Investment highlights: Gross sales profit recovered in 2013: As the macro environment is weaker than expectations and fluctuations in consumer behavior, management expects sales growth and profit margins to return to normal levels in the second half of 2013, despite greater pressure to increase upstream sales volume by 5%. With upstream sales and downstream gross margin increasing on a quarterly basis, management will strive to achieve a 20% increase in slaughter volume in 2013. The recovery in sales was mainly driven by a recovery in capacity utilization, pipeline expansion (such as chain restaurants), and macroeconomics. The expansion of slaughter production capacity is based on long-term industry integration, but it will come at the cost of short-term low capacity utilization and erosion of gross margin. Yu Run maintained its five-year capital expenditure plan up to 2015 with a total amount of RMB 14 billion to expand upstream slaughter and downstream deep processing capacity. Capital expenditure reached HK$4.9 billion in 2011, and the company reduced its expansion by half in 2012. The most important consideration for expanding production capacity is to reap the dividends of industry integration: governments seek to control slaughter licenses (for example, slaughter licenses are issued up to 4 in cities with a population exceeding 5 million) in order to better regulate business practices and improve food quality. Currently, the industry leader, Yurun Food and Shuanghui, has a total production capacity of 7 million heads (about 10% of domestic pig demand). Management estimates that after consolidation, the number of slaughterhouses will be reduced from 17,000 to 3,000. The company's target return on investment for the new slaughterhouse is 15%, which means that the new factory will need to recover the initial investment in about 7 years. Therefore, we believe that the company's expansion is aimed at achieving a leading position in the future industry, while the short-term cost is a decrease in production efficiency due to increased depreciation costs and low capacity utilization (negative economic effect). Both of these factors have led to erosion of gross profit and/or financial stability. Concerns about connected transactions: Yurun Foods began purchasing raw materials from Yurun Group in May 2012, and is likely to increase the (maximum) total procurement volume to RMB 171 billion in 2013-15. The parent company currently has 30 farms with an annual production capacity of 3 million heads. The company recognises that this procurement arrangement is in line with its strategy of purchasing from large-scale and regulated farms. Currently, this portion of procurement will account for less than 30% to improve product quality and reduce inspection costs. In 2015, the amount of raw pigs purchased from the parent company will reach 15% of the total purchase price of Yu Run. Management's share-free repurchase plan: CEO Mr. Li and Chairman Mr. Yu hosted the first reverse roadshow of the year. Investors agreed to clearly explain the company's operations. However, the management stated that the company had no share repurchase plans, and that the management and major shareholders had no intention of increasing their shares. These are the signals that the market is looking for to strengthen confidence. All in all, Yurun Foods mainly focuses on slaughter business and sales channel construction. Its long-term positioning is also the main source of disagreement between investors and companies: we agree that the government's determination and strength to restrict slaughter photography is the key to industry integration, and therefore, the success of Yu Run's overall strategy. Although we can safely expect that first-tier cities have stricter controls, the difficulty of reducing the number of slaughterhouses from 17,000 to 3,000 is also obvious. Therefore, we believe that the mismatch between the company's actions and long-term goals and investors' concerns about its short-term earnings will continue to put pressure on stock prices.