Event: the company released a semi-annual report that in the first half of 2016, the total operating income was 210 million yuan, an increase of 316.9% over the same period last year; the operating profit was-44.02 million yuan, a decrease of 215.3% over the same period last year; and the net profit attributed to the owner of the parent company was-29.93 million yuan, a decrease of 195.4% over the same period last year.

The national sales channel is still under construction, and the gross profit margin in the early stage of the project is low. The reasons for the company's high revenue growth in the first half of 2016 are as follows: 1) with the promotion of the company's "big beef cattle" strategy, the proportion of the company's breeder business has increased. However, the long export cycle, many links, high shipping costs and the continuous decline in the sales price of dairy cattle in China and other factors have led to a decline in the gross profit of breeding livestock sales. 2) the company's meat sales market is in the cultivation stage, with low gross profit margin and high expenses during the period, resulting in a decline in the company's profit level and an increase in losses; 3) the company's ordinary frozen semen business with high gross margin is affected by the delay in national bidding for good repairs. as a result, the sales revenue of ordinary frozen semen decreased by 71.47% compared with the same period last year. 4) with the expansion of the company's business and merger scope, the expenses and capital requirements of each link have increased significantly, resulting in an increase of 54.52% in expenses over the same period last year, including an increase of 256.9% in financial expenses compared with the same period last year. We believe that with the steady progress of the company's big beef cattle strategy, the normal operation of the standardization of each module business, the completion of the national channel construction of the company, and the steady increase in Angus' output, the company's gross profit margin will increase greatly and the profit growth space will be huge.

The acquisition of He Mu Sunshine, performance commitment to protect profits. In order to promote the company's "Big Beef cattle" strategy, the company acquired 65% of the shares of he Pastoral Sunshine in the first half of 2016, which is mainly engaged in crop cultivation and sales, and transformed to the integrated operation of agriculture and animal husbandry. We believe that as the support of the company's "Big Beef Strategy", the enrichment of land resources will provide a strong guarantee for the company's sustainable development in the future. At the same time, the net profit of the Hemu Sunshine Project from 2016 to 2018 is 30 million yuan, 40 million yuan and 50 million yuan respectively. We believe that the company's semi-annual report has reached the bottom of the company's annual performance, and in the second half of the year, with the help of the company's frozen semen business, Angus beef products, and the Hemu Yangguan project, the acquisition is expected to be completed this year. We believe that the company will be in the stage of performance recovery in the second half of the year, and is optimistic about the development prospects in the next few years.

Profit forecast and investment advice. It is estimated that the EPS from 2016 to 2018 is 0.01,0.14,0.21 yuan respectively, and the corresponding PE is 1654 times, 111times and 75 times respectively. We believe that the company's profitability will be greatly improved in the future with the launch of Angus beef and the rebound in domestic dairy prices. We are optimistic about the company's development prospects in the domestic high-end market and maintain the "overweight" rating.

Risk tips: beef cattle out of the column size may not meet expectations; beef cattle prices may fall sharply; sales channel construction may not meet expectations; industry policies or changes in beef cattle import.