Investment points: The company is a leading domestic identification solution provider and service provider: the company specializes in the R&D, production, sales and service of intelligent identity authentication terminals and industry application software, mainly serving customers in the financial, public security, communications, social security, medical and other industries. The company has significant advantages in technology development and marketing channels, and the market share of its products ranks among the highest in the same industry. Benefiting from the concentrated explosion of rigid demand under the real-name system in the communications industry, the company's revenue experienced explosive growth in 2015, but declined rapidly in the first half of 2016. Since 2014, mainly due to the liberalization of production qualifications for second-generation ID card reading devices and increased market competition, the company's gross sales margin has declined markedly, and net profit growth has fallen below revenue. It is expected that as the competitive pattern of the market becomes more balanced, there is limited room for decline in the company's gross margin, so it will stabilize, and the company's annual performance will improve compared to the first half of the year. A clear strategic development plan has been drawn up around the “five elements and ten facets”: with “becoming the leading domestic and international advanced comprehensive solution provider and service provider in the field of identification” as its strategic development goal, the company has formed a “five elements and ten facets” main business structure composed of the real name system of accounts in the financial industry and bank card EMV, identity verification and actual population management in the public security industry, the real-name system and paperless business acceptance of customers in the communications industry, and the construction of a new social system for the social sector and “the same identity” certification. In the future, the company will take biometric recognition technology represented by face recognition as the main line, and use the entry point for two-generation certification applications to focus on achieving deep industry cultivation and industry integration, and plans to intervene in intelligent cognition and five services. The company's intelligent identity authentication business is in a leading position in China: the company is one of the ten enterprises that obtained the designated production qualification for second-generation ID card reading devices in 2004, and is one of the three enterprises that obtained the designated production qualification for second-generation ID cards and additional address reading and writing devices in 2007, and has always been in a leading position in the industry in the field of second-generation ID card identification business. Looking to the future, in addition to the large inventory of traditional second-generation ID card reading devices, it is expected that when the proportion of ID cards containing stripes exceeds a certain threshold, demand for new reading devices will be released again, bringing new product demand to the company's products. According to the forecast of the Forward-looking Industry Research Institute, the size of China's biometrics technology market will increase from 10 billion yuan to 30 billion yuan, and the CAGR will reach 24.6%. The intelligent identification market space closely related to this is vast. The company is actively developing a new type of business based on identification: focusing on deep industry implantation and system function expansion, the company is currently vigorously developing mobile exhibition, convenient payment, banking and medical self-service services, and has launched a series of innovative equipment products and system products. At present, the company's mobile exhibition products have entered the batch procurement stage of the Postbank, and it is expected that they will be widely used in credit card center business in the future; the company's convenient payment products are a model supplier for the “Food Basket Bao” project in many places, and the pilot operation of the Shandong Food Market has now been completed. It is expected that the second half of the year will achieve substantial growth as UnionPay promotes the strengthening of micropayments; the company's banking self-service products have signed a contract with the Second Affiliated Hospital of Shandong University and achieved batch supply. The market outlook is quite optimistic, and it is expected that they will make a considerable contribution to the company's revenue and net profit. The company's recent intensive foreign investment activities are worth paying attention to: in May to May of this year, the company launched three consecutive foreign investment activities, setting up PE fund Woji Investment and joint ventures such as Shinsitu and Shensi Xuhui. According to the company announcement, the three focused on the fields of financial informatization, visual perception, and smart healthcare, respectively. We judge that the company will accelerate the penetration of intelligent identification technology into key industries and the layout of new biometrics technology, and it is expected that it will continue to make an impact in terms of external development in the future. Profit forecast and investment recommendations: The company's net profit for 2016-2018 is estimated to be 40.58 million yuan, 55.48 million yuan and 74.49 million yuan respectively. The EPS for these three years is 0.25 yuan, 0.35 yuan, and 0.47 yuan, respectively, and the PE corresponding to the closing price on September 26 is 112, 82, and 61 times, respectively. We believe that the company has obvious technical, experience and customer advantages in the second-generation card reading equipment market. The company will use this advantage to continue to strengthen its market position and further expand its layout in new technologies and new business fields through endogenous growth and participation in mergers and acquisitions, and focus on achieving a strategy of deepening industry cultivation and industry penetration. We are optimistic about the company's development prospects, covered it for the first time, and gave it a “recommended” rating. Risk warning: The level of competition in the second-generation license reading equipment market has exceeded expectations; the development status of new businesses such as the mobile exhibition industry has fallen short of expectations.