Announcement: (1) On March 29, 2016, the company released its 2015 annual report, achieving operating income of 435 million yuan, a decrease of 8.41% over the same period last year; net profit of 17.8 million yuan, an increase of 147.42% over the previous year. (2) On December 27, 2015, the company disclosed the “Sichuan Huiyuan Optical Communications Co., Ltd. Major Asset Exchange and Issuance of Shares and Payment of Cash to Purchase Assets and Raise Supporting Funds and Related Transactions Plan”. It is proposed to purchase 100% of Tongbaolai's shares and 100% of Xuntong Technology's shares by exchanging assets and issuing shares to purchase assets. Both companies are engaged in smart city security business. After the transaction is completed, Tongbaolai and Xuntong Technology will become wholly-owned subsidiaries of the listed companies.

Purchase the original assets and acquire Tongbaolai and Xuntong Technology to build a large security platform. The company plans to acquire 100% of Tongbaolai's shares and 100% of Xuntong Technology's shares through asset swaps, issuance of shares, and cash payments. Both companies are excellent security companies in the smart city field. After this transaction is completed, the companies will officially transform the security industry. Tongbaolai is a solution provider and system integrator for the smart city security industry, and Xuntong Technology, a provider of network video surveillance products and solutions, will make full use of synergies to jointly provide customers with comprehensive and integrated system solutions to enhance the company's overall competitiveness.

Seek differentiated advantages in fierce competition and be a market segment leader. In 2014, there were more than 30,000 security enterprises in China, with 1.6 million employees. In the fierce market competition, Tongbaolai and Xuntong Technology were market segment leaders through differentiated competitive strategies and strived to find new profit growth points outside of smart city projects. Tongbaolai has a first-mover advantage in the field of self-developed intelligent photoelectric intrusion prevention systems. In the future, it will focus on important land perimeter security fields such as civil aviation systems, judicial prisons, high-speed rail systems, border security, and military police systems. At the same time, Xuntong Technology will continue to expand customers in new industries and provide the overall solution of “front-end smart camera+back-end multi-level intelligent management platform+intelligent VAIS video image processing”.

The growth rate of performance is high, and undervaluation highlights the value of investment. Judging from the amount of current orders disclosed by Tongbaolai and Xuntong Technology, the two companies are likely to be able to complete the betting performance. At the same time, considering the obvious advantages of the two companies in the future development of industry segments, we judge that the company's valuation is currently at the bottom.

Investment advice: The company enters the security field through asset restructuring to build a large security platform. Adopting a differentiated competitive strategy has obvious advantages in the development of industry segments, and valuations are currently at the bottom. We expect the company's net profit from 2016 to 2017 to reach 220 million yuan and 290 million yuan, covering the purchase with a -A rating for the first time, with a target price of 26.7 yuan for 6 months. Investors are invited to focus their attention.

Risk warning: the progress of the restructuring falls short of expectations;