Zhuo Lang Intelligent released the 2018 annual report, the annual operating income was 9.22 billion yuan, an increase of 5.8% over the same period last year, the net profit of shareholders belonging to listed companies was 810 million yuan, an increase of 23.1% over the same period last year, and the non-net profit of shareholders belonging to listed companies was 767 million yuan, an increase of 18.2% over the same period last year. The performance is in line with expectations and the promised profit has been successfully completed.

The industry is basically running smoothly, focusing on developing emerging markets. In 2018, textile machinery enterprises above scale achieved textile machinery revenue of 91.169 billion yuan, an increase of 8.8% over the same period last year, and total profits were 6.833 billion yuan, an increase of 5.1% over the same period last year. The growth rate of the industry was slower than that of 2017, but the overall operation quality was good. Zhuo Lang Intelligence has focused on developing emerging markets such as Uzbekistan and Vietnam, where it has performed well, with year-on-year growth rates of 47.6% and 20.4% in Uzbekistan and Vietnam, respectively. In the future, the trend of the transfer of the spinning industry from China's coastal areas to China's Xinjiang, India, Uzbekistan and other emerging economies will continue, and the company is expected to continue to enjoy orders from these incremental markets.

The gross profit margin is 26.5%, and we will continue to implement the strategy of reducing costs and increasing efficiency. The gross profit margin for the whole year of 2018 was 26.5%, an increase of 2.0pct over 2017, with a gross profit margin of 33% per quarter in the fourth quarter. The increase in gross profit margin is mainly due to the company's active implementation of supply chain integration plans to select high-quality suppliers in China, India and other low-cost regions to reduce procurement costs. At the same time, in terms of sales, implement key customer projects, focusing on and maintaining high gross margin orders. The gross profit margin of the fourth quarter is significantly higher than that of the previous three quarters, mainly due to the increase in high value-added business in the income structure of the fourth quarter, involving higher gross margins of software and special products, thus raising the gross profit margin of Zhuolang Intelligence in the fourth quarter as a whole.

Successfully complete the promised profits and open up overseas and domestic customers. In 2017, Zhuo Lang borrowed a shell from Xinjiang urban construction, and the bet performance in 17-19 years was 5.83 yuan 7.66 / 1.003 billion yuan respectively. According to the bet caliber, Zhuo Lang actually completed a net profit of 684 million yuan in 17 years, with a completion rate of 117%, and an actual completion rate of 867 million yuan in 18 years, with a completion rate of 113%. It has been over-fulfilled for two consecutive years. In addition to the expansion of overseas customers, Zhuo Lang has also received a lot of goods in terms of domestic customer development. It is understood that Zhuo Lang has carried out in-depth cooperation with well-known domestic spinning enterprises such as Blum Oriental, Huafu Color Textile, Zhongtai and other well-known domestic spinning enterprises, and there is a high probability that they will continue to achieve the promised profits in 2019.

The operating cash flow is slightly under pressure and the overall risk is controllable. The net operating cash flow of Zhuo Lang in 2018 was-1.043 billion yuan, which decreased a lot. The decline in operating cash flow has a lot to do with the textile machinery payment model. Due to the high value of textile machinery equipment, customers often go through financing channels such as bank loans in the procurement process, while in 2018, in the overall domestic deleveraging environment, the financing progress of some Zhuolang customers slowed down, resulting in an increase in accounts receivable and a decrease in cash flow inflows. But these customers are all big customers, with good credit history, normal financing project status, and will be gradually implemented in the later stage, so the overall risk is more controllable.

The second phase of the Litai project began, with revenue from related party transactions of 2.54 billion yuan, accounting for 27.4%. According to the company announcement, in 2018, the total income from Xinjiang Litai, Kuitun Litai and LT Textile International totaled 2.54 billion yuan, accounting for 27.4% of the 2018 revenue, and the proportion of related party transactions increased compared with 2017. The construction of the second phase of Litai project began in 2018, so the amount of equipment procurement increased, resulting in a substantial increase in Zhuolang intelligent related party transactions in 2018. It is expected that the related party transactions will remain at 20% in 2019-20 and will decrease year by year in the future.

R & D drives innovation and continues to increase market share. In 2018, Zhuo Lang spent 475 million yuan on R & D, an increase of 53% over the same period last year. Continuous R & D investment also makes Zhuo Lang in the forefront of product innovation. The company's integrated quality control, high productivity special parts and automation functions make products such as Autocoro and Becton Dickinson & Co rotor spinning machines the most leading machines in the world. With its excellent performance, it is expected that the market share of products such as blowing-carding unit, semi-automatic air spinning, vortex spinning and spinning frame will be increased.

Performance forecast and investment advice. We believe that Zhuo Lang will continue to benefit from 1) the transfer of cotton yarn industry to Belt and Road Initiative countries such as Xinjiang and Central and West Asia; 2) the increasing demand of spinning mills for high-end automation and intelligent spinning machinery equipment; 3) through the layout of developing countries such as China and India, Zhuolang is expected to significantly reduce procurement and labor costs and increase gross profit margin. Based on the above three points, it is predicted that Zhuolang Intelligence will have an income of 9.82 billion yuan in 2019 and a net profit of 1.03 billion yuan, corresponding to 14.4 times of PE.

Risk tips: cotton yarn production capacity transfer progress is lower than expected, spinning machinery high-end rate is lower than expected, foreign currency exchange rate fluctuations, trade war continues to escalate.