Incident: On April 13, 2019, Hunan Haili (600731) issued an announcement: The company's net profit for the first quarter is expected to be between 2875.6 and 32.263 million yuan, an increase of 310% to 360% over the previous year. The reason for the increase is mainly due to the expansion of product sales scale and the increase in sales prices of some products during the reporting period. We think this year is likely to be an inflection point in the company's performance for 4 reasons: 1. The prices of the main products have been rising steadily for the past two years. The prices of urethane products have been rising for more than two years under safety supervision and environmental control. The prices of the company's two core products, Krobuvir and Xandovir (which accounted for 30% of the company's sales revenue in 2018), increased 57% and 70% respectively in the fourth quarter of 2018 compared to the first quarter of 2017. Urethane pesticides are highly toxic, the process is dangerous, and the supply of upstream intermediates is very low, making it difficult to find new entrants in the short term. As of mid-April 2019, the market price of KBV has reached 110,000 yuan/ton, and product prices are expected to continue to rise in the future. 2. The demolition of the Zhuzhou subsidiary has basically been completed, which will not hinder the 2019 performance. The relocation expenses of the company's subsidiary in Zhuzhou, Hunan affected the company's performance in 2018. Demolition expenses are reflected in the categories “non-operating expenses,” “asset impairment losses,” and “dismissal benefits” (management expenses) in the financial report. The total impact of the three is close to 100 million yuan, while the land storage compensation granted by the Zhuzhou government of 142 million yuan is reflected in the category “deferred income” and was not reflected in the income statement, causing the company's actual operating performance to be underestimated. According to the 2018 annual report, the company's net profit was 51.5 million yuan (yoy +23.5%), while net profit from continuing operations reached 138 million yuan (yoy +60%). The latter is a reflection of the company's real operating results. The sharp increase in 2019Q1 performance is also a continuation of the same logic. 3. Third, the fee rate has been reduced, and management efficiency has been improved. The company's three rate before 2015 was around 20%, which is high compared to other listed pesticide companies. After 2016, the company reduced costs and increased efficiency. In 2018, the three fee rate fell to 13.7%, and was reduced by 6 percentage points in 3 years. On the one hand, there is a streamlining of employees - the number of employees in 2018 was reduced by 332 compared to 2017, and on the other hand, the company's product revenue growth diluted management costs. Furthermore, in January 2018, the company successfully completed employee shareholding, and internal incentives improved. 4. Star projects contributed to performance in 2019. After a difficult climb in production capacity in 2018, the star project of the company and Bayer, Sulphur Double Extinction, Dowel, mass production was basically stable in the first quarter of 2019, and the products were mainly sold to Bayer. It is estimated that 2019 will bring about 400 million yuan in revenue growth to the company, with strong performance certainty. Combining the above 4 points, we believe that the company's performance in 2019 is likely to reach an inflection point, and that high performance growth may continue. Key investment points: Leading domestic carbamate pesticides, production barriers are extremely high. The company's main business is carbamate pesticides (production capacity more than 10,000 tons), organophosphorus pesticides (production capacity more than 10,000 tons), and heterocyclic pesticides, and has a production capacity of 50,000 tons of upstream raw gas, as well as production and supply capacity of major core intermediates. Among them, the main products produced by carbamate pesticides are: kabavir (sales revenue accounted for 17% of 2018 revenue), xidorubil (13%), sulfidovir (8%), methanavir (8%), butavir (8%) (5%) and killing power (4%), which together account for more than half of the company's revenue 。 