Incident: In the first half of 2020, the company achieved revenue of 872 million yuan, a year-on-year decrease of 6.83%; operating profit of 122 million yuan, a year-on-year decrease of 14.66%; net profit to mother of 96 million yuan, a year-on-year decrease of 15.87%; net operating cash flow inflow of 65 million yuan, a net outflow of 30 million yuan in the same period last year; EPS was 0.31 yuan, a weighted average ROE of 5.71%. Comment: 1. The operation is relatively steady. The benefits of the Central China market are gradually showing that the company is mainly engaged in B-side business. Considering the impact of the epidemic, the first half of the year's results were in line with expectations. By product, the revenue of PVC series/PPR series/PE series was 682 million yuan/102 million yuan/86 million yuan respectively, +0.63%/-9.67%/-38.29%, respectively. By region, the revenue of the three subsidiaries of Guangxi/Guangxi/Guangdong/Henan Xiongsu in the first half of the year was 384 million yuan/73 million yuan/0.7 billion yuan, respectively, +7.98%/-22.43%/+10.21%; net profit was 56.36 million yuan/2.29 million yuan/2.83 million yuan, respectively, +9.24%/-177.25%/+57.67% year-on-year, respectively. The company's market expansion in central China is beginning to bear fruit. On a quarterly basis, Q1/Q2 revenue was 313 million yuan/559 million yuan, respectively, -26.14%/+9.17%; Q1/Q2 net profit to mother was 30 million yuan/66 million yuan, respectively, -46.99%/+14.89%. Considering the large base for the same period last year, the second-quarter results recovered steadily. 2. The cost ratio decreased slightly during the market development phase, and cash flow improved. The gross sales margin for the first half of the year decreased by 0.57pp to 25.37% year-on-year. By product, the gross margins of PVC series/PPR series/PE series were 24.50%/31.88%/24.41%, respectively, -0.70pp/-0.42pp/-0.72pp compared to the same period. The cost ratio increased by 0.72 pp to 10.43% year-on-year during the first half of the year. Among them, the sales/management/R&D/finance ratio was +0.12pp/+0.56pp/+0.10pp/ -0.06pp to 3.83%/3.83%/3.09%/-0.32%, respectively. Under the offsite expansion+blank market expansion strategy, sales and management expenses rates have increased. Net sales margin fell 1.18pp to 10.98%. The balance ratio increased by 5.19pp to 21.86%. Considering fixed increase capital raising, the asset structure is expected to improve in the future. Net operating cash flow in the first half of the year was 65 million yuan, an increase of 95 million yuan over the previous year; the revenue ratio increased by 653 pp to 107.15%, and the cash flow situation improved, mainly due to the decline in revenue less than the decline in purchase payments. 3. The demand for engineering pipes is broad, and active expansion of production is beneficial to increasing the share of the company's main PVC, PPR and PE pipes, which are widely used in the engineering side. In the medium to long term, they will continue to benefit from (1) municipal pipe needs brought about by flood control shortfalls and sponge city construction, (2) inventory renovation needs brought about by the renovation of old neighborhoods, and (3) demand for high-end quality home improvement pipes under the trend of fine decoration. The company currently has six major production bases with a design capacity of about 504,000 tons. Hainan Xiongsu is expected to be completed and put into operation by the end of 2020, and Yunnan Xiongsu is expected to be put into operation one after another in the second half of 2021. The company's production capacity has reached production one after another, which is conducive to the rapid expansion of market share. In particular, the market share in central China and southwest China is expected to increase rapidly. 4. Production capacity investment helps increase performance and maintain the “Highly Recommended - A” rating. Due to the concentration of downstream customers, refinement trends, and stricter environmental protection, the concentration of the plastic pipeline industry continues to increase. As a plastic pipeline leader in South China, the company is actively preparing to build new production capacity, and the fund-raising project is progressing smoothly, which is conducive to further expanding the gap market and increasing market share. At present, the central China region has begun to show results, and it is optimistic that the southwest market will contribute to an increase in performance after the Yunnan production capacity is completed and put into operation. In terms of channels, the company relies on dealers to basically achieve nationwide network coverage. We expect the company's 2020-2021 EPS to be 0.96 and 1.23 yuan respectively, and the corresponding PE will be 15.6 times and 12.3 times respectively, maintaining the “Highly Recommended - A” rating. 5. Risk warning: Prices and costs of raw materials have increased dramatically, and production capacity investment falls short of expectations.