Incidents:

The company announced its 2013 quarterly report on April 19:2013Q1. The company achieved revenue of about 84.17 million, an increase of 126.1% over the previous year; achieved operating profit of 6.54 million, an increase of 55.3% over the previous year; realized net profit attributable to shareholders of listed companies was 5.32 million, an increase of 46.3% over the previous year, and the overall diluted EPS was 0.02 yuan; the total number of newly signed contracts was 77.76 million yuan.

Commentary:

Revenue continues to grow rapidly, stemming from good progress in the intelligent building business. 2013Q1, the company achieved total revenue of about 84.17 million yuan, a year-on-year growth rate of 126.1%. Judging from the execution of signed orders announced by the company, Q1 has implemented a total of 75.23 million yuan of intelligent building projects, accounting for 89.4% of revenue, which is the main driving force for rapid revenue growth. Judging from the number of new orders signed, the total number of new contracts signed in Q1 was 77.76 million yuan, all of which were intelligent building projects, an increase of 69.0% over the previous year, indicating that the intelligent building industry is still facing high prosperity. At the same time, most of the company's new orders are located in Chongqing, Inner Mongolia, Beijing, Yunnan, etc., indicating that the company initially has the ability to expand from other locations. According to the company's announcement statistics, the company's current contracts have reached 400 million yuan, laying a good foundation for continuing to achieve relatively rapid revenue growth in 2013.

There was a slight decrease in gross margin, and the cost ratio continued to decrease significantly during the period. 2013Q1, the company's comprehensive gross margin was 19.6%, down about 1.6 percentage points from the previous year. Continuing the trend of continuous decline in single-quarter gross margin since 2012 (only the 2012Q3 gross margin showed a slight increase), we judge that the continued decline in gross margin was caused by a combination of changes in business structure and a slight decline in the profitability of intelligent buildings. Looking at the full year of 2013, Q1, a number of new products developed by the company, such as face recognition, integrated railway video surveillance, audio and video codecs, and special communication and command and dispatch systems for rail transit, have all been tested and completed. It is expected that the profit level of the company's integrated business will increase in the future. Therefore, we expect the company's comprehensive gross margin level to maintain a steady upward trend compared to 2012.

The company's total sales and management expense ratio decreased by about 4.3 percentage points. