Report summary Shareholders are strong and have a deep background in the industry. Jihua Group is the largest military light industry manufacturer in China. It is the main manufacturer supplier of unified domestic clothing departments and industries and other professional clothing units, and is one of the few domestic sales and processing bases for the international military goods market. The actual controller of the company is the State Assets Administration Commission, and the controlling shareholder is Xinxing Jihua Group, with a shareholding ratio of 66.33%. Judging from the total number of employees, the size of state-owned assets, operating income, and total profit, the controlling shareholder Xinxing Jihua Group ranks in the top 50 of the central enterprise camp. A leader in the military supplies industry, the profitability and order growth rate of the military business bottomed out in 2016, and is expected to achieve both profitability and order size growth in 2017. The company is the only supplier of a full range of military products in China. It has a full product range, full war zone coverage, and full-process service capabilities, and occupies 70% of the market share of the military products market. Currently, only Jihua Group in China has the ability to meet the supply requirements of the military and armed police forces in various areas such as large volumes, variety, and urgent delivery times. Since the bidding method for military supplies changed to a low price bidding method after 2015, there was disorderly competition in the market, and the gross margin of the company's military goods business declined. It is expected that after the bidding method was changed to a comprehensive bidding law in 2016, the company will be able to benefit from competition with its strong R&D strength and comprehensive supply guarantee capabilities. After 2017, the gross margin of military orders will gradually recover, and the order size will also increase. The fixed increase helped the company transform the modern service industry and create the unique “1+X” model of Jihuayuan. The company's fixed growth projects include an investment of 4.1 billion yuan in Jihuayuan (Chongqing, Changchun, Yangzhong, Xi'an, Xianning, and Qingyuan) in a new “1+X” business format. As an organic combination of manufacturing and trade services, it mainly consists of shopping centers, indoor sports centers, hotels and specialty catering services. Unlike traditional shopping centers, Jihuayuan has a unique location, relies on large cities, yet is far from big cities, and has an advantage in investment costs. In addition, sports such as indoor surfing, indoor skiing, indoor rock climbing, and indoor skydiving have been introduced, which is conducive to increasing customer loyalty and enhancing the shopping experience. Land disposal income and government subsidies form a useful complement to net profit. Most of the company's enterprises are located in the core area of the city. Combining the local government's plan to leave the city and the objective requirements of developing land assets in the old factory area or implementing government storage, the company has successively relocated its production business since 2013, and it is expected that a certain scale of land development income or land disposal income will still be realized during the 13th Five-Year Plan period. Furthermore, the company has carried out forward-looking R&D and innovation in projects such as environmentally friendly filter materials, API development, high-end textile technology, and protective equipment, etc., and has actively applied for government subsidy funds and support from national special funds, which is a beneficial supplement to profits. Profit forecast and investment advice: Due to the large upfront investment in the Jihuayuan project and the long payback period, the contribution of Jihuayuan to the company's performance will not be considered for the time being. It is conservatively estimated that the company's 2016-2018 EPS will be 0.33 yuan, 0.36 yuan, and 0.42 yuan respectively, with corresponding price-earnings ratios of 28 times, 25 times, and 22 times, and a fixed increase price of 8.19 yuan, with a certain margin of safety. If the 66.33% shares held by Xinxing Jihua Group and the 3.55% shares held by Central Huijin are deducted, the actual market value in circulation is less than 11 billion yuan, giving it a “buy” rating.