Revenue growth has slowed, and companies with high pressure on the profit side achieved operating income of 7.349 billion yuan in the first half of 2019, an increase of 8.22% over the previous year; net profit of 351 million yuan, a year-on-year decrease of 36.36%; net profit after deducting 210 million yuan, a year-on-year decrease of 46.33%; and EPS of 0.23 yuan. The large decline in profit was mainly due to a decrease in gross margin and an increase in the cost ratio. On a quarterly basis, quarterly revenue from 18Q1 to 19Q2 increased by 30.96%, 21.12%, 14.23%, -4.10%, 19.78%, and -1.11%, respectively, while net profit increased by 31.88%, 22.22%, 8.02%, -72.38%, -21.47%, and -46.16%, respectively. Trade frictions between China and the US have had ups and downs since the second quarter of 2018, and weak domestic and foreign demand affected yarn business orders. Trade frictions continued to escalate in '19, the market became more severe, and Q2 on the company's revenue side was under pressure. Revenue splitting up: Trade friction between China and the US has led to a clear decline in yarn exports. Looking at the net chain business growth spin-off business: 1) 19H1's yarn business revenue was 3.665 billion yuan, down 9.10% year on year. Compared with Q1, there was a high single-digit increase and a clear decline in Q2, mainly due to weak domestic and foreign demand, and a greater impact on exports. The impact on exports was greater, mainly because trade friction between China and the US affected overseas customer confidence, leading to a decrease in orders placed and indirectly affected the company's acceptance of orders (the company almost did not directly export US products). Looking at the breakdown, yarn exports and domestic revenue decreased by 25.32% and increased by 6.56% respectively. In addition, the network chain business increased by 41.35% year-on-year to 3.656 billion yuan, of which the Q2 growth rate was higher than Q1. 2) By region, domestic revenue of 5.842 billion yuan, a year-on-year increase of 25.96%, was mainly driven by the network chain business. Export revenue was 1,479 billion yuan, a year-on-year decrease of 25.32%. 3) In terms of yarn production capacity, the total production capacity was 1.89 million ingots at the end of June '19, the same level as at the beginning of the year. Gross margin declined, production was greater than sales, and inventory increased. The gross margin of 19H1 company fell 2.87PCT to 9.87% year on year, mainly due to the decline in gross margin of the yarn and network chain business. At the same time, the gross margin of the net chain business was low and the growth rate was high, leading to an increase in share. The gross margins of the yarn business and the network chain business were 14.75% (-0.23PCT) and 4.62% (-0.32PCT), respectively. The yarn business was further split. Domestic and export gross margins were 17.71% (+0.79PCT) and 10.37% (-2.60PCT), respectively, and exports declined significantly. Q1/Q2 quarterly gross margins were -1.51 and -4.08PCT, respectively. The large decline in gross margin in the second quarter is related to changes in the business structure. Furthermore, the decline in order acceptance in the yarn business in the second quarter also had an impact. Analysis of the gross margin of the yarn business: 1) Cotton is the company's main raw material and accounts for more than 60% of the cost. Cotton prices both inside and outside of '19 have weakened. Since the beginning of the year (August 29), the domestic cotton 328 index has fallen 15.52% to 12,983 yuan/ton, and the international cotton price Cotlook A index has fallen 14.29% to 69.30 cents/pound. 2) In terms of order prices, the pressure on the company's production and marketing balance increased in the first half of the year. The company tried to keep the capacity utilization rate stable. The expected decline in sales volume was not significant. The 9.10% decline in yarn revenue was mainly due to a drop in unit prices. The company's inventory of goods at the end of June was 2,283 billion yuan, an increase of 155 million yuan over the beginning of the year, mainly due to poor demand and a year-on-year increase in production capacity, which outweighed sales. Expense ratio increased slightly, procurement reduction promoted a sharp increase in operating cash flow. Expense ratio increased slightly by 0.98PCT year-on-year during the 19H1 period. Among them, sales, management+R&D, and financial expense rates increased by -0.31PCT, 0.82PCT, and 0.47PCT, respectively. Other revenue decreased by 20.82% year-on-year to $128 million, due to a reduction in government subsidies. Investment income increased by 205.37% year-on-year to 63.7 million yuan, mainly contributing to increased income from cotton futures trading and investment income from holdings of saleable assets. Net operating cash flow increased by 4879.67% year on year to 532 million yuan, a net increase of 521 million yuan, mainly due to a net decrease of 433 million yuan in cash purchased goods and receiving labor payments, mainly due to the company's more careful preparation of goods and reduced procurement of raw materials. There is pressure on short-term performance. Focus on the demand side to stabilize, and we believe: 1) Short-term company performance is under pressure, mainly due to external environmental effects. Although the company hardly directly exports US products, trade friction between China and the US affects the prosperity of the textile and garment manufacturing industry. Company customers are less motivated to place orders and the pressure to take orders has increased. At the same time, the growth rate of domestic consumption has also slowed, and the downstream demand side is weak both at home and abroad. Currently, the scope of tariffs imposed by the US side includes all textile and garment export products, and taxation began on September 1. If trade friction between China and the US gradually settles, pessimistic expectations on the demand side and concerns about uncertainty are digested, the company's order acceptance is expected to stabilize, yarn business revenue and gross margin are expected to be repaired, and we still need to pay attention to changes in the external environment. 2) At present, the company will continue to absorb the pressure that production exceeds sales and adopt a relatively cautious strategy. The pace of production capacity investment will slow down somewhat in 2019. 3) The third phase of the employee stock ownership plan was purchased in June 2019, with a total amount of 199 million yuan and an average price of 7.32 yuan/share. Considering that the company's performance in the first half of the year was lower than expected, downstream demand has not improved, and trade negotiations between China and the US are still uncertain, we lowered the EPS for 19-21 to 0.38/0.44/0.48 yuan, and the PE 19 times in '19 to the “increased holdings” rating. Risk warning: Cotton prices are falling or fluctuating sharply, trade friction between China and the US is affecting companies taking orders, capacity building projects are not progressing as expected, new network chain business is not progressing as expected, and the exchange rate fluctuates greatly.