Report highlights Event description Shandong Ruyi (002193) released its 2015 annual report. The main operating results are as follows: In 2015, the company achieved operating income of 592.3569 million yuan, up 2.48% year on year; realized imputed net profit of 17.1184 million yuan, up 1,054.10% year on year. Basic earnings per share are 0.11 yuan/share, 1,200.00%. The 2015 profit distribution plan is to distribute cash of 0.15 yuan (tax included) to all shareholders for every 10 shares based on the company's total share capital of 160,000,000 shares as of December 31, 2015. Incident reviews The positive sales volume is driving revenue, and rising costs are dragging down gross profit. In 2015, the company achieved a 2.48% year-on-year increase in operating income by optimizing the order structure and innovating sales models. The slight increase in revenue benefited from an increase in domestic sales, which increased by 12.73% year on year; export sales decreased by 20.14% year on year due to weak international demand. When broken down into products, sales revenue of worsted wool, which accounted for 94.25% of revenue, also increased by 4.81%; sales revenue of raw materials, which accounted for 5.16% of revenue, decreased by 29.89%; revenue from water, electricity, steam, and leasing businesses increased sharply year on year, but the volume was small, accounting for 0.59% of total revenue. Due to fluctuations in raw material prices and rising labor costs, operating costs also increased by 12.34%, dragging down gross profit by 24.43% and gross margin by 5.56 pct. Expenses are well controlled, investment returns have increased, and net profit has increased dramatically. In 2015, the company implemented sales model reforms and reduced salary commissions for sales staff, which reduced sales expenses by 11.96%; the company increased investment in technology research and development, and management expenses increased 9.88% year over year; financial expenses were also reduced by 19.63% due to lower loan interest rates and increased bill financing. The above reasons reduced the period fee by 10.46%. During the reporting period, the company transferred 100% of the shares of its subsidiary Shandong Jining Ruyi Zhangjiagang Free Trade Zone International Trade Co., Ltd. at a price of 4.3003 million yuan, and received a cash dividend from the Bank of Jining, increasing investment income by 4611,000 yuan. The company has stepped up efforts to recover receivables receivable and collected accounts receivable that have already been prepared for bad debts, reducing asset impairment losses by 165.65%. The above reasons also led to a 464.97% increase in the company's operating profit. Furthermore, the company received a one-time subsidy of 9.349 million yuan from the government, which further helped the company achieve a year-on-year increase of 1,481.91% in total profit in 2015, which in turn contributed to a significant increase in net profit. It is proposed to increase 1,838 billion yuan to improve the integration of the industrial chain. Of the capital raised, 290 million yuan, and 119 million yuan were used to acquire 100% of the shares of Ruyi Technology, Taian Ruyi, and 51% of Wenzhou Zhuangji's shares; 197 million yuan, 236 million yuan, and 406 million yuan were used to build Ruyi textile high-end fabric projects, research center projects, and Ruyi textile 2 million high-end suit projects; the remaining 500 million yuan was used to return bank loans and improve the company's balance and liability structure. Wenzhou Zhuangji Apparel has made impressive performance promises for this acquisition. Ruyi Textile's high-end worsted fabric project and Ruyi Textile's 2 million high-end suit project are expected to increase production by 20.1185 million yuan and 64,5397 million yuan in net profit for the same year, respectively. The fixed increase plan has been approved by the Securities Regulatory Commission, which will help the company extend and improve its industrial chain structure and exert synergies. We are optimistic about the company's industrial chain integration advantages. The basic earnings per share for 2016-2017 are expected to be 0.15 yuan/share and 0.21 yuan/share. The corresponding current valuation is 103 times and 73 times. Maintain a “buy” rating. Risk warning: risk of changes in macroeconomic and market conditions; risk of fluctuations in raw material prices, etc.