1. Overview of the incident We recently investigated Xinxiang Chemical Fiber and had in-depth communication with management on the business situation and future development. 2. Analyze and judge the country's viscose filament leader to fully benefit from rising filament prices. The company has a viscose filament production capacity of 60,000 tons as the domestic leader. The competitive pattern of the industry is stable and highly concentrated. Domestic CR5 = global CR10 = 70%. The industry has benefited from the state ban on building new production capacity from other locations. The national production capacity has remained around 200,000 tons for the past two years. In recent years, only Jilin Chemical Fiber and the Company expect to start production of 10,000 tons each in 2016, and prices have risen steadily in 2018. From January to May 2015/2016/2017, the average price of a ton of filament was 36400/37500/41,800 yuan, respectively, and the price at the end of May 2017 was 40,750 yuan/ton. The cumulative increase in January-May was 2,100 yuan/+5.4%. It is expected that prices will rise steadily in the future. Spandex production capacity has gradually increased, and performance continues to be released. The company's new production capacity of 20,000 tons of “Super Soft Spandex Phase II” was built and put into operation in the first quarter. Currently, the spandex production capacity has reached 60,000 tons. The price of the new production of 20,000 tons of 96-head spandex is higher, and it also has a latecomer advantage in terms of cost. It will boost the gross profit margin of the spandex business and is expected to contribute more than 50 million yuan in net profit throughout the year. In May 2018, it is expected that the first phase of production of spandex 2x3 will be put into operation to produce 120 filaments, and the gross margin of the spandex business will be further improved. The latest inventory of spandex in June is in the middle of the 36-day history. Under the pattern of “cost driving” combined with “demand warming,” the price of spandex is expected to remain stable. Prices of viscose staple fiber are expected to rise steadily in the third quarter. Profitability is expected to repair improvements in viscose fundamentals in 2015-2016, and prices will continue to rise. With the arrival of the off-season and the end of centralized downstream inventory replenishment after the Spring Festival, viscose staple fiber pulled back 2,800 yuan/ -19%, and the price at the end of May was 14,600 yuan/ton. In April, exports were 33,000 tons/ +25% in a single month, and the cumulative exports in January-April were 99,900 tons/ +1%. At the end of May, the operating rate of 93% was still high, and the inventory was 13.4 days. Demand rebounded after entering the peak season in the third quarter. Combined with the fact that the growth rate of adhesive production capacity has remained low in recent years, supply is expected to return to a tight balance. Furthermore, after putting aside reserves, the state's cotton stocks are gradually declining, and the pressure on cotton prices is gradually weakening, so market sentiment is expected to be boosted. The company's current production capacity is less than 100,000 tons, and profitability will be restored when the peak season arrives. The participating subsidiary “Green Short Fiber & Egret Pharmaceutical” project is progressing well. The company's participation in 33% of the subsidiary, China Textile Institute Green Fiber Company, is progressing well in the solvent method “100,000 ton green staple fiber project phase I”. The solvent cost is only 1/3 of that of foreign counterparts. Currently, the yield is stabilizing, and it has full intellectual property rights. At the same time, the “green filament” process is also being tested. As environmental protection becomes more stringent, the green fiber process is expected to become a new industry standard. Bailu Pharmaceutical, a 30% shareholding subsidiary, is actively promoting drug declaration certification and has invested in the construction of 2 API production workshops. It is expected that 2-3 drugs will pass certification in 2017. 3. Profit Forecast and Investment Suggestions We believe that the profit level of the company's filament business is expected to remain high. Under the foundation of the spandex industry, production capacity is gradually invested to contribute to performance, and the price of viscose staple fiber is expected to stabilize in the third quarter. At the same time, green fiber and pharmaceutical projects are progressing well, and the company's performance is expected to improve. We expect the company's net profit for 2017-2019 to be 230 million yuan, 330 million yuan and 440 million yuan respectively, corresponding to PE of 24X, 17X and 13X, respectively. Give it a “Highly Recommended” rating. 4. Risk warning: the risk of a sharp drop in product prices; the risk that viscose filament and spandex projects will not progress as expected.