Investment points: One of the leading enterprises in the microfiber leather industry. Since its establishment for more than ten years, the company has been focusing on the production and sales of microfiber leather, and currently has a production capacity of about 16 million square meters through steady operation and expansion. The company has key technologies for base cloth production in the microfiber leather industry, and has become an industry leader along with Huafeng Microfiber and Shuangxiang Co., Ltd. Through years of steady expansion, product quality has been unanimously recognized by customers. Downstream end customers include well-known domestic and foreign companies such as Nike, Anta, Guirenniao, and Li Ning. In 2015, it achieved operating income of 453 million yuan, a year-on-year decrease of 7.65%; attributable net profit of 35 million yuan, an increase of 18.81% over the previous year. 1Q2016 achieved revenue of 98 million yuan, a year-on-year decrease of 10.08%; attributable net profit of 0.7 billion yuan, an increase of 5.8% year-on-year. Downstream demand is strong, and there is plenty of room for replacement. We believe that the microfiber synthetic leather industry will maintain a steady growth rate in the next few years, mainly benefiting from: (1) Changes in consumption preferences drive strong downstream demand. The application fields of microfiber leather products have expanded from initial tourist shoes and sneakers to luggage, leather shoes, automotive interiors, apparel and other fields. (2) There is a wide range of alternatives to improve product cost performance. On the one hand, with the strengthening of environmental protection requirements, the development of the leather industry will be restricted. In 2015, the China Leather Association officially released the “Technical Roadmap for Water Saving and Emission Reduction in the Tannery Industry”, and the environmental pollution control intensity of the leather industry has been further upgraded. And with the gradual improvement of product quality and performance, the replacement effect of microfiber leather on leather continues to increase. On the other hand, along with the decline in product prices, its cost performance advantage over ordinary PVC and PU leather continues to show, and it is expected that it will gradually be replaced in the future. The technical level is leading, and emphasis is placed on new product development. The company is the earliest domestic enterprise engaged in R&D and production of ecological high-simulation microfiber artificial leather. It has 11 core patented technologies and participated in or presided over the formulation of 8 national standards and industry standards. The company continues to innovate and upgrade products according to industry technology development trends and market demand trends. Over the past three years, the number of R&D personnel has remained above 110, accounting for more than 15% of the total number of employees, and R&D investment has always accounted for more than 3% of revenue. The product structure has been continuously optimized, and gross margin has been rising steadily. With years of technology accumulation, the company has made full use of its technological advantages. On the one hand, it has put products with high added value on the market one after another through continuous research and development; on the other hand, it has taken the initiative to adjust the product structure, abandoning varieties with low added value and low technical content, and focusing on varieties with high gross profit levels and high technical thresholds as marketing priorities. Through product structure optimization, the company's comprehensive gross margin in 2015 was 21.38%, an increase of 3.87 percentage points over the previous year. We believe that in the future, the entire microfiber leather industry will gradually mature, and both product prices and gross margin will decline. Only differentiated competition is the path to sustainable development. We are optimistic that the company will actively change its product structure ahead of schedule and position itself in the middle and high-end markets. There is still some room for growth in gross margin in the future, and performance is expected to maintain steady growth. Profit forecasts and investment ratings. We believe that in the future, by targeting the middle and high-end markets and optimizing the product structure, the company's performance will maintain steady growth. The company's EPS for 2016-2018 is expected to be 0.95, 1.09 yuan, and 1.30 yuan, respectively. Since the company's current stock price is 66 times the corresponding valuation in 2016, which is higher than the average valuation level of the same industry, coverage for the first time is not rated yet. Risk warning. Product prices have fallen, demand growth has declined, and the industry has overcapacity.