Key points of the report The incident description of Zhongyuan Special Steel released its 2016 quarterly report today. During the reporting period, the company achieved operating income of 211 million yuan, a year-on-year decrease of 25.70%; operating costs of 200 million yuan, a year-on-year decrease of 21.26%; realized net profit attributable to owners of the parent company of -021 million yuan, compared with -012 million yuan for the same period last year; achieved an EPS of -0.042 yuan, and an EPS of -0.296 yuan for the fourth quarter of 2015. At the same time, the company expects profit for the first half of 2016 to be -60 million yuan - 45 million yuan, and the corresponding EPS is -0.08 yuan - 0.05 yuan. Incident comment: Sluggish demand compounded by a severe competitive situation, first-quarter results declined year on year: Although steel prices gradually picked up at the beginning of 2016, overall demand was still low year on year, and demand in some downstream industries, petroleum, coal, machinery and other industries did not improve significantly. For example, although oil prices rebounded in the first quarter, they were still operating in a low range. The spot price of oil in the first quarter fell 36.43% year on year, making it difficult to effectively ease the operating pressure of the company's oil drilling tool business in the context of weak oil prices. However, as a leading enterprise in China's large special steel precision forgings, its product demand is closely related to the overall manufacturing boom, yet the official manufacturing PMI index for March 2016 remained below the boom and dry line for the eighth month, showing that the manufacturing industry was still in a contraction range in the first quarter, with poor conditions or dragging down custom forging revenue. At the same time, most of the company's products have entered a mature period of life and are facing increased competition for product homogenization. Combined with the above factors, the company's operating income during the reporting period fell 25.70% year on year. Although operating costs decreased by 21.26% year on year with the introduction of high-cleaning projects, the decline was lower than the decline in revenue, so the overall gross margin decreased by 5.35% year on year and gross profit increased by 19 million yuan in the first quarter. So far, the company's performance in the first quarter of 2016 has increased its year-on-year loss margin. However, the increase in government subsidies received in the first quarter caused a year-on-year increase in non-operating income and profit of 11 million yuan, which mitigated the year-on-year decline in the company's first-quarter performance to a certain extent. In the end, the company achieved net profit attributable to the owners of the parent company -- 210 million yuan, a year-on-year increase in loss of 0.9 million yuan. On a month-on-month basis, performance improved. Revenue in the first quarter increased 25.60% month-on-month, while operating costs were reduced by 9.91%, resulting in a sharp increase in gross margin in the first quarter and an increase of 65 million dollars in gross profit over the same period last year. Furthermore, due to three expenses being reduced by 37 million yuan month-on-month, and asset impairment losses falling by 14 million yuan month-on-month due to reduced losses due to falling inventory prices, the company's first-quarter results ultimately improved month-on-month. In line with the trend of transformation and upgrading, the product structure continues to be optimized: the company is represented by high-clean heavy machinery and equipment manufacturing technology transformation projects. The completion of such projects will help accelerate the transformation and upgrading of the company's products. The continuous release of fund-raising projects also supports the increasing share of high-end varieties, and the final product structure has been optimized, thus seizing the high value-added market in the field. The company's 2016 and 2017 EPS are expected to be 0.03 yuan and 0.03 yuan respectively, maintaining the “increase in holdings” rating. Risk warning: 1. There is systemic risk in the market; 2. Demand in the steel industry has fluctuated beyond expectations.