Event

On March 16, the company issued a foreign investment announcement, contributing 21.3158 million yuan in cash to subscribe for Tianyu Jingwei with an additional registered capital of 261300 yuan. after this capital increase is completed, it will hold a 27% stake in Tianyu Jingwei.

Brief comment

Invest in the next generation of core applications of the Internet of things, seek the combination point with the existing business, and cultivate new profit growth points. Tianyu Jingwei mainly focuses on three business areas: application of UAV industry, management and control service of UAV and networking of intelligent sensors. engaged in UAV industry application solution demonstration and construction, UAV management and control and information service system development, operation and maintenance, national defense key technology research and other business directions, to provide government and industry users with technical advice, system integration and data services in the field of UAV industry To solve the technical bottleneck in the development of UAV industry. At present, Tianyu Jingwei has successfully organized the first long-range UAV network measurement and control flight in Yunnan-Guizhou Plateau, proving to potential users its ability to organize long-distance cross-regional complex flight and its core technical capabilities such as UAV industrial flight, large area networking measurement and control, time-sensitive data distribution and application. At the same time, strategic cooperation agreements have been reached with high-tech enterprises affiliated to many scientific research institutes. The aim is to promote the application of UAV system in the field of aerial remote sensing industry. When the company set up the M & A fund in April 2016, it began to gradually look for new technologies in the next generation of emerging industries, especially in the field of the Internet of things, to seek the combination of the three existing businesses, and to cultivate new performance growth points. As an important terminal of information transmission and collection in the era of the Internet of things, UAV is expected to popularize in many vertical industries to promote the development of traffic management and other services, and promote the growth of the company's original business.

In 2016, after business adjustment and personnel reduction, business fully recovered, fundamentals reversed, and entered the channel of high performance growth. According to KuaiBao, the company's performance in 2016, total revenue in 2016 was 394 million yuan, an increase of 103.32 percent over the same period last year, while the net profit of returning home was 78 million yuan, an increase of 509.67 percent over the same period last year, reaching an all-time high since the company went public in 2007. Over the past four quarters, the company's net profit has grown at a month-on-month growth rate of more than 20%, entering the path of high performance growth. In 2016, the business is reorganized: mobile games are clearly positioned, focusing on the introduction, release and operation of overseas boutique games, and strive to achieve the forefront of subdivision; after the increase of virtual operator business, it expands to traffic operation, launches new enterprise short message products, and forms a perfect communication solution for enterprise WiFi, traffic products and short messages, with revenue exceeding 100 million. As the rental rate of Nanjing Internet Industrial Park exceeds 70%, it will become a new growth point in 2017, and we expect the overall profit growth of the company to exceed 50% in 2017.

In 2016, major shareholders increased their holdings many times and had sufficient confidence in future development. Equity incentives were awarded at the beginning of 2017, and the long-term development momentum was sufficient. Major shareholders increased a total of 5.6 million shares from the secondary market three times in February and September 2016, with the equity ratio rising from 19.01% to 21.25%, demonstrating sufficient confidence in future development. At the same time, the company completed the registration of incentive plan grant in January 2017, with a total of 2.039 million restricted shares, which were unlocked in three phases (40,30,30 per cent). The unlocking condition is that the net profit from 2016 to 2018 is not less than 72 million yuan, 93.6 million yuan and 121.68 million yuan respectively (an annualized growth of 30%). The implementation of equity incentive after the adjustment of each line of business personnel will improve team morale and bring long-term development motivation for the company.

