Events:

The company released its third-quarter financial report on October 27, 2016: the company's operating income in the first three quarters was 872 million yuan. The net profit increased by 85.50% over the same period last year, the net profit of 263 million yuan increased by 31.19% over the same period last year, and the net profit after deducting 232 million yuan increased by 18.36% over the same period last year.

Comments:

The company's performance was basically in line with expectations, and both revenue and net profit maintained a high growth rate. the company's operating cost in the first three quarters was 419 million yuan, an increase of 146.77% over the same period last year. The sharp increase in operating costs was mainly due to the corresponding increase in costs brought about by revenue growth. Sales expenses were 78.86 million yuan, an increase of 344.76% over the same period last year. The sharp increase in sales expenses was mainly due to a substantial increase in promotion expenses caused by the company's increased business promotion. The management cost was 99.91 million yuan, an increase of 171.71% over the same period last year. The sharp increase in management expenses was mainly due to the increase in R & D investment by the company and the increase in salary expenditure brought about by the increase in the number of managers.

Smartphone OS system, enjoy 100 million-level user port: the company's main smartphone OS operating system research and development, the company's products basically cover all low-and middle-end smartphone manufacturers, the company provides OS operating system to low-and middle-end manufacturers free of charge, through the implantation of its own App and intermodal smartphone game center, application distribution center to control the traffic entrance, and finally through application distribution and advertising and other business realization.

The integration of software and hardware ushered in a new era of IoT. With its accumulated technology and huge user groups in the smartphone era, the company actively laid out smart hardware products such as smart home, car networking and smart wear, promoted the derivation of contact OS system to other intelligent hardware products, built a contact OS platform to realize the connection between different hardware and end-to-end connection, and opened a new era of IoT. In addition to independent research and development, the company has also reached cooperation with high-quality enterprises in the industrial chain such as Haier, Razer and Dehai through epitaxial mergers and acquisitions, equity joint ventures and strategic cooperation to build an OS pan-intelligent ecosystem.

Endogenesis + extension to create intelligent hardware e-commerce platform: the company established its own e-commerce platform to contact the mall to create the largest vertical intelligent hardware e-commerce platform in China. In addition to launching its own smart hardware, it has also set up third-party cooperation plates such as Apple Inc area and Haier area. The company plans to spend $264 million in 2016 to acquire a stake in e-commerce Newegg55.7%, the second largest in the North American IT/CE category. If the deal is successful, the company will quickly increase its market share in smart hardware sales and expand its influence in overseas markets.

Profit forecast and valuation: we are optimistic about the company's strategy of establishing pan-intelligent contact OS with the combination of software and hardware. Relying on the good cooperative relationship with many hardware manufacturers, the company has obvious clamping effect and continues to be optimistic about the future development of the company. We predict that from 2016 to 2018, the company's EPS will be 0.25,0.37,0.58 yuan, corresponding to PE 81,55,34 times, and will be rated as "overweight".

Risks: Newegg acquisition risk, market competition aggravating risk, smart hardware launch not up to expectations, VR product sales not up to expectations, advertising + game business development lower than expected, overseas business lower than expected