Event: The company announced the 18-year semi-annual report and the oil and gas industry production data situation. In the first half of 2018, the company achieved operating income of 2.148 billion yuan, a year-on-year increase of nearly 17.5 times, net profit attributable to shareholders of listed companies of 241 million yuan, a year-on-year increase of 492.1%, and net profit of 230 million yuan after deduction, an increase of about 22.6 times over the previous year. Comment: The sharp increase in performance is due to Howard & Borden Oilfield's merger. Since the change of shareholders in 2014, the company has decided to enter the overseas oil and gas industry. It has successively completed the acquisition of Hoople Oilfield and Howard & Borden Oilfield, and has been merged since December 2015 and August 2017, respectively. The year-on-year increase in performance was mainly due to changes in the scope of the merger table. Production and sales increased steadily in the first half of the year. Discounts stemmed from bottlenecks in US shale oil pipeline transportation. The company's oil and gas industry achieved revenue of 2.148 billion yuan in the first half of the year, achieving oil and gas equivalent production of 6,534 million barrels, equivalent to 36,000 barrels per day, of which oil production accounted for 76.7%, reaching 33,000 b/d; natural gas production accounted for 13.3%, equivalent production of 0.48 million b/d. In the second quarter, oil and gas equivalent production reached 39,000 b/d in a single quarter, a significant increase over the previous quarter. Since the company's 18H1 hedging profit and loss of $347.78 million directly reduced current operating income, we added back this reduction and assumed that the average spot price of natural gas was $2.86 /mmbtu to achieve the price. The realized price of the converted crude oil portion was 60.8 US dollars/barrel, and the discount was -4.6 US dollars/barrel, down about 5 US dollars/barrel from the first quarter. The large discounts on crude oil are mainly due to bottlenecks in US shale oil pipeline transportation. Since June, prices in Midland production areas have been heavily discounted compared to Houston port prices, which is in line with the trend reflected in the company's business data. Low asset costs, good production increase effects, and transparent and traceable production are the core advantages of modern energy. The company made an accurate move at the end of 2015, when the oil price sentiment was most pessimistic, and acquired the Howard & Borden oil field. The full cost was estimated at 24 US dollars/barrel at a 16-year level. Due to the recovery in commodity and oil service prices, the overall cost of the block has risen, estimated at around $30/barrel. Up to now, there is still about 3/4 of the area in the northern part of the block to be developed, and there is great potential for increasing production; in the absence of a significant increase in the drilling speed of the existing block, block production has jumped, indicating that the production situation at existing well sites is good. We have always emphasized that unlike other overseas oil and gas resource operators, the Dezhou region, where Xinchao Energy's assets are located, has a complete oil and gas industry chain, a high degree of marketization, and transparent and traceable production conditions. The advantages are very obvious. The risk was gradually released, and the impairment value of 18H1 was 190 million yuan. There is still pressure to accrue in the future. There are two main reasons limiting the release of the company's performance: First, the block's current financial expenses are high, mainly due to penalty interest (US$209.1117 million) and amortization of issuance costs (US$159.544 million) by US subsidiaries for issuing bonds. Currently, the company has successfully issued bonds (cost about 6.5%) to repay all short-term high-interest loans, and debt costs are expected to be capitalized; second, in the first half of the year, it is estimated that there will be continued impairment pressure during the year. At present, the corporate shareholder governance situation has also stabilized, and risks have been gradually released. The value of the investment is promising. Given the pressure to impair value, a prudent recommendation rating was given. Assuming that the oil price is 59/65/71 US dollars/barrel in 2018-2020, with equivalent production of 38,000, 44,000, and 50,000 b/d, the income tax rate in 2018 was reduced to 21%, and the annual value was reduced by 500 million dollars. It is estimated that in 18-20, the company will achieve net profit attributable to shareholders of listed companies of 63/14.1/222 billion yuan, corresponding to PE 24.4, 11, and 7 times the current price. Due to the risk of impairment, a “prudent recommendation” rating was given for the time being. Risk warning: International oil prices have fallen sharply; corporate governance risks.