The company's business fully recovered in 2016, with full-year revenue and profit reaching a 10-year high since listing. In the past six quarters, the growth rate of revenue and net profit increased significantly compared with the same period last year, and the performance was fully reversed, entering the channel of high performance growth. According to KuaiBao, the company's performance in 2016, the total revenue in 2016 was 394 million yuan, an increase of 103.32 percent over the same period last year, and the net profit of homing was 78 million yuan, an increase of 509.67 percent over the same period last year, reaching the highest level since the company went public in 2007. Compared with a loss of 19.098 million yuan in 2015, the performance has been reversed. From the single-quarter revenue and net profit of the past six quarters, we can see that the revenue and net profit of each quarter have increased significantly compared with the previous six quarters. At the same time, the sales expense rate and management expense rate of each quarter have also dropped sharply. In 2016, the Q3 expense rate dropped from the highest 67% of Q2 in 2015 to about 21%. The fundamentals reversed, walked out of the transition trough, and the performance entered a rapid upward channel. It is expected to maintain high growth from 2017 to 2018.

In 2016, the company comprehensively combed the business, adjusted the strategic focus of each business and optimized the personnel structure, especially the loss-making mobile game subsidiaries, which significantly reduced their operating costs and expenses. At present, the company's main business segment is divided into mobile value-added services (including traditional mobile value-added services such as MMS, CRBT, mobile video and so on), mobile game distribution and operation, virtual operator business, mobile Internet aviation business and mobile Internet industrial park. According to the data of the 2016 mid-term report, the company's mobile value-added business was 62.55 million yuan, up 10% from the same period last year, accounting for 44.81% of the total revenue, accounting for 57.30% of the total profit; the operating income of mobile game issuance was 30.62 million yuan, accounting for 21.93% of the total income, and the gross profit margin increased by 38% over the same period last year. Contribution gross profit accounted for 19.73%; mobile Internet industry application business income 36.94 million yuan, accounting for 26.46%, contribution gross profit accounted for 16.93%. In 2016, the company reduced the size of 800 employees to the current 300, while cultivating new performance growth points and refined operation of the existing business, the company greatly reduced operating costs and greatly improved operational efficiency.

In 2016, the company comprehensively combed the existing business: (1) the mobile game business segment: from the previous strategy of mobile game self-research + issuance + operation to mobile game distribution operation, and only focused on the agency distribution of international high-quality mobile games, after team reduction, it currently leaves a distribution operation team of about 50 people, and the sharp reduction in cost has increased the gross profit margin of mobile game business by 38% compared with the same period last year. (2) Virtual operator business: in 2016, the backward traffic resale business was increased on the basis of previous WiFi resale, and the scale of WiFi and traffic resale business was further expanded, with an increase of 154.5% in the first half of 2016 compared with the same period last year. (3) Mobile Internet Aviation Business and Mobile Internet Industrial Park: the company has always maintained a stable cooperative relationship with Sichuan Airlines and developed a customized comprehensive e-commerce platform to provide integrated mobile Internet solutions ranging from ticket purchase, service and marketing to data analysis and peripheral industry connections. In 2016, the company deeply ploughed the aviation industry and expanded new customers. At present, the Hainan Airlines WiFi website project has been successfully accepted. Nanjing Mobile Internet Industrial Park (Northlatitude International Center) was completed and accepted in December 2015, with an occupancy rate of nearly 70% by the end of 2016, and is expected to become a new profit growth point in 2017. (4) traditional mobile value-added services: including traditional mobile communication value-added services such as MMS, CRBT, mobile phone video, etc. At present, the company actively expands enterprise CRBT, traffic management and other services on the basis of the original communication value-added services, and will maintain stable growth in the future.

Mobile game business has experienced a turbulent trough, re-positioning will focus on overseas boutique mobile games into the issuance operation, and strive to maintain high growth. The company's Honeycomb Game is one of the leading mobile game publishers in China. Has successfully issued "Big Boss", "Concubine OL" and other card games in the domestic market can be called phenomenal card games, deeply trusted by mobile game channels and mobile game players. After introducing the strategic focus into the distribution and operation of international boutique games in 2016, the company deeply expanded the existing partnerships among many well-known international game companies such as EA, Rovio, Zynga and Fireproof Games, and made use of the advantages of nearly 500 domestic mobile games channels to introduce, issue and operate overseas boutique IP. In addition to the original "Concubine OL" in 2016, the introduction of new games such as "Angry Birds rush" and "heartbeat jewel" brought high revenue and profit growth. In 2017, the company plans to expand the cooperation scope of international game companies, continue to dig boutique IP, and expect to introduce and release more than a dozen boutique mobile games. The EA game "simulated City", which was launched in February 2017,

I am the mayor "DAU reached 600000, MAU 6 million, the data is beautiful, I believe that in 2017 the company's mobile game business revenue and profits will continue to increase significantly, the company is expected to cooperate with overseas well-known enterprises in the future to carry out the joint development of classic IP.

After the 2015 exploration period, the virtual operator business launched new traffic operation and enterprise SMS products in 2016, improved enterprise cloud communication products, and the backward traffic business revenue exploded. The company obtained the virtual operator license and established a Honeycomb Interconnection subsidiary to focus on enterprise communications business, launched WiFi resale products in June 2014, providing 600W operator hot spots, and launched 3G/4G traffic resale service in March 2015, with key customers being banks and Internet companies. After a year of exploration and trial, the revenue from WiFi resale and traffic operation business in 2015 is about 15 million. In June 2016, Honeycomb Internet launched enterprise short message service to further improve enterprise cloud communication solutions, while deeply expanding banking and Internet customers, including Pudong Development Bank, Tencent, 360. with the explosive growth of backward flow products, the revenue of virtual operator business has also reached 100 million in 2016, and virtual operator business is expected to maintain high growth in 2017.

In 2016, major shareholders continued to increase their holdings, and the increase in the proportion of shares also demonstrated confidence in the future development of the company. Major shareholders increased their holdings many times in 2016: on February 5, 2016, they increased their holdings by 500000 shares, with an average price of 14.56 yuan; on September 19, 2016, they increased their holdings by 1.8 million shares, with an average price of 18.752 yuan; on September 20, 2016, they increased their holdings by 3.3 million shares, with an average price of 19.175 yuan. After several increases, the proportion of shares held by major shareholders has increased from 19.01% to 21.25%, unlocked in three phases, boost team morale and cohesion, and provide long-term driving force for the development of the company. The company issued an announcement on January 3, 2017, and the equity incentive plan was granted and registered. The total number of restricted shares granted is 2.039 million shares, the grant price is 10.96 yuan per share, the grant date is December 19, 2016, and the listing date of restricted shares is January 5, 2017. Restricted shares are unlocked in three stages (40,30,30 per cent) on the condition that the net profit from 2016 to 2018 is not less than 72 million yuan, 93.6 million yuan and 121.68 million yuan respectively (an annualized 30 per cent increase). The equity incentive covers a wide range, including 5 executives and 66 technicians. The completion of the implementation of equity incentives will help to enhance team cohesion and bring a strong driving force for the long-term development of the company.

Investment advice: the company was at a low ebb in the past three years due to the mobile game bubble and job-hopping of the core team. after business strategy adjustment and personnel optimization, the company achieved a comprehensive recovery in business and fundamentals in 2016, with revenue and profits reaching record highs. The company's net profit has grown by more than 20% month-on-month in the past four quarters, entering the channel of high performance growth. With the company's clear strategic positioning and in-depth business operations, on the basis of the steady growth of the value-added services of the main operators, it is expected that mobile games, virtual operators and Internet industrial parks will maintain high growth in 2017. At the same time, the company set up M & A funds to cultivate new performance growth points for the next generation of emerging industries, especially the investment layout in the field of the Internet of things, which is closely integrated with the existing business.

We expect the company's net profit from 2017 to 2018 to be 130 million and 195 million respectively, with a 6-month target price of 30.23 yuan, with a "buy" rating.

Risk Tips:

1. The flow operation may be affected by the operator's policy and the risk of gross profit margin decline.

two。 The newly introduced mobile game operation data does not meet the expected risk.

3. The fierce competition of traditional operators' value-added services may lead to the decline risk of mobile value-added services.