Incident: The company released its 2018 annual report. During the reporting period, the company achieved operating income of 1,415 million yuan, a decrease of 9.56% over the same period of the previous year; realized operating profit of -0.22 million yuan, a decrease of 131.43% over the same period of the previous year; realized net profit attributable to owners of the parent company of 122 million yuan, a decrease of 94.59% over the same period of the previous year; and realized deducted non-net profit of 0.11 billion yuan, a decrease of 102.78% over the same period of the previous year. Corresponding earnings per share of -0.03 yuan, the weighted average ROE fell to 3.33%. Dividend plan: Cash dividend of 1.00 yuan (tax included) for every 10 shares. The company released its report for the first quarter of 2019. During the reporting period, the company achieved operating income of 312 million yuan, a decrease of 25.52% over the same period of the previous year, realized operating profit of -0.22 million yuan, a decrease of 124.46% over the same period of the previous year, and realized net profit attributable to shareholders of the parent company of -25 million yuan, a decrease of -135.11% over the same period last year. Key investment points The price of vitamins fell in Q3 and Q4 in '18. Under pressure from short-term performance, the company achieved operating income of 340 million yuan in the fourth quarter of '18, a year-on-year decrease of 30.04%, and net profit to mother of -54 million yuan, a year-on-year decrease of 133.77%. The sharp decline in the company's performance in 2018 is mainly due to the overall downward trend in the price of the company's vitamin products in the second half of 2018. The prices of some products have fallen close to the industry's cost line, and profits are minimal. During the reporting period, the company's overall gross profit margin was 26.50%, a year-on-year decrease of 44.63 percentage points. By sector, the revenue of the vitamin sector was 1,063 billion yuan, a year-on-year decrease of 12.95%, gross profit margin of 30.14%, and gross margin down 27.70 percentage points year-on-year, mainly due to the overall decline in vitamin prices and the rise in upstream raw material prices in 2018; the leather chemical sector's revenue was 0.3 billion yuan, down 0.19% year on year, gross profit margin decreased by 0.91% year on year, and gross margin decreased 11.26 percentage points year on year, mainly due to an increase in raw material costs. During the reporting period, the company's sales expenses were 53 million yuan, an increase of 29.51% over the previous year, mainly due to the increase in product sales in the current period, which led to an increase in sales expenses of 0.22 million yuan, an increase of 49.85% over the previous year, mainly due to a sharp increase in amortization interest on convertible bonds during the reporting period; 484 million yuan in construction, an increase of 303.33% over the previous year, mainly due to continued investment in the second phase of the Brother Pharmaceutical project. The Q1 performance is a phased point. Subsequently, it will gradually improve the company's performance in the first quarter of 2019, mainly due to the sharp decline in vitamin prices in '18, and orders for vitamin products were signed earlier. Although starting in the first quarter of 2019, as safety and environmental protection became more strict, prices for some vitamin products rebounded, but due to the signing cycle, vitamin product orders in the first quarter were mainly based on last year's Q4 prices, so there was no significant improvement in performance. The company's R&D expenses in the first quarter were 0.14 million yuan, a decrease of 42.06%; sales expenses were 0.11 million yuan, up 12.27% year on year and a decrease of 40.71% month on month; management expenses were 0.36 million yuan, down 24.70% year on year, up 13.48% month on month; financial expenses were 12 million yuan, down 51.19% year on year, up 60.36% month on month, mainly due to a decrease in exchange losses. The rise in vitamin K3 and B5 prices is driving the company's performance to gradually improve. The upstream raw material for vitamin K3 is sodium red bauxite. Sodium red bauxite is a downstream product of chromium ore. The current rise in vitamin K3 prices is mainly due to the rise in the price of chromium ore driving up the price of downstream products. The current rise in chrome ore prices is mainly due to the power restriction incident in the south, which affected its chrome ore exports. Currently, the price of vitamin K3 has increased by nearly 70% compared to February, which is a significant improvement in the company's performance. Due to the stricter environmental situation in Shandong, Jiangsu and other places, the supply of vitamin B5 products was limited in some manufacturers, and the price increase was close to 80% compared to February. The rise in the price of vitamin products is expected to greatly improve the company's current business situation. Vitamin B3 and B5 production has been expanded, and construction of new projects continues to advance the company's annual output of 13,000 tons of vitamin B3, 5,000 tons of calcium pantothenate, and the 2,000 ton 3-cyanopyridine project has been completed and put into operation, with a total conversion of 540 million yuan. Over the next 1-2 years, the two major products will provide an increase in the company's revenue and profit. In the short term, due to changes in the supply structure and industry demand, the company's vitamin B3 and B5 prices fell to a low level, so the company's gross profit margin was affected in the short term after capacity expansion. Several of the company's major varieties are already leading in the industry. In the future, under environmental pressure, they will gradually enjoy market dividends brought about by increased industry concentration. Currently, the company continues to plan the 1000 tons of iodine contrast agent raw materials and intermediates project, 20,000 tons of hydroquinol and 31,100 tons of hydroquinone derivatives, which are expected to be put into operation this year. Companies that have set up a pharmaceutical industry fund to balance long-term growth and high-quality targets have only begun to gradually develop the vitamin business. Originally, their main business was leather chemical products, vitamin K3, and a small amount of vitamin B1. After listing, the company's financing strength increased. After listing, technical improvements to the vitamin K3 process were carried out to increase gross profit, and the production capacity of pharmaceutical-grade vitamin B1 and vitamin B3 was built and increased. The production capacity for vitamin B5 is now in operation. Currently, the company has set up four major divisions. The Jiangxi production base is planning to use 3,000 mu of land. The current usage is less than half. In the future, on the basis of making strong cyclical products such as small-variety vitamins, it will expand stable cash flow varieties such as fragrance intermediates and iodine contrast agents, and use the “DSM” development model to become a domestic high-quality raw materials and intermediates enterprise. Profit forecast and valuation estimate that the company will achieve operating income of RMB 1,683 billion, RMB 1,787 billion and RMB 1,803 billion in 2019-2021, with growth rates of 18.95%, 6.20%, and 0.90%, respectively. Net profit attributable to the parent company was 151 million, 165 million yuan, and 175 million yuan, with growth rates of 592.88%, 9.25%, and 6.44%, respectively. The company's EPS is expected to be 0.17, 0.19, 0.20 yuan/share in 2019-2021. Risk tips 1. Vitamin prices have dropped drastically. 2. New project construction falls short of expectations