Main points of investment:

The performance increased by 36.65%. Hongxing Development released the 17-year mid-year report, during the reporting period, the company realized total operating income of about 642 million yuan, an increase of 19.02% over the same period last year; realized net profit of about 39 million yuan belonging to the parent company, an increase of 36.65% over the same period last year; and realized EPS0.13 yuan.

The volume and price of inorganic salt products have risen, leading to rapid growth in performance. According to the 2017 report, due to the periodic inspection and maintenance of the barium carbonate production line and the relocation of the strontium nitrate production line in the first half of this year, the total output of major inorganic salt products decreased by 4.56% compared with the same period last year. However, the company seized the market opportunity of reduced supply in the same industry and increased its sales. Sales of barium salt and strontium salt totaled 179600 tons in the first half of the year, an increase of 12.87% over the same period last year. At the same time, in the second quarter of 2017, the average selling prices of barium carbonate, barium sulfate, strontium carbonate and other inorganic salt products (excluding tax) increased by 20.60%, 20.88% and 7.14% respectively over the same period last year. The sales volume and price of inorganic salt products increased compared with the same period last year, realizing the double growth of operating income and operating profit.

The demand for ternary cathode materials increased, and high purity manganese sulfate benefited significantly. During the reporting period, the company's output of high-purity manganese sulfate was 6469 tons, an increase of 26.89 percent over the same period last year; sales volume was 6525 tons, an increase of 45.58 percent over the same period last year; and the average selling price (excluding tax) in the second quarter increased to 5464.55 yuan / ton, an increase of 10.91 percent over the same period last year. The increase in production and sales of high-purity manganese sulfate compared with the same period last year is mainly due to the increased demand for ternary cathode (precursor) materials for downstream lithium-ion batteries. We expect that in the future, high-purity manganese sulfate will continue to benefit from the rapid development of new energy vehicles, achieve an increase in production and sales scale compared with the same period last year, and further promote the company's performance growth. According to the 16-year annual report, the company's budgeted output of high-purity manganese sulfate in 2017 was 19350 tons, an increase of 75.61 percent over the actual production in 2016.

We will strengthen the management of saving expenditure and reducing consumption, and reduce investment losses compared with the same period last year. The associated company Hongxing Logistics has realized the year-on-year growth of service income and greatly reduced losses by increasing rental fees, handling fees and other service fees and reducing expenditure. According to the China News, in the first half of 2017, Hongxing Logistics achieved an operating income of 23.9179 million yuan, an increase of 18.71 percent over the same period last year, and a net profit of-2.2034 million yuan, a loss of 5.2204 million yuan over the same period last year. The company's investment loss in Hongxing Logistics was correspondingly reduced by 5.2204 million yuan over the same period last year.

Profit forecast and investment advice. We estimate that the company's net profit from 2017 to 2019 is 92 million yuan, 135 million yuan and 182 million yuan respectively, and the corresponding EPS is 0.31,0.46 yuan and 0.62 yuan respectively, and the company's dynamic price-to-earnings ratio in 2017 is 38 times. Considering that the current valuation is slightly higher than that of the same industry, the rating is not rated for the first time.

Risk hint. The growth of product sales is lower than expected; the risk of falling product prices; the release of capacity is not as expected.