Incident: January 9, 2019, Yangfan New Materials released its 2018 annual results forecast: Profit for the full year of 2018 was 131-148 million yuan, up 100.89%-126.96% year on year; of these, the expected profit for the fourth quarter was 2378-40.78 million yuan, up 37.8%-136.4% year on year, and the performance was basically in line with expectations. The increase in performance in 2018 was mainly due to 1) an increase in product prices; 2) a gradual increase in profits from reserve varieties of thiol compounds (pharmaceutical intermediates); and 3) exchange gains from the appreciation of the US dollar. Currently, the company's Alashan project in Inner Mongolia is under construction, and trial production is expected in the second half of 2019. Key investment points: Domestic photoinitiators and thiol compounds have significant advantages in integrated production. The company's main products are photoinitiators and thiol compounds and their derivatives. In terms of photoinitiators, the company's main products include 907/369/TPO/184, etc., of which 907 accounts for more than 60% of the global market share (disclosed in the company's interim report). In terms of thiol compounds, the company is the only one in China, with more than 500 product categories and high technical barriers. Japan's main competitor is Sumitomo Chemical of Japan. There is a good synergy between the company's two main businesses. Thiol compounds are one of the core raw materials for photoinitiators, such as photoinitiator 907. Everything from production of basic raw materials to sales of finished products is controlled by the company itself, and integrated production guarantees cost advantages and resilience to risks. Benefiting from stricter environmental protection, rising prices of main products and significant increases in profitability. Domestic environmental protection has become stricter in recent years. The shutdown of many intermediate companies has led to insufficient market supply. The prices of the company's photoinitiators and thiol compounds have all risen sharply, and profitability has increased. According to the company's May announcement, photoinitiator 1173 rose 71.4% from 35,000 yuan/ton in 2017 to 60,000 yuan/ton in May; during the same period, the photoinitiator TPO increased from a low level of 100,000 yuan/ton to 20-30 thousand yuan/ton, an increase of more than 100%. Under the trend of normalization of environmental protection and high pressure, the high popularity of the company's products is likely to continue. The 1 billion yuan fund-raising project has a large market space, and the company's growth path is clear. With the rapid development of China's light-curing industry, the photoinitiator market is seriously undersupplied. Currently, the company's 3,000 ton production capacity accounts for only about 10% of domestic market demand (2018 mid-year report revealed). As a result, the company changed the original IPO fundraising project to a “29,000t/a photoinitiator and pharmaceutical intermediate project”, with a total investment of 1 billion yuan. The construction site is in Alashan Economic Development Zone, Inner Mongolia. The new project includes 11,000 tons of photoinitiators, the rest being thiol compounds and related supporting materials. The project is divided into two phases. The first phase is expected to be completed within two years with an investment of 500 million yuan and put into operation in mid-2019; the second phase of the project is expected to be completed in about 5 years. After delivery, it can achieve revenue of 950 million yuan and net profit of 270 million yuan at the 2017 product price. Profit forecast and investment rating: Maintain a “buy” rating. The company is a leader in the photoinitiator and thiol compounds industry, benefiting from the normalization of environmental protection and high pressure, and the Inner Mongolia project will open up room for growth. Considering that future industry competition may intensify, we slightly lowered profit expectations. It is estimated that in 2018-2020, the company's EPS will be RMB 1.17, 1.37, and 1.60 yuan/share, respectively, and PE corresponding to the current stock price is 23.40, 19.92 and 17.06 times, respectively. In the long run, the company has obvious technical advantages and a clear growth path. We continue to be optimistic, so we maintain a “buy” rating. Risk warning: falling product prices; competitor production expansion; production safety and environmental risks; project construction progress falls short of expectations.