Incident: The company released its three-quarter report. From January to September 2016, the company achieved operating income of 3.34 billion yuan, an increase of 107.0% over the previous year; realized net profit attributable to owners of the parent company - 578.19 million yuan, a decrease of 306.6% over the previous year, and performance fell short of expectations.

Interest rates for incubation period projects were low, and performance fell short of expectations. The company's revenue continued to grow rapidly in the first three quarters, mainly due to the increase in livestock breeding sales and beef and lamb product sales revenue of 180.1% and 144.5% year-on-year with the development of the company's breeding business and the promotion of the Big Beef Cow Strategy. Compared with the sharp increase in operating income, the company's net profit loss widened further, mainly because: 1) Due to the increase in the scope of introduction business and merger during the reporting period, various expenses increased 42.2% year-on-year; 2) Affected by the sharp drop in sales prices of domestic imported Holstein cows, the gross profit margin of the company's overseas subsidiaries further declined, and since its revenue share reached 68.1%, the livestock breeding sales business lost a large amount; 3) Frozen sales volume with a higher gross margin decreased 71.5% year-on-year due to delays in national tenders. We believe that the company's performance is expected to pick up somewhat in the fourth quarter of this year with the development of national repair tenders, but it is likely that it will remain at a loss throughout the year. Looking at the long term, in the future, with the strengthening of mutual collaboration between the company's various business segments, the improvement of the beef cattle industry layout, and the warming of the market, the company's expenses during the period are expected to be effectively controlled, and gross margin is expected to increase.

The strategic layout of big beef cattle is developing steadily, and Angus beef products have opened up space for imagination: under the Big Beef Cow strategy, the company uses high-quality germplasm resources as the lead, introduced and promoted breeding of Australian purebred Angus beef cattle, and gradually built the entire “breeding base - fattening base - beef slaughter - beef sales” industry chain. Meanwhile, the listing of Angus beef products will open up the scarce domestic premium beef market. The company's own farming scale is currently around 2,000 Angus cows, and it owns more than 10,000 Angus cows under the “company+farmer” breeding model. We believe that although the company lost money in the short term, with the release of Angus beef and the improvement of the company's overall industrial chain layout, the company's profitability will be greatly enhanced.

Profit forecasts and investment recommendations. Considering the company's current operating situation this year, we lowered our profit forecast for the company. We expect the company's 2017-2018 EPS to be 0.10 yuan and 0.17 yuan respectively, and the corresponding dynamic PE for 2017-2018 will be 162 times and 98 times, respectively. We believe that although the company's current performance has fallen short of expectations, it has basically completed the layout with the help of the “Big Beef Cow” strategy. Next year, with the release of Angus beef and the completion of corresponding channel construction, the company's profitability will be greatly enhanced. Considering that the company's market capitalization is currently small and its performance is at the bottom, it is a time of exhaustion. Long-term attention is recommended.

Risk warning: risk of good seed subsidy policies; adverse effects of a slowdown in the country's economic growth rate; risk of epidemics; risk of seasonal fluctuations in business performance due to government tendering and procurement, etc.