Incident: Company announcement '18 quarterly report. In the first three quarters of 2018, the company achieved operating income of 3.56 billion yuan, an increase of about 5 times over the previous year, realized net profit attributable to shareholders of listed companies of 650 million yuan, an increase of 454.96% over the previous year, and achieved net profit of 636 million yuan after deduction, an increase of 640.54% over the previous year. Among them, the third quarter achieved quarterly revenue of 1,413 billion yuan and net profit attributable to shareholders of listed companies of 41 million yuan. The performance was good. Comment: Production and sales continued to increase in the third quarter. Performance basically reflects the true level of asset profitability, and there is still plenty of room for improvement. The company's announcement shows that oil and gas equivalent production was 4.213 million barrels in the Q3 quarter, equivalent to 46,300 barrels per day, of which 40,000 barrels/day of oil production and 0.61 million b/d of natural gas equivalent production accounted for 13.1%. Compared with Q2, oil and gas equivalent production of 39,300 b/d continued to increase significantly. Xinchao Energy incurred financial expenses of more than 200 million yuan in the first quarter of this year due to the company's use of low-interest bonds in exchange for high-interest loans with high-interest loans, and matters such as Hami mining rights. Xinchao Energy incurred financial expenses of more than 200 million yuan in the first quarter of this year, and also calculated nearly 200 million yuan in bad debt impairment preparations in the second quarter. These matters affected current performance. The company is conservative and did not further accrue impairment of bad debts in the third quarter. We believe that current results can basically reflect the current real profit level of US assets. What is particularly noteworthy is that the third quarter results were obtained under conditions where there was a large price difference between the Midland Basin and WTI prices. According to the Q3 average exchange rate of 6.8, assuming that hedging profit and loss has been realized - 15 million US dollars, the average spot price of Q3 natural gas is 2.85 US dollars/mmbtu, etc., the company's Q3 crude oil achieved a price of about 57 US dollars/barrel, which is about 12 US dollars/barrel on average with the WTIQ3 price. At present, this level of support has clearly declined. We believe that as the US shale oil pipeline transportation bottleneck is gradually overcome in the next 1-2 quarters, the level of water support will return to the average value of 4-5 US dollars/barrel, which is expected to directly increase the company's performance by 120 million yuan in a single quarter. Low asset costs, good production increase effects, and transparent and traceable production are the core advantages of Xinchao Energy that distinguishes Xinchao Energy from other oil and gas companies. The company made an accurate move at the end of 2015, when the oil price sentiment was most pessimistic, and acquired the Howard & Borden oil field. The full cost is estimated at 24 US dollars/barrel at a 16-year level (currently around 32 US dollars/barrel based on normal financial expenses). Up to now, there is still a large area to be developed in the northern part of the block, and there is great potential for increasing production. According to the company's data for the third quarter, the number of wells drilled in Q3 declined slightly from Q2. When there was no significant increase in the drilling speed of existing blocks, block production jumped, indicating that production conditions at existing well positions are good. We have always emphasized that unlike other overseas oil and gas resource operators, the Dezhou region, where Xinchao Energy's assets are located, has a complete oil and gas industry chain, a high degree of marketization, and transparent and traceable production conditions. The advantages are very obvious. Risks are removed, and we still need to pay attention to the progress of bad debt calculation during the year. The risk points that constrained the company's performance this year have been removed one by one: first, the early repayment of loans by US subsidiaries affects financial expenses. Judging from the situation in the third quarter, debt costs have been capitalized according to convention; second, there is a high level of support between US production areas and WTI, which is expected to be gradually resolved over the next 1-2 quarters; third, bad debt impairment has been implemented on matters such as Hami mining investment and Fangzheng Trust carried out by the previous management. 95 million dollars have already been calculated in the first half of the year, and there is still subsequent impairment pressure. At present, the company's shareholder governance situation has stabilized, and the new management has returned to focus on the main oil and gas business, and is looking forward to its further actions. The investment value is promising. Given the pressure to impair, the prudent recommendation rating will be maintained for the time being. Based on the current oil price performance and production situation in the first three quarters, the oil price assumption for 2018-2020 was raised to 59/69/76 US dollars/barrel, with equivalent production of 410,000, 48,000 and 55,000 b/d, and asset impairment of 500 million dollars in 2018. It is estimated that in 18-20, the company will achieve net profit attributable to shareholders of listed companies of 7.6/19.0 billion yuan or 2.93 billion yuan, corresponding to PE 21.1, 8.4 and 5.5 times the current price. In view of the risk of impairment, the “Prudent Recommendation” rating will be maintained for the time being, and the original rating will be restored after the impairment pressure is released. Risk warning: A sharp decline in international oil prices; corporate governance risks.