Tianyun's performance in the first half of 2019 was worse than expected. The company's revenue for the first half of 2019 increased 4.2% year over year to RMB 457.6 million, mainly due to continued growth of its own brands, which increased 23.2% year over year to RMB 258 million. However, OEM sales fell 8.2% year over year to RMB 167 million due to tight global trade. Tianyun's gross margin increased slightly by 0.2 percentage points to 28.0% in the first half of 2019, mainly due to an increase in the average selling price of OEM products. The company's sales expense ratio remained at 1.5% in the first half of 2019. Tianyun's share of management expenses increased 0.3 percentage points over the same period last year. Tianyun's net profit for the first half of 2019 increased 4.1% year over year to RMB 70.3 million.

Private label products are more abundant, and sales channels continue to expand. Tianyun plans to carry out further research and development and launch more products to make its product structure more diverse. The number of Tianyun dealers increased from 210 in 2018 to 277 in the first half of 2019.

As the newly acquired Yichang plant continued to optimize production capacity, Tianyun's production capacity and de-seasonalized production increased further in the first half of 2019. The company's 5th and 6th production plants in Shandong are expected to start operation in the first quarter of 2020. A win-win partnership with Sumishang Foods and Sichuan Development will strengthen Tianyun's roots in Sichuan Province and significantly increase its sales growth.

Due to lower earnings forecasts, we lowered our target price to HK$1.56. With the support of Sichuan Development and Sumishang Foods, there is significant room for the company's revenue and profits to grow. Its current valuation is attractive. As a result, we maintained our “buy” rating but lowered our target price to HK$1.56, which is equivalent to 8.6 times, 7.2 times, and 6.2 times the price-earnings ratio of 2019, 2020 and 2021.