Dilong New Materials semi-annual report: 2016H1's revenue was 604 million yuan, up 47.81% year on year; net profit attributable to shareholders of listed companies was 108 million yuan, up 159.79% year on year; after deducting non-net profit of 106 million yuan, up 167.94% year on year. The company expects net profit of 225-260 million yuan for the first three quarters, an increase of 230%-280%. The performance of the traditional building materials business was in line with expectations, and the acquisition of Meishengyuan contributed profits: the company's revenue and net profit increased by 47.81% and 159.79% respectively in the first half of the year; among them, revenue and net profit increased by 75.81% and 218.01% respectively in the second quarter. By business, in the traditional business, revenue from the decorative paper (including decorative paper and impregnated paper) business increased 7.1% in the first half of the year, revenue from the decorative board business increased 19.7%, and revenue from PVC decorative materials increased by 28.9%. The overall performance of the traditional building materials business was in line with expectations. The company completed the acquisition of Meishengyuan in the first half of the year and began merger in May-June, contributing approximately 150 million yuan in revenue and 62.19 million yuan in net profit. The company's comprehensive gross profit margin in the first half of the year was 29.6%, an increase of 6.1 pct, mainly benefiting from the increase in the gross margin of the two types of business, decorative paper and PVC decoration materials, as well as the increase in the share of high-margin products. The company's expense ratio for the first half of the year was 12.3%, a year-on-year decrease of 2.1 pct; among them, sales and management expenses decreased by 0.2 pct and 2 pct, respectively, and the financial expenses ratio increased by 0.1 pct. The company is a leading enterprise in the domestic decorative paper industry. Its product positioning is high-end, and it has established stable cooperative relationships with large customers such as Bologna, Sophia, and Dongyi Risheng. Since its listing, the company has carried out a national layout with strong capital advantages, and has successively set up subsidiaries in Chengdu, Langfang, Hebei, Linyi, Shandong, etc., as well as the Zhejiang headquarters, to form four major production bases. Currently, the decorative paper market is scattered. As the leading market in the industry, the company accounts for about 8% of the market, and there is plenty of room for improvement. The leader in the decorative paper industry, there is still room for improvement in the main business growth: China is a major producer and consumer of decorative paper. According to data from the China Forestry Industry Association, China's decorative paper production reached 690,000 tons in 2013, of which the decorative paper market for printing was about 300,000 tons, with a compound growth rate of about 17.4% from 2011 to 2013. According to the forecast of the China Forestry Industry Association, demand in the decorative paper industry is still expected to grow by 10%-15% in the future. With the extension of downstream applications (such as the extension of wood-based panels such as chipboard to applications such as interior walls and ceilings of buildings) and the replacement of traditional solid wood products by wood-based panels, we expect the decorative paper industry to maintain steady growth. At present, the company has a production capacity of 22,700 tons of decorative paper, 2 million sheets of decorative cardboard, and a production capacity of about 30 million meters of PVC film. In 2013, the company raised an additional 315 million yuan to invest in 6 new projects, including decorative paper, decorative board, PVC floor film and impregnated paper. It is expected to increase the company's production capacity of various products by 70%-90%. With the commissioning of the company's major fund-raising projects, the product line continues to be enriched, and the market share is expected to increase further. Acquisition of Meishengyuan, cross-border transformation of games and other pan-entertainment fields: The company previously announced the acquisition of Suzhou Meishengyuan to transform the game development and distribution sector across borders. Meishengyuan's performance promises net profit of not less than 180 million yuan, 320 million yuan, and 468 million yuan for 15-17 after deducting non-recurring profit and loss. China is the third-largest mobile game market in the world. With the popularity of smartphones, the increase in wireless networks and 3G/4G coverage, and the diversification and convenience of payment methods, mobile games have maintained rapid development. Established in 2013, Meishengyuan specializes in the development and distribution of mobile games (mainly mobile stand-alone games). With professional game planning and promotion capabilities and rich distribution and operation experience, it provides services to small and medium-sized game developers, and obtains profits through external licensing of distribution/agency game products and R&D products. Since its establishment, the company has released more than 80 games. In the future, Meishengyuan will increase its industrial layout, enter the field of game research and development and online game joint ventures, and develop new growth points. The company's joint online game Doodle Sky was launched in August 2015. Meishengyuan has strong channel advantages, including mainstream types such as offline pre-installed apps, app stores, ad networks, and large-scale apps, and has established good partnerships with online channels such as Baidu Mobile Gaming, 360, and Tencent App Bao, as well as mobile phone manufacturers such as Xiaomi, Oppo, Vivo, Huawei, and Lenovo. The Pan-Entertainment layout is worth looking forward to: the acquisition of Meishengyuan and crossing borders into the gaming sector shows the company's determination to transform its strategy. We expect the acquisition of Meishengyuan to be the first step in the company's strategic transformation of the pan-entertainment industry. In the future, it is not ruled out that the company will continue to lay out in the pan-entertainment field through epitaxial methods to create a dual main business of decorative paper and pan-entertainment. Investment advice: We expect the company's net profit for 2016 to 2018 to be RMB 410 million, RMB 590 million and RMB 73 million (performance preparation), with net profit growth rates of 379.9%, 42.6%, and 24.3% respectively, EPS of 0.48 yuan, 0.69 yuan, and 0.86 yuan (considering additional and dilution), and a target price of 20.7 yuan for 6 months, maintaining a “buy-A” rating. Risk warning: Performance promises are growing at a high rate, competition in the game industry is fierce, and run-ins with acquisition management teams.