Performance review Lekai New Materials released a quarterly report. In the first quarter of 2017, the company achieved operating income of 70 million yuan, +2.56%; net profit of 0.3 billion yuan, +2.92% year-on-year; and diluted EPS of 0.248 yuan. The company's first quarter results are generally in line with expectations. Business analysis The growth of the main business was in line with expectations, and profitability continued to be remarkable: in the first quarter of 2017, the company achieved steady growth in revenue of +2.56% and net profit of +2.92%, due to the fact that the development of the main thermal magnetic ticket business was in line with expectations. Thermal magnetic tickets account for more than 80% of the company's revenue. The company occupies almost all of the domestic thermal magnetic ticket market share, and its competitive advantage is obvious. The company had a gross profit margin of 60.81% and a net profit margin of 43.70% in the first quarter of 2017. Profitability continued to be remarkable. Demand for thermal magnetic tickets continues to be strong, and the company has initiated production line expansion: According to the “13th Five-Year Plan” for the Development of Modern Integrated Transportation Systems issued by the State Council, by 2020, China's high-speed rail will cover more than 80% of cities with a resident population of more than 1 million in urban areas, and the total operating mileage of high-speed rail will increase from 19,000 kilometers in 2015 to 30,000 kilometers. The construction of high-speed rail lines will continue to drive demand for railway thermal magnetic tickets. At the same time, thermal magnetic tickets currently account for only half of the entire train ticket market. In the future, the replacement of thermal magnetic tickets (“blue tickets”) with traditional paper train tickets (“red tickets”) will also become an important driving force for the company's performance growth. In the first quarter, the company decided to launch the “Thermal Magnetic Ticket Production Line Expansion Project” and plans to complete it by the end of 2018. It is estimated that after the new production line is delivered, the company's thermal magnetic ticket production capacity will increase from 2200 tons to 3,200 tons, corresponding to full production revenue of 274 million yuan (110% capacity utilization rate in 2016). In addition, the company is also actively expanding the development of new material products such as decorative films, electromagnetic wave protective films for FPCs, and magnetic water treatment resins. Among them, electromagnetic shielding films are expected to enter the market as soon as this year, and will make a significant contribution to the company's performance starting next year. It is expected to benefit from the integration of resources of Aerospace Science and Technology Group and the construction of Xiong'an New Area: The company is the Sun Company of Aerospace Science and Technology Group and merged into Aerospace Science and Technology Group Corporation in 2011 with the overall restructuring of the Aerospace Science and Technology Group. The Aerospace Science and Technology Group has set a target of tripling the asset securitization rate during the “13th Five-Year Plan” period. There is close industrial cooperation between Lecai Group and various research institutes of the Aerospace Science and Technology Group. We judge that the company is expected to become the focus of the Group's resource integration. Furthermore, the Aerospace Science and Technology Group has invested in the construction of an aerospace science and technology industrial park in Gu'an, Hebei since 2012, and will use Gu'an as a base to cultivate strategic emerging industries such as aerospace technology equipment, satellite applications, new materials, new energy, energy saving, and environmental protection. In April 2017, the Central Committee of the Communist Party of China and the State Council issued a notice deciding to establish Hebei Xiong'an New Area. Aerospace Science and Technology Group actively stated that it “supports the central deployment and fully supports the construction of Xiong'an New Area”. The company is located in the hinterland of Beijing-Tianjin-Hebei, close to the Gu'an Aerospace Industrial Group, and is expected to directly benefit from the construction and development of the Gu'an Aerospace Industrial Cluster and Xiong'an New Area. Profit forecast We expect the overall revenue of the company's main business to reach 2.91/3.25/370 million yuan in 2017-2019, with a year-on-year growth rate of 11.1%/11.9%/13.7%; net profit of 1.19/1.33/151 billion yuan, a year-on-year growth rate of 10.56%/11.59%/12.93%. The growth will mainly come from thermal magnetic tickets and new business development. Investment advice We believe that the company is a high-quality military to civilian enterprise. The business occupies a small but beautiful segment, and its profitability is remarkable. The company is an important new materials business platform for the Aerospace Science and Technology Group in the civil-military integration process. It is located in Gu'an, Hebei - the hinterland of Beijing-Tianjin-Hebei Province, and is expected to benefit from the integration of the Group's assets, the Gu'an Aerospace Industry Group, and the development of Xiong'an New Area. The company's current stock price corresponds to 45X17PE and 40X18PE. Considering that the company's future performance growth expectations are clear, and it is also expected to benefit from the group's mixed reforms, we have given the company a target price of 60 yuan for the next 6-12 months to maintain the “buy” rating. The impact of risky e-tickets on thermal magnetic tickets; asset integration falls short of expectations; and the construction process of Xiong'an New Area falls short of expectations.