Incident: The company released its 2016 mid-year report. In the first half of 2016, the company achieved operating income of 345 million yuan, an increase of 26.87% over the previous year; realized a total profit of 3.8844 million yuan, an increase of 7.42% over the previous year; and net profit attributable to owners of the parent company was 32.21118 million yuan, an increase of 5.21% over the previous year.

During the reporting period, the company's main business operated well, various businesses progressed steadily, and the company's cloud video products and data center related businesses developed smoothly. Looking at single-quarter data, the company's quarterly revenue was 217 million yuan, an increase of 42.11% over the previous year; realized total profit of 238.16 million yuan, an increase of 13.71% over the previous year; and net profit attributable to owners of the parent company was 25.9963 million yuan, an increase of 8.33% over the previous year. During the reporting period, the company's various businesses operated well, and the development of various technologies and product promotion progressed in an orderly manner: 1) During the reporting period, the company completed the research and development of the cloud video system “True Connect” system based on cloud technology. The operating platform was officially launched and entered the market operation and promotion stage. We believe that as a cloud-based video platform, Zhenhuitong addresses the cloud video-related needs of enterprises and integrates many functional modules including cloud video solutions, traditional video conference interconnection and control, cloud media, and cloud training. Furthermore, we are also optimistic about True Connect and the business integration and integration of the enterprise's various related businesses, and the deep business connections and collaboration between True Connect and enterprise users. We believe that this product is expected to open up new profit growth space for the company; 2) During the reporting period, the company's revenue from data center system construction and services increased dramatically, which became an important driving force for the company's performance growth. Furthermore, during the reporting period, the company proposed a merger and acquisition of NetRunjke, an industry-leading enterprise in the field of cloud computing and data center construction. We are optimistic about the company's accumulation of technical channels in the field of data center system construction and service. We are optimistic that in the future, the company will build on its existing advantages and enhance the growth of data center related businesses through endogenous growth and extension expansion.

During the reporting period, the comprehensive profit margin remained at a high level, and the company's profitability was good. In the first half of 2016, the company's comprehensive gross margin was 24.15%, down 0.65 percentage points from the previous year; the company's consolidated gross margin for the second quarter was 23.24%, down 0.99 percentage points from the previous year. We anticipate that with the continuous promotion of the company's Zhenhuitong products and the continuous growth of the data center business, the company's comprehensive profit margin is expected to continue to rise over the long term.

Expenses were well controlled during the company period, and R&D expenses were kept at a reasonable level. During the reporting period, the company's period expense ratio was 12.54%, up 0.3 percentage points from the previous year; among them, the cumulative sales expenses rate at the beginning of the year was 3.78%, down 0.25 percentage points from the previous year; the cumulative management expenses rate at the beginning of the year was 9.04%, up 0.63 percentage points from the previous year; and the cumulative financial expenses rate at the beginning of the year was -0.29%, down 0.08 percentage points from the previous year. During the reporting period, the company's R&D expenses increased 62.76 year-on-year. We believe that the company's expenses have been kept on a reasonable scale, and expenses were well controlled during the period. We are optimistic that the company's R&D investment and commercialization of various R & D will provide new impetus for performance growth.

For the first time, we gave the company an “increase in holdings” investment rating. We expect the company's revenue for 2016/2017/2018 to be 888 million yuan, 1.2 million yuan and 1,567 million yuan respectively; net profit attributable to the parent company of the listed company was 774.633 million yuan, 115 million yuan and 150 million yuan respectively; earnings per share were 0.96 yuan, 1.42 yuan and 1.86 yuan respectively; the corresponding dynamic PE was 92.1 times, 62.27 times and 47.54 times, respectively. We are optimistic about the company's deep accumulation of technology, channels, and brands, and the growth space for the company's enterprise cloud video business and data center construction operation and maintenance business. For the first time, the company was given an investment rating of “increasing holdings”.

Risk warning: Downstream demand fluctuates more than expected.