The company is the main supplier of carbamate pesticides in China, and product production barriers are extremely high: first, the initial raw material is a highly toxic product, phosgene, and new production capacity is strictly prohibited in China; second, the core intermediate isocyanate value (MIC) and alkylphenol are highly dangerous and difficult to process. The former is highly toxic and unstable, and requires low temperature storage; the latter, such as furanol, domestic companies have only two domestic suppliers; third, product registration is difficult. Carbamate pesticides themselves are highly toxic, and some countries are not banning them. China's Ministry of Agriculture stopped banning them as early as 2011. We accept registrations for products such as Carbovir and Methovir. The supply and demand pattern was optimized under safety supervision and environmental rectification. Prices of leading products continued to rise, and Q1 performance increased significantly in 2019. In recent years, under safety supervision and environmental control, the main competitor's production capacity has been limited or withdrawn from the market. The company is the main supplier of carbamate pesticides in China, and product prices have continued to rise. According to business data disclosed by the company, the tax-free price of the representative product KBR increased from 60,000 yuan/ton in 2017 Q1 to 94,000 yuan in 2018 Q4, an increase of 56.7%, while the extinction of Dowell increased from 50,000 yuan/ton to 85,000 yuan/ton during the same period, an increase of 70%. As of mid-April 2019, the market price of KBV had reached 110,000 yuan/ton. The increase in product prices brought about an increase in profitability. In 2018, the company was affected by the demolition of its subsidiary in Zhuzhou, and the net profit attributable to the parent company was only 51.4984 million yuan (yoy +23.5%), but the net profit from continuing operations disclosed in the annual report reached 138.486 million yuan (yoy +60%); in the first quarter of 2019, the company disclosed net profit between 2875.6 and 32.263 million yuan (yoy +310-360%), and the performance inflection point rate has probably arrived. The national reform dividend was released, and the 2018 fixed increase was successfully issued, and the three-fee rate was reduced by 4.4 percentage points. From the company's planned increase in 2016 to January 2018, the company issued 27.986 million shares at 7.53 yuan/share in non-public shares, accounting for 7.87% of the company's total share capital after the non-public offering, and raised 206 million yuan after deduction of issuance fees. Among them, Hailey Group, the majority shareholder, subscribed for 8.4756 million shares, accounting for 30.4% of the total issuance volume; the Hunan State Assets Administration Commission subscribed for 3.989 million shares, accounting for 14.3%; the company's employee stock ownership plan (company management and current employees) subscribed for 5.073 million shares, accounting for 18.2%; the total subscription of the three parties was 62.9%, and the stock lockdown period was 36 months (the ban was lifted in February 2021). Until 2016, the company's three-fee rate had always been as high as 20%. Since then, the company has reduced costs and increased efficiency. The three-fee rate has been falling for three consecutive years. By 2018, the three-fee rate had dropped to 13.7%, down 4.4 percentage points from the previous year. Among them, management expenses fell by 1.9 percentage points. The number of employees employed in the company in 2018 was 1,837, a decrease of 332 compared to 2017. The star project was successfully put into operation, rich in reserve projects, and strong growth. Hunan Hailey and Bayer of Germany collaborated to build a star project: 4,000 tons/year of sulfur and double extinction Dowell was put into operation in 2018, and stable mass production had been achieved by the first quarter of 2019. It is expected to bring the company about 400 million dollars in revenue throughout the year, accounting for more than 20% of the total revenue scale in 2018. In addition, the company's reserves of salicyliconitrile, newly expanded production of butylthiocarb, methylpyrimidine phosphorus, and other pesticide types will also be put into production in 2019-2020, becoming a new profit growth point for the company. Profit forecast and investment rating: First coverage, giving a “buy” rating. The company is a leading domestic carbamate pesticide with high production barriers. In recent years, competitors have gradually withdrawn under the security surveillance and environmental protection storm, and the company's products have gradually risen. At the same time, the company has used the power of national reform to reduce costs and increase efficiency, and its profitability has gradually increased. We are optimistic about the company's development. We expect the company's EPS in 2019-2021 to be 0.55, 0.70, and 0.86 yuan, respectively, with PE multiples corresponding to the current stock price of 12.73, 9.98, and 8.12. First coverage, giving a “buy” rating. Risk warning: production safety and environmental risks, relocation of subsidiaries affects performance, downstream demand for products falls short of expectations, product prices fall, and new production capacity investment falls short of expectations.