Domestic superfiber leader, steady growth in performance. Huafeng superfiber is a leading domestic superfiber leather enterprise, accounting for 50% of the domestic market. The company is one of the only two companies in the industry that master the high gross margin superfiber upstream technology-superfiber base cloth production technology, and the raw material procurement has a cost advantage over its competitors, so its profitability is significantly better than other domestic counterparts. Under the background of the general decline in the performance of domestic ultra-fiber leather enterprises, the company achieved operating income of 3.065 billion yuan in 2018, an increase of 22.33% over the same period last year, with a five-year compound growth rate of 33.32%. The return net profit was 295 million yuan, an increase of 18.50% over the same period last year, and a five-year compound growth rate of 26.40%. Steady growth.

The substitution potential of superfiber business is huge and the competitive advantage is remarkable. Ultra-fiber leather is the third generation artificial leather simulation material, which is the most similar substitute for handle and performance under the environment of stricter environmental protection and reduced leather production. It is superior to genuine leather in terms of preservation time, wear resistance and tear resistance, low price, environmental protection, air permeability and comfort, etc., and has great replacement potential, with a compound demand growth rate of about 40% in the past five years. The total national production capacity is about 190 million meters, the actual output is about 120 million meters, and the demand is about 219 million meters, resulting in a large gap between supply and demand. The company currently has an ultra-fiber leather production capacity of 101.27 million meters, and announced in August 18 that it intends to issue shares to increase production capacity by 50 million meters. After the release of production capacity, sales and market share are expected to further increase.

Acquire Weifutong, a mobile payment technology service. In 2016, the company bought a 100% stake in Weifutong for 2.05 billion yuan to enter the field of mobile payment. Weifutong is the first batch of WeChat Pay to sign and accept the contract, and the third-party payment company it cooperates with has covered the current domestic mainstream mobile payment software clients. In 2017 and 2018, Weifutong contributed operating income of 2.15 yuan and 323 million yuan, gross profit of 1.75 yuan and 261 million yuan, net profit of 1.04 yuan and 149 million yuan, and two-year gross profit margin of 81.18% and 80.79% respectively (Weifutong was included in the company's consolidated statement on June 23, 2017). Although Weifutong's performance has declined slightly under the influence of "disconnection", the company will seek to cooperate deeply with UnionPay in the future, and provide deep operations and industry solutions to merchant segments, and its business is expected to continue to grow in the future.

Profit forecast and investment advice. We estimate that the company's operating income from 2019 to 2021 will be RMB 43.5 billion, respectively, and the estimated net profit will be RMB 2.90 / 4.80 / 580 million (there is a profit or loss of 60 million yuan in fair value of financial assets in 19 years). The EPS is equivalent to RMB 0.17 / 0.28 / 0.34 per share, which corresponds to 28.3 times PE respectively. Considering that the company's software business is comparable to the company's high valuation, Weifutong, as a leading company in the mobile payment industry, has great prospects for the future development of the industry, covering it for the first time and giving it an "overweight" rating.

Risk hints: changes in mobile payment regulatory environment, rate adjustment, valuation fluctuation risk, environmental protection and safety production risk, business integration risk, fluctuation of superfiber raw material price business, lower-than-expected investment project schedule, weak demand side of superfiber downstream.