Core view: In 2018, the company's operating income and net profit increased by 13.58% and 10.98%, respectively, and net profit after deduction fell by 22.85% year on year, and 18Q4 company revenue and net profit fell 4.1% and 72.38% year on year respectively. The decline in profit was mainly due to the calculation of asset impairment losses and a decrease in government subsidies. The decline in profit in 19Q1 was 19.78% year on year, net profit fell 21.47% year on year, and the decline in profit was mainly due to a decrease in government subsidies. The annual report company plans to pay a dividend of 0.35 yuan per share. In 2018, the company's consolidated gross margin fell 0.67pct year on year. The overall cost control for the period was quite adequate, and was basically the same year over year. At the end of the first quarter, the company's accounts receivable increased by 6.13% compared to the beginning of the year, inventory increased 8.39% from the beginning of the year, and the net cash flow from operating activities changed from negative to positive year on year. By business, the production capacity of the yarn business was deployed in an orderly manner in 2018, reaching 1.89 million ingots at the end of the year, revenue increased by 22.68%, and gross margin increased by 0.68pct (excluding the impact of accounting adjustments, the gross margin of comparable yarn sizes declined); the net chain business slowed down due to low cotton prices in 18Q4, and annual revenue increased 7.32% year on year, accounting for 49% of overall revenue, and gross margin fell 0.88pct year on year. By region, domestic sales increased 32.36% year on year in 2018, and export sales fell 36.69% year on year. The slowdown in downstream demand affects sales and profits, and in the long run, the company's leading advantage in the color-spinning yarn industry is still quite obvious. In an environment where downstream demand is weak, the company's revenue and gross margin of yarn products have also been affected to a certain extent. In the long run, as color spinning continues to expand in downstream application fields, domestic environmental protection regulations become stricter, and the process characteristics of color spinning first are also driving the increase in the share and penetration rate of color spinning in the overall yarn market. The industry's increasingly high technical, capital, R&D, brand, and customer resource barriers are conducive to a further increase in the share of industry leaders such as Huafu. Faced with the uncertainty of the trade war, the company will actively expand new space, new categories, and new customers with its advantages in scale and technology to further reduce costs and increase efficiency. In terms of yarn business, in December '18, the company disclosed that it plans to invest 2.5 billion yuan to increase Vietnam's production capacity by 500,000 spindles (long-term plan is 1 million spindles). Combined with the investment of new production capacity in Xinjiang, production will shift to a low-cost region, and the company's expansion will continue to grow steadily. The network chain business relies on deep cultivation of supply chain resources in Xinjiang, and will maintain a relatively rapid increase in revenue scale in the future. Financial forecasts and investment recommendations According to the annual report, we downgraded the company's revenue for the next 3 years and other earnings forecasts. We expect the company's earnings per share in 2019-2021 to be 0.54 yuan, 0.60 yuan and 0.66 yuan respectively (originally predicted earnings per share for 19-20 were 0.62 yuan and 0.72 yuan). Referring to the average valuation of comparable companies, the company was given a PE valuation of 14 times in 19 years, corresponding to the target price of 7.56 yuan, and downgraded the company's rating to “increase holdings”. Risks suggest that domestic and foreign cotton prices and the RMB exchange rate fluctuate greatly, additional production capacity cannot be absorbed by expectations, and trade friction between China and the US, etc.