Key investment points Demand in the custom furniture market is strong, and performance is growing rapidly: the company achieved revenue of 355 million yuan in the first half of the year, an increase of 48.77% over the previous year; net profit of 53.56 million yuan, an increase of 77.22% over the previous year; the increase in performance was basically in line with expectations. The consolidated gross margin for the first half of this year was 29.49%, a slight decline from 30.82% in the same period last year. The company's products are being transformed according to changes in market demand, increasing the market share of processing center products. The sales volume of processing centers was 78.78 million yuan, up 60.38% year on year, but gross margin fell 4.01 pct to 25.37%, which is the main reason for the decline in overall gross margin. In order to meet future market demand, the company increased R&D investment and new product reserves, and invested 15.21 million yuan in R&D in the first half of the year, doubling the previous year; in addition, the company expects net profit of 6786-81.44 million yuan, up 50-80% year on year. The prosperity of the real estate industry is still relatively good, boosting the market growth of the woodworking machinery industry: according to statistics from the National Bureau of Statistics, the year-on-year growth rate of commercial housing in China reached 6.5% in 2015, changing from negative to positive, reaching 22.5% in 2016, the highest growth rate since 2010. The sales area of commercial housing increased by 16.1% year on year in the first half of 2017, and despite some decline, it is still at a high level in recent years; in the first half of 2017, the revenue of the furniture manufacturing industry above scale was 443.66 billion yuan, up 13.9% year on year, a significant increase from 8.4% and 8.7% in the same period in 2015 and 2016. According to statistics, there are 24 listed companies in the furniture industry, with total revenue reaching 60.1 billion yuan in 2016, an increase of 21.01% over the previous year, a significant increase from 11.31% in 2015. The prosperity of the downstream real estate and furniture industry has had a great impact on the woodworking machinery industry. Currently, the effects of inventory removal in third- and fourth-tier cities are remarkable, offsetting the impact of policies such as purchase restrictions and loan restrictions in some Tier 1 and 2 cities on the real estate sales area. As one of the two leaders in domestic panel furniture and woodworking equipment, the company will benefit from the high prosperity of the real estate and furniture markets. With the general trend of numerical control of equipment, market concentration will increase: the domestic woodworking machinery and equipment industry has excess capacity at the low end, the middle and high-end production capacity is insufficient, and mainly foreign brands and domestic brands with a certain degree of competitiveness occupy the market. Currently, the market share of local brands in the middle and high-end markets is still low, so there is a lot of room for improvement. The domestic market has moved from price and marketing to a development path that puts technology and service first. The company has accumulated 20 years of industry experience in the R&D and production of panel furniture machinery. Many products are at the leading level of technology in China, and some technologies have reached the advanced level of similar international products, and can replace imported equipment. As the company introduces new high-end CNC products to the market, such as a new high-speed computerized board saw, a six-sided CNC drill, and a pass-through CNC drilling center, etc., technological differences will increase the brand premium of the company's products, thus occupying a high technological position and gaining more market share under the trend of flexible equipment and numerical control. Investment suggestions: We forecast the company's operating income for 2017-2019 to be 730 million yuan, 991 million yuan and 1,294 million yuan respectively, and earnings per share of 0.90 yuan, 1.29 yuan and 1.78 yuan respectively. The investment rating for “increased holdings - A” is given, and the target price for 6 months is 43.5 yuan, which is equivalent to a price-earnings ratio of 34 times that of 2018. Risk warning: Unsustainable risk of high prosperity in the real estate industry; risk of declining gross margin due to increased competition in the industry; continued decline in gross margin of processing centers, etc.