Main points of investment

Items:

On October 25, 2016, the company released its third quarter 2016 report.

Peace viewpoint:

The growth rate in the first three quarters was in line with expectations, and the financial performance was excellent: during the reporting period, the company achieved 134 million yuan in revenue, 21.8 million yuan in net profit and 20.54 million yuan in non-return net profit, with year-on-year growth rates of 54.27%, 40.79% and 50.54%, respectively, which slowed down significantly compared with the previous two quarters, but still maintained a high growth level. The reason may be due to the high base formed by the number code of Tang Dynasty in the middle of August last year. From the beginning of the year to the end of the reporting period, thanks to the good development momentum in the areas of public security, network resource management, culture and entertainment, as well as the influence of the number code of the Tang Dynasty, the company achieved a total revenue of 378 million yuan in the first three quarters, an increase of 82.51% over the same period last year. In the first three quarters, the company achieved a total net profit of 70.16 million yuan, an increase of 142.94%, exceeding the revenue growth rate. The main reason is that the gross profit margin of the Tang Dynasty digital game business is close to 100%, and the gross profit margin of new products and solutions in the public security field is high. The gross profit margin of the company's business as a whole has been significantly improved. The company deducted 65.27 million yuan in non-home net profit in the first three quarters, a year-on-year growth rate of 197.25%. This growth rate was higher than that of home net profit, mainly due to a sharp reduction in government subsidies. The company's performance is expected to maintain rapid growth throughout the year.

Continue to carry out the strategy of "endogenesis + extension" and seek development with epitaxial investment mergers and acquisitions: the company adopts the "endogenesis + extension" development strategy, comprehensively considering factors such as matching with the company's main business and producing synergy, timely carry out epitaxial investment mergers and acquisitions, preferred investment targets related to the field of network and information security. After acquiring 100% stake in board game company Tangren Digital and 51% equity in operator business company Yahong Century in 2015, the company has been planning major asset restructuring activities again since the end of August this year. It is proposed to acquire 100% equity in Paojiao Sizhi, a game platform company, and a further 44% stake in the holding subsidiary Yahong Century by means of "share + cash" payment, as of the date of announcement. The company has signed a framework agreement on asset acquisition with the underlying company and the main counterparty, but has not yet signed a formal agreement. If this transaction can be completed, the company operator-related business and entertainment sector business strength will be strengthened.

Increase capital operation, focus on improving asset profitability: on October 13, the company announced that it intends to use its own capital of 100 million yuan to jointly set up two industrial investment funds with related parties such as Asia-Pacific Fubon. The issuance scale of the two industrial funds is 100 million yuan, including cultural and creative funds and information security funds. The establishment of the two funds will help to integrate industrial resources using the "listed company + PE" model. Reserve and cultivate high-quality projects to help the company accelerate its extension in the field of cultural creativity and information security. In addition, in terms of the operation of existing assets, the company transferred 56.04% of the shares held by Bohai Communications, a communications product production and marketing company, on August 22, divesting the lossmaking business and optimizing the company's asset structure.

The company has obtained Class A qualification for secret-related information system integration, and its market competitiveness has been enhanced: the company is one of the earliest enterprises in China to set foot in the field of network information security. It is committed to providing network behavior audit and content supervision products for national management agencies, operators, enterprises and institutions. During the reporting period, Ren Zixing Science and Technology Development, a wholly owned subsidiary of the company, obtained the Class A qualification Certificate of Secret Information system Integration from the State Secret Bureau, which enables the company to engage in secret, secret and top secret information system integration business of corresponding business types nationwide. The acquisition of this certificate will help to enhance the company's market competitiveness and have a positive impact on the company's future business performance.

The business space for online audit supervision is huge, and the company's prospects continue to improve: policy promotion and the rapid popularity of cloud networking have contributed to the growth of China's online audit supervision market from 640 million yuan in 2010 to 2.18 billion yuan in 2015, with CAGR as high as 27.22%. During the 13th five-year Plan period, with the establishment of the national security strategy and the gradual landing of the Anti-Terrorism Law, as well as the rapid development of five computing, "cloud networking +" and mobile cloud networking, it is expected that national investment in the field of information security will continue to increase. The demand for cloud networking information supervision and public opinion supervision will drive the company's network content and behavior audit and supervision business to continue to expand, and the company's performance will continue to maintain rapid growth in the next few years.

Profit forecast and investment advice: we maintain our previous profit forecast and expect revenue from 2016 to 2018 to be 789 million yuan, 1.045 billion yuan and 1.389 billion yuan respectively, with a corresponding year-on-year growth rate of 119.2%, 32.4% and 33.0%. The corresponding EPS is 0.34,0.44,0.58 yuan, and the PE corresponding to the closing price on the last day before the suspension is 62.4,48.1,36.9 times, respectively. We are optimistic about the growth prospects of the company's online content and behavior audit and regulatory business, and maintain the "recommended" rating.

Risk hints: the investment intensity of mobile cloud network supervision is not as strong as expected; the risk of integration after investment mergers and acquisitions; the risk of major asset restructuring.