Incident Xinxiang Chemical Fiber released its 2019 semi-annual report. 2019H1 achieved operating income of 2.45 billion yuan, an increase of 13.3% over the previous year; net profit attributable to shareholders of listed companies of 67.56 million yuan, an increase of 192% over the previous year; and net profit attributable to shareholders of listed companies after deducting non-recurring profits and losses of 62.4 million yuan, an increase of 257% over the previous year. 2019Q2 achieved operating income of 1.15 billion yuan, up 7.2% year on year; net profit attributable to shareholders of listed companies was 48.91 million yuan, up 133% year on year; and net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 62.4 million yuan, up 169% year on year. Briefly, the widening price spread of viscose filament and the increase in production and sales have led to a sharp increase in the company's profit. In the first half of 2019, as prices of dissolved paste and caustic soda for viscose filament raw materials continued to decline, the gross profit of a single ton of viscose filament climbed from 6,000-7,000 yuan/ton to 9,000-10,000 yuan/ton; in May 2018, the company added 10,000 tons of viscose filament project and put into operation, and 2019H1's adhesive filament production was 30,000 tons, an increase of 70,000 tons over the previous year, further increasing the profit of the viscose filament business. 2019H1's viscose filament revenue was 1.03 billion yuan, +32.8% year on year; gross profit was 219 million yuan, +119 million yuan, gross profit margin of 21.2%. The gross profit of viscose staple fiber is -13 million yuan, which is basically the same as the same period last year. The market price of dissolved slurry, caustic soda, and viscose filament 120D is 7,050 yuan/ton, 3,290 yuan/ton, 37,780 yuan/ton, 37,780 yuan/ton, year-on-year, -5.6%, -25.5%, -0.03%; the 120D price difference for viscose filament is 23,650 yuan/ton, +1,770 yuan/ton over the same period. The viscose filament industry is a typical oligopoly industry. In 2019, the company had a production capacity of 70,000 tons of viscose filament, accounting for 33% of the country. At the same time, the company began construction of the “Biomass Cellulose Project Phase I Project with an Annual Output of 20,000 Tons” at the end of May 2019. It is estimated that by 2020, the company's viscose filament production capacity will reach 80,000 tons, once again consolidating its leading position in the industry, and reaching a new level of profitability. In the first half of the year, the price of spandex was compensated by volume, and the gross profit was basically the same. 2019H1's spandex revenue was 1.17 billion yuan, +23.2% year on year; gross profit was 106 million yuan, +0.056 billion yuan year on year, with a gross profit margin of 9.0%. In the first half of 2019, spandex prices declined and the price spread continued to narrow, and the company's spandex gross margin fell 1.5 percentage points year on year; 2018Q2 added 20,000 tons of spandex production capacity, and 2019H1 produced 42,000 tons of spandex, an increase of 80,000 tons over the previous year. The increase in production and sales made gross profit basically the same as last year. The market prices of 2019H1 MDI, PTMEG, and spandex 40D were 21,190 yuan/ton, 16,800 yuan/ton, and 32,440 yuan/ton, respectively, -30.3%, and -11.1%; spandex 40D, 30D, and 20D price differences were 15,690 yuan/ton, 21,040 yuan/ton, 22,040 yuan/ton, year-on-year -900 yuan/ton, -310 yuan/ton, -1,145 yuan/ton. The gross profit margin of 2019H1's chemical fiber products was 13.6%, up 4.2 percentage points from the previous year. In 2014-2019, the company continued to increase its spandex industry. The company's spandex production capacity increased steadily from 20,000 tons to 120,000 tons, accounting for 13.4% of the national production capacity, ranking first in the industry. The company takes advantage of production capacity and low cost to occupy a broad market space. When the spandex industry returns to prosperity, the company will be the biggest beneficiary. Impairment losses affect part of profits, and the growth rate of three fees is slightly higher than the growth rate of revenue. 2019H1 made provision for asset impairment and reduced total profit by $30.2 million, including $6.3 million for bad debts and $23.9 million for falling prices of inventory products ($21.5 million to make up for reduced inventory prices of viscose staple fiber). In the future, the viscose staple fiber business transformation is imminent, and the impact on the company's profit will be greatly reduced. The total cost of the 2019H1 company was 206 million yuan, +30.0% over the same period last year. Among them, sales expenses were $47 million, up $101 million year over year, mainly due to increased production of spandex and filament; financial expenses of $46 million, up $19 million year over year, mainly due to interest charges on project loans; and management expenses of $108 million, up $11 million year over year. Advanced production technology brings significant cost advantages, ensuring that the gross profit of core products is at the forefront of the industry. After years of innovation and development, the company has accumulated unique technical and parameter control data packages in terms of equipment, technology, and processes for viscose fiber and spandex fiber. 70% of Xinxiang Chemical Fiber's viscose filament production capacity uses advanced continuous spinning technology, and the production cost is far lower than that of competitors in the same industry. In 2008-2018, the average gross profit margin of the company's viscose filament was 13.2%, far higher than that of other companies in the industry. Among the 100,000 tons of production capacity added since 2014, the company's spandex exclusively uses the fourth-generation spandex production technology developed by COSCO in Zhengzhou, which is currently leading in the industry, and signed a technology exclusive agreement with COSCO Spandex to ensure its leading position in technology. In addition, the company built a 2 x 170 ton/hour steam boiler to satisfy itself while selling steam to the outside world, further reducing production costs. With the low cost advantages brought by advanced technology, it will promote the continuous expansion of the company's main product market. Profit forecast and valuation: It is predicted that the company's net profit for 2019, 2020 and 2021 was 154 million yuan, 255 million yuan and 513 million yuan respectively, EPS 0.12 yuan, 0.20 yuan and 0.41 yuan, PE 30.4X, 18.4X and 9.1X, covering the “buy” rating for the first time. Risk warning: Macroeconomic downturn, project commissioning falls short of expectations