Event: The company released its 2017 quarterly report. The first quarter achieved operating income of 586 million yuan, a year-on-year increase of 0.91%, and net profit attributable to shareholders of listed companies of 36 million yuan, a year-on-year decrease of 38.83%. The main reason for the year-on-year decline in net profit is the sharp decline in gross margin. Revenue was flat year on year, and increased competition in the industry led to a decline in ingredient revenue growth: by business, the flavor and fragrance industry as a whole is relatively stable, and the company's flavor and fragrance business revenue is expected to increase slightly year over year; the food ingredients industry is still growing rapidly but competition is intensifying. It is expected that sales volume will increase year on year but unit sales price has declined, which is ultimately reflected in revenue being basically flat year over year. The decline in gross margin in the ingredients business drags down overall performance, and the manufacturing side will continue to be under pressure until a breakthrough is achieved: gross profit margin for the first quarter was 19.6%, down 3.9pct year on year; sales, management, and financial expense ratios were 5.2%, 6.5%, and -0.7%, respectively, +0.2, -0.1, and 0 pct, and the overall cost rate was basically the same; net profit margin was 6.9%, down 3.4 pct year on year. Due to the stable development of flavors and fragrances, gross margin is not expected to change much year over year. The decline in gross margin is mainly affected by the food ingredients business. On the one hand, the company added some foreign brand agents, and the initial price was relatively low in brand promotion, so gross margin decreased year-on-year; on the other hand, Fonterra, the company's main agent, is now gradually liberalizing domestic channels, and competition has clearly intensified, and the company may maintain its current share through active price cuts. In the medium to long term, the gross margin of new brands is expected to gradually return to a reasonable level as brand awareness and acceptance increase, but the impact of Fonterra's channel liberalization will continue, and it is expected that the gross margin of the ingredients business will continue to be under pressure until the company achieves a breakthrough in construction on the manufacturing side of the company. The profit and loss of minority shareholders increased due to investment in Tianshun, and there was little pressure on achieving gambling performance targets: the minority shareholders' equity in the first quarter increased by more than 3 million, mainly from Tianshun. According to estimates of the company's shareholding ratio, Tianshun's net profit for the first quarter exceeded 5 million, which is growing steadily. It is expected that the performance achieved throughout the year will not put much pressure on the gambling target (10 million net profit). Investment advice: In view of increased competition in the industry, we slightly adjusted the company's revenue growth rate from 2017 to 18 to 7% and 9.8%. The net profit growth rate was 4.6% and 6% respectively, and maintained an investment rating of increased holdings -B. The six-month target price is 18 yuan, which is equivalent to a dynamic price-earnings ratio of 27 times that of 2018. Risk warning: Competition in the ingredients business has intensified, and the pace of construction on the manufacturing side is lower than expected.