Incident Company published its 2016 Annual Report and 2017 Quarterly Report. In 2016, the company achieved operating income of 385 million yuan, an increase of 5.99% over the previous year; operating profit of 95.96556 million yuan, a slight increase of 3.79% over the previous year; and net profit of 72.7557 million yuan, an increase of 5.81% over the previous year. Among them, 2016 Q4 achieved operating income of 125 million yuan, an increase of 19.77% over the previous year; realized operating profit of 31.387 million yuan, an increase of 20.11% over the previous year; and realized net profit of 236.963 million yuan, an increase of 25.42% over the previous year. 2017Q1 achieved operating income of 89.013,400 yuan, an increase of 9.09% over the previous year; realized operating profit of 23.3992 million yuan, an increase of 26.85% over the previous year; realized net profit of 17.6665 million yuan, an increase of 17.16% over the previous year; and realized net profit deducted from non-return mother of 17.2984 million yuan, an increase of 25.35% over the previous year. Based on 202.3 million shares, the company distributed cash dividends of 1.00 yuan (tax included) to all shareholders for every 10 shares. A total cash dividend of 20230 million yuan was distributed, accounting for 27.81% of the mother's net profit. Brief review (1) Offline channels are expanding smoothly, strong demand in the baby market is driving the company's performance growth, cost control increases, and gross margin continues to rise. Since 2016, the company has actively explored the market, adjusted its business strategy, tested the franchise model, and expanded the direct business system. The number of stores opened increased by 77, increased product market share, and driven rapid growth in sales and revenue. By business, the annual sales volume of cotton clothing for infants and young children was 6.518 million pieces, up 10.41% year on year, and contributed 312 million, up 3.35% year on year. At the same time, the company strengthened procurement and outsourced processing cost control, and gross margin increased 4.99 pct year on year to 52.64%. Daily necessities for infants and toddlers contributed 65.5688 million yuan to revenue, an increase of 15.44% over the previous year, and gross margin of 45.12%, an increase of 3.32 pct over the previous year. Following the liberalization of the two-child policy, there was a significant increase in the number of newborns. Demand in the infant market did not decrease in 2017, and the company's sales volume continued to rise. The Q1 revenue growth rate increased to 9.09%, and the gross profit margin for a single quarter was 52.14%, an increase of 3.67 pct over the previous year. (2) There has been a steady increase in the cost rate for the period. In 2016, the company's sales expenses and management expenses were 71.625,500 yuan and 34.2875 million yuan respectively, up 17.60% and 8.86% year on year, and financial expenses were -8.2292 million yuan, down 17.38% year on year, mainly due to the decline in interest income due to a decrease in bank time deposits. The sales expense ratio, management expense ratio, and financial expense ratio were 18.58%, 8.90%, and -2.14% respectively, up 1.82 pct, 0.24 pct, and down 4.88 pct year on year. The financial expenses of the 2017Q1 company were -1.07 million yuan, a year-on-year decrease of 60.28%. The sales expense ratio and management expense ratio increased by 0.82 pct and decreased by 1.11 pct, respectively. In addition, the company's purchase of wealth management products in 2016 brought additional investment income, bringing the company an investment income of 1,801,900 yuan throughout the year. The 2017Q1 company withdrew some of its wealth management products on schedule and achieved investment income of 1,944,500 yuan in a single quarter, which also boosted performance. (3) Inventory and accounts receivable amounts have both declined, and operational efficiency has improved. At the end of 2017Q1, the company's inventory value was 130 million yuan, a decrease of 9.72% from the end of 2016, and a decrease of 12.16% from the previous year; accounts receivable were 39.061 million yuan, a slight decrease of 2.97% from the end of 2016. As inventory removal progresses and accounts receivable are properly managed, the company's operating efficiency will gradually improve. The two-child effect+consumption upgrade helped the maternal and child industry take off, and market segmentation and diversification benefited advantageous enterprises. The domestic maternal and child market has exploded in recent years, benefiting from the increase in the birth population brought about by the prenatal policy and the promotion of consumption upgrades. The full two-child population was officially implemented in 2016, and the annual number of births rebounded to 18.46 million, an increase of 11.5% over the previous year. We predict that in 2017-2020, the number of new births will continue to grow at a CAGR of 4.3% and reach 21.87 million in 2020. In the future, the number of infants will increase further, and consumer demand in various areas such as baby-related clothing, food, lodging, and medical education will continue to grow. At the same time, as the per capita disposable income of urban and rural residents increases, and individualized demand becomes more prominent due to the increase in the share of parents in 80/90, etc., high-end consumer goods for infants and young children will usher in a development space, and the industry has entered an era of brand and market segmentation and diversification. As a well-known enterprise in the domestic high-end infant apparel cotton and daily necessities market, the company is facing an unprecedented opportunity for development. The first mother and child stock in China adheres to the “online and offline two-wheel drive, focusing on the economy of two children and the big consumption of mothers and children” to build a comprehensive ecosystem for the maternal, child and child industry. (1) It has a matrix of three independent brands, and differentiated management has achieved coverage of the entire product line of mother and child products. As a leading brand operator for infants and toddlers in China, the company was founded in 1996 and has been deeply involved in the infant industry for more than 20 years. Currently, it has become one of the few companies that have achieved full product line coverage of infant apparel, cotton, and daily necessities. The company has a matrix of three brands: Rabbi, Next Generation, and Baby Rabbi, covering a comprehensive range of consumer goods “worn” and “used” by infants aged 0-3 to achieve differentiated development. (2) Combine offline stores/cabinets with e-commerce to introduce a rich product matrix of high-quality foreign brands. The company is actively expanding online and offline links. Its offline sales network covers South China and East China, covering the whole country. Currently, it has more than 1,300 offline brand stores/cabinets; at the same time, it is cooperating with cross-border e-commerce to promote the construction of online channels. In terms of categories, in addition to the main baby clothing and toiletries, the company also continues to introduce high-quality infant product brands from abroad. In 2015 and 2016, the company sold Ferrari children's toys and British Bfree baby bottles, respectively. Aiming at the introduction of brands, in 2016, the company innovated the terminal model and added integrated brand stores in addition to traditional specialty stores, bringing other high-quality and well-known brands and cross-border e-commerce businesses into terminal stores, promoting sales profits, while enhancing brand image and consolidating the competitive advantage of physical stores. Excellent quality control combined with excellent innovation capabilities helps the company stand out in the wave of industry standardization. Due to the special nature of infant products, the company attaches importance to the quality of its own products. Its core products, such as underwear, are all produced independently by the company, and the materials are made of high-quality Xinjiang and American long-staple cotton from designated suppliers. At the same time, as a pioneer in domestic research and development of maternal and child products, the company insists on independent innovation and development. The investment platform is structured in an orderly manner, and the extensive layout of the maternal, child and child ecosystem can be expected. The company's future investment strategy is being implemented steadily. In March 2016, the company invested 19 million yuan to establish a wholly-owned subsidiary “Guangdong Golden Rabbi Investment Co., Ltd.”, using the company to actively carry out various investment activities. In September, through its wholly-owned subsidiary “Rabbi Hong Kong”, the company plans to invest 225 million yuan to subscribe for shares in the Asia Pacific International Maternal, Infant and Child Industry Fund. The fund size is 1 billion yuan. The GP is J3 Capital Limited. Its core management members have more than 20 years of experience in the domestic and international infant industry and investment and mergers and acquisitions in the international maternal, child and child industry. With this overseas investment platform, the company focuses on foreign countries, especially in Europe, America, Australia, New Zealand, Japan and South Korea, etc., covering the six major fields of food, clothing, use, play, culture, education, and health care involving infants and children aged 0-12 and pregnant women. In February 2016, the company invested 45.5 million yuan to subscribe for 5.14% of Jiangtong Animation Media's shares to achieve a layout in the direction of mother and child culture and entertainment. Deepening synergies can be expected with the layout in the future. In the future, the company will actively focus on entry opportunities in the fields of cross-border e-commerce (mother and baby, beauty), healthcare (confinement center services, etc.), food and supplies for mothers and children, and early childhood education, etc., to open up new business directions in external expansion. Investment suggestions: The company has a comprehensive layout of the infant industry chain. The first target to benefit from the high growth of the infant industry after the liberalization of the two-child policy is scarce. The main business is solid and steady, with brand advantages and technical advantages. The investment platform has been successfully built to facilitate the future expansion of high-quality baby-related businesses, and actively achieve the strategic goal of a comprehensive ecosystem for the mother, child and child industry covering the six major fields of “food, clothing, use, play, culture, education, and health care.” We expect net profit for 2017-2018 to be $1.11 million and 126 million respectively, up 10.8% and 12.8% from the previous year. The corresponding EPS is 0.40 and 0.45, respectively, and the corresponding PE is 71.1 and 63.6 times. The current total market value is 5.8 billion yuan. The initial rating is given a “buy” rating. Risk factors: The rapid development of the infant industry has led to increased competition in the future; the implementation of the two-child policy is not as effective as expected; the risk that offline channels will be impacted by e-commerce expansion; the outsourcing production capacity and quality of some of the company's products will not meet requirements.