Net profit fell slightly in the first half of the year, with a dividend payout rate of 65.1%:

In the first half of 2013, the company recorded operating income of 680 million yuan, a slight decrease of 1.3%, of which collagen sales increased by 2%, but the average sales price decreased due to changes in sales structure. During the period, the company recorded a net profit of 305 million yuan, a slight drop of 2.6%. The company earned 9.16 cents per share and paid an interim dividend of HK4.7 cents and a special dividend of HK2.8 cents. The dividend payout ratio increased from 47.9% to 65.1%.

Gross profit margin fell in the first half of the year and will rise in the second half of the year:

In the first half of 2013, the company's gross profit margin was 57.6%, down 2.5% from a year earlier, mainly due to the fact that the company used the whole piece of cowhide as raw material in the first quarter, but the process was not smooth enough to lead to waste, resulting in a relatively low gross profit margin in the first quarter of this year. By the medium term, 70% of the company's production line has adopted the new thermal technology, and the whole project will be completed by the end of August. In addition, as workers become more familiar with the new treatment methods and processing procedures, the technical problems are easily solved, the situation begins to improve, and the gross profit margin will increase in the second half of the year.

Mainly domestic sales, exports are growing rapidly:

From the perspective of sales income structure, domestic sales are still the main source of income, but export sales have increased greatly, accounting for 7.5% of the total income. At present, the company mainly exports to developing countries, such as fiber and plastic casings are used in most markets in Asia. With the improvement of living standards, consumption habits will change, which will create new market space.

Revenue is expected to grow by 6-7% in 13 years, and the gross profit margin is similar to that of last year:

In the future, production is expected to increase by 10% in 2013; in terms of product prices, the company is less likely to raise prices in the short term, and the annual average selling price is likely to decline slightly due to the sales structure. We expect revenue growth of 6-7% in 2013. In addition, in terms of raw materials and staff costs, raw material prices rose in 2013; staff costs rose to a certain extent, which is expected to be shared in the future as the company's degree of automation increases, and the company's gross profit margin in 2013 is expected to be the same as last year.

Target price: HK $3.80, given buy rating:

Due to the company's lower-than-expected performance in the first half of the year, we lowered our EPS from 2013 to 2015 to 0.24,0.27 and 0.32 yuan respectively, by 4.0%, 6.9% and 5.9% respectively. At present, the average PE of companies in the same industry in 2013 is 12.7 times, which is equivalent to the company's target price of HK $3.80, which is 22.6% higher than yesterday's closing price.