The Company posted 60% profit growth in 1Q and achieved EPS at RMB 0.13/share, slightly beating our expectations. In 1Q13, the Company earned revenues of RMB 643M in 1Q, up 11% YoY; making operating profits of RMB 78.74M and net profits attributable to shareholders of listed company of RMB 91.26M, up 60% YoY (up 61% after deducting non -current gains & losses), it achieved EPS of RMB 0.13/share, in line with what is expected in its 1Q13 report preview, slightly exceeding our previous estimate of RMB 0.12/share. 1) It posted revenue growth of 11% in low season: In 1Q13, it is a low season for the Company’ s delivery. Due to structural adjustment , the Company’s raw material sales ratio gradually declined. So, its revenue growth slowed down in 1Q. 2) Gross profit margin jumped almost 3ppts: under structural adjustment, its overall gross margin climbed almost 3ppts from 21.5% to 24.4%. 3) Asset impairment loss dropped 201.38%: Thanks to collection of long-aging receivables, its assets impairment losses decreased 201.38%. 4) Non -business revenues rose 114%: we expect non -business revenue growth mainly stems from interest-free working capital loans and other policy subsidies.

W e expect the Company will face high season which confirms revenues in 2Q and 3Q. Since its downstream clients are primarily luxuries and brand garment producers, they sell cashmere sweater in winter. Thus in 2Q and 3Q, the Company will gradually step into high season of production and sale. W e expect the Company will face high season which confirms revenues in 2Q and 3Q. With continuously rising proportion of terminal brand producers in its clients, we expect its overall gross margin will see an further increase.

Opinions vs. market consensus: 1) Through adjusting product structure to lift gross margin: the Company gradually reduce its sale of low-gross-margin primarily -processed cashmere, water-washed cashmere, but increased sale of high -gross- margin yarn and brand garments and will shift more resource advantages to d ownstream. 2) The Company collaborates directly with brand operators in order to lift profit growth through adjusting client structure: In past, its clients were principally cashmere intermediaries. Through reshape in past few years, now 100% yarn business directly stems from terminal brand producers. Of which yarn business under Todd Duncan has directly supplied to luxurious brand operators; In future, the Company will further reduce its collaboration with intermediaries in garment business and will directly face to brand operators so as to increase its profit growth. 3) In future, it will devote to become luxurious material supplier:

On January 30, 2013, the Company announced that it had planned to raise RMB 2.3B from its controlling shareholder and CITI C Securities through secondary offering in order to expand production projects on cashmere, wool, and linen etc. The capacity of high -end production line introduced from Europe has no competitive relationship with 90% existing domestic capacity of cashmere, wool and linen. Its principal cashmere garments and other high -end clothing materials will be supplied to the clients (luxurious products, brand garment operators, famous departments stores in Europe and US etc) which keep long -term cooperation with the Company.

Maintaining earnings forecast and “Outperform” rating. W e maintain earnings forecast, it is expected that 2013 -2015 its EPS is RMB 0.65/share, RMB 0.93/share and RMB 1.28/share, corresponding to 13xPE, 9xPE and 7xPE respectively. In consideration of dilution effect by secondary offering, the Company will achieve EPS at RMB 0.46/share, RMB 0.67/share and RMB 0.92/share, corresponding to 18xPE, 13xPE and 9xPE respectively. W e are optimistic about its rising cashmere pricing power and increasing production of high -quality yarn and cashmere products. W e are also optimistic about further expansion of its product lines after a in -depth collaborations with its high -end clients. We are optimistic about its controlling shareholder’s confidence to the Company. An “Outperform” rating is maintained.