Event: On the evening of August 29, 2018, Haixiang Pharmaceutical (002099) released its 2018 semi-annual report. In the first half of 2018, it achieved operating income of 1,366 million yuan, an increase of 11.2% over the first half of 2017; realized net profit of 276 million yuan, an increase of 13.3% over the first half of 2017, and realized net profit of 272 million yuan after deduction, an increase of 14.6% over the first half of 2017; of these, the second quarter of 2018 achieved operating income of 755 million yuan, compared with 2017 The second quarter of the year grew 17.3%, up 23.7% from the first quarter of 2018; the second quarter of 2018 achieved net profit of 231 million yuan, up 81.7% from the second quarter of 2017 and 416.1% from the second quarter of 2017. In the first half of 2018, the pharmaceutical sector achieved sales revenue of 685 million yuan, up 2.7% year on year; the pharmaceutical sector's comprehensive gross margin reached 29.9%, down 8.2 percentage points year on year, and realized net profit of 71.3962 million yuan, accounting for 25.9% of total net profit in the first half of the year; the dye sector achieved sales revenue of 666 million yuan, up 20.96% year on year, and comprehensive gross margin reached 53.5%, up 0.1 percentage points year on year, and achieved net profit of 204 million yuan, accounting for 73.9% of total net profit. In 2018, Haixiang Pharmaceutical's cash accounts reached 2.19 billion yuan, an increase of 130 million yuan; accounts receivable of 500 million yuan, an increase of 121 million yuan; and inventory reached 833 million yuan, an increase of 20.4% over the previous year of 692 million yuan in the first half of 2017. We analyzed the discontinuation of production in chemical parks in northern Jiangsu in the first half of 2018. The upstream raw materials for KN-R active dyes in Haixiang Pharmaceutical faced short-term oversupply. The overall price of active dyes has risen, industry leaders have properly accumulated inventory, and some products are reluctant to sell. Haixiang Pharmaceutical expects net profit of 430 million yuan to 510 million yuan in the first three quarters of 2018, an increase of 50.8% to 78.8% over the first three quarters of 2017. Among them, net profit for the third quarter is expected to be 154 million yuan to 234 million yuan, a decrease of 33.3% to 1.3% from the second quarter. We analyze that the third quarter has entered the peak printing and dyeing season, and the company's operating income will increase significantly year-on-year. The downside risk of profit compared to the second quarter is mainly due to declining product sales and the appreciation of the RMB exchange rate, resulting in exports Increased product costs. Key investment points: optimization of pharmaceutical product structure, expansion of international customized cooperation business, and continuous improvement of overall gross margin level. Haixiang Pharmaceutical's pharmaceutical business is mainly engaged in the production and sale of specialty APIs and formulations, as well as providing customized production and supporting research and development services for international pharmaceutical companies. The company has maintained good cooperative relationships with internationally renowned pharmaceutical companies and has cooperated with Pfizer for more than ten years. It is Germany's BII's only strategic partner in China. The company's Peinan series, clindamycin series, and fluorphenicol series have absolute advantages in scale, quality and technology in the market, and are in a leading position in the industry. In 2017, by strengthening internal management, reducing costs and increasing efficiency, the company continued to consolidate the market share of leading products such as clindamycin series and peinam series, and the profitability of the pharmaceutical sector was stable. The variety and production of dye products have been increased and expanded, and there is plenty of room for future growth. Haixiang Pharmaceutical's Active Blue KN-R is in a leading position in the field of high-end active dyes. It has an absolute voice in its price, and its downstream customers are stable. At present, Taizhou Qianjin Phase I and Phase II Active Blue KR-N have both put into operation with a total production capacity of 15,000 tons. Environmental protection became stricter in 2018, and the flexibility of the company's dye product price increase performance increased. In the future, the company will adapt to the major trend of dye industry upgrading and expand from a single anthraquinone series of active blue dye products to more than 10 active blue dyes such as methylene active blue and fluorine-containing active blue, as well as other color active dyes and acid dye products, which will help enhance its ability to cope with market risks, and at the same time help expand the company's competitive advantage in the high-end dye segment and increase market share. Profit forecast and investment rating: The company achieved steady growth in performance through new product expansion and production capacity expansion, and the flexibility of the company's product price increase performance expanded in the context of stricter environmental protection. The company's 2018-2020 EPS is expected to reach 0.41, 0.52, and 0.61 yuan, maintaining the “increase in holdings” rating. Risk warning: Competition in the pharmaceutical intermediates industry is intensifying; environmental protection measures in the dye industry are lower than expected; risk of declining prices of dye products; the impact of fluctuations in the RMB exchange rate on the company's performance.