prices have continued to rise since the second half of 2016, the company's 2017 Q1 coal costs have increased dramatically, resulting in a sharp increase in Q1 gross margin of 1.43 pct year-on-year (the company's coal is generally purchased one quarter in advance; the average price of coal used in Q1 is estimated at about 577.89 yuan/ton according to the 2016 Q4 Q4 Qinhuangdao thermal coal price, up 52.60%, or 196.69 yuan/ton from 2015Q4). (3) The establishment of a long-term incentive fund has led to a significant increase in the management expense ratio and an increase in exchange earnings to save on financial expenses. In 2016, the company's sales expenses and management expenses were 161 million yuan and 172 million yuan, respectively, up 0.53% and 37.38% year-on-year respectively. Among them, the sharp increase in management expenses was mainly due to the company's introduction of long-term employee incentive fund management measures, which used 20-30% of the annual net profit increase as incentive funds for employees, and increased the company's wages and benefits; financial expenses 3.64, down 44.38% year on year, mainly due to the increase in exchange income due to the appreciation of the US dollar. Overall, the annual fee rate decreased by 0.21 pct. The sales expense ratio of 2017Q1 company decreased by 0.62 pct year on year to 4.15%, while the management expense ratio increased slightly by 0.13 pct year on year to 4.29%. The financial expense ratio was basically the same as the same period last year, at 2.61%, and the overall period expense ratio decreased by 0.49 pct year on year. (4) Asset impairment losses declined sharply in 2016 and investment returns increased dramatically. Affected by a significant reduction in bad debt losses and inventory price losses, the company's asset impairment losses in 2016 fell sharply by 40.37% to 13.424 million yuan; in 2017Q1, the company's asset impairment losses due to increased bad debt preparations increased 64.30% year-on-year to 2.203 million yuan. In addition, the company's investment income in 2016 increased significantly due to financial asset investment. The annual net investment income increased by 34.70% year-on-year to 92.4882 million yuan; 2017Q1 investment income increased slightly by 2.60% to 24.8193 million yuan. In addition, the non-operating income of 2017Q1 companies surged 437.57% year on year to 5.6459 million yuan due to income from disposal of fixed assets and increased government subsidies. In addition, the net cash flow from the company's operating activities at the end of Q1 in 2017 was RMB 22.2494 million, a year-on-year decrease of 64.26%. The main reason is that since the second half of last year, the company has successively increased cotton inventories, carried out cotton reserves, and increased cash expenses for cotton purchases in early 2017. At the same time, there has also been an increase in salary bonuses paid by companies. In response to the “Belt and Road”, the layout of overseas production capacity is progressing steadily. (1) Currently, the company is the second largest leader in yarn-dyed fabrics in the world, with a diversified and integrated layout of the cotton industry chain. Currently, the production capacity of yarn-dyed fabric is 160 million meters, the production capacity of printed and dyed cloth is 60 million meters, the production capacity of home textiles is 30 million meters, and the production capacity of clothing (shirts) is 11 million pieces (OEM processing, supplied to brands such as Uniqlo, H&M, Semma, Meibang, Jack Jones, etc.) (3 million pieces in Cambodia, 800 nights at the headquarters in Haian), and 6,000 tons/year for knitted yarn and knitted fabric dyeing. The company has an integrated industrial chain layout, with a multi-sector layout from embossing, spinning, dyeing, weaving, finishing to garment processing and brand operation. From an upstream perspective, the company has a cotton yarn production capacity of 210,000 ingots (Hai'an and Aksu in Xinjiang each account for 50%), accounting for 50% of its own supply. Downstream, the company has its own clothing brand James. In addition, it also has its own power plant and sewage treatment plant, which is conducive to ensuring product quality, operation and management stability, and controlling manufacturing costs. (2) The release of shirt production capacity in Cambodia has boosted the growth of the apparel business. The company currently has three garment factories in Cambodia, including the acquired AMM Clothing and Lianfa Hengyu, and the self-built Lianfa Garment. With the completion of the inspection of brand companies, we expect to release 2 to 3 million pieces of production capacity in 2017 to drive the growth of the shirt processing business. In addition, another business model for the company's shirts is re-export trade — that is, using the advantages of receiving orders and design, receiving orders directly from customers, organizing purchases, to production at a foreign factory in Bangladesh, to delivering customers. In this model, the company plays the role of a supply chain manager and can achieve asset-light and rapid growth. The future explosive power of this business is still worth looking forward to. (3) In response to the “Belt and Road” strategy, African production capacity is progressing steadily. The company's overseas layout continues to improve. It has signed an agreement of intent with the Ethiopian government, and plans to build a textile industrial park integrating spinning, printing and dyeing cloth, yarn-dyed cloth, and ready-to-wear in the country. It is expected to form a production scale of 200,000 spindles, 2.5 million meters of printed and dyed fabrics, 2.5 million meters of yarn-dyed fabric, and 3 million pieces of ready-to-wear, making full use of the tariff advantages, labor resource advantages and raw material advantages of Southeast Asia and Africa to enhance the global competitiveness of the enterprise. Management is improved, and there is hope that home textile and knitted fabric color spinning subsidiaries will reduce losses, boosting profits. On the one hand, in early 2015, the company acquired the home textile company Lianfa Tianxiang, which held 67% of the shares and lost about 20 million in 2015. However, after changing the management team in 2016, losses were drastically reduced, and the business is expected to reverse losses in 2017. On the other hand, the company's knitting yarn and knitted fabric dyeing business was managed by a subsidiary. Previously, production management and quality control were poor. After the chairman personally took over this business in 2015, the management team was drastically adjusted in 2016, losses were drastically reduced, and losses will continue to be reduced in 2017. In addition, the company is promoting environmental protection, increasing capital, and establishing Shanghai Chongshan Investment Co., Ltd., using this investment platform to expand the company's business areas and create new profit growth points for the company through mergers and acquisitions. Diversified development can still be expected. Investment suggestions: The company's main business is solid and steady, overseas production capacity is steadily expanding, and subsidiaries are in sight; full industry chain operation, gross margin is higher than that of peers; innovative business models, strengthened brand building, and market development is getting stronger; increasing thermal power and sewage treatment and setting up investment companies, new growth points can be expected. Considering that export demand is still uncertain, we carefully expect net profit for 2017-2018 to be 427 million and 476 million, up 8.3% and 11.4% year on year, corresponding to EPS of 1.32 and 1.47, and corresponding PE of 12.3 and 11.1 times. Currently, the total market value is 5.27 billion, maintaining the “buy” rating. Risk factors: exchange rate fluctuations, cotton price fluctuations, downstream consumption recovery falls short of expectations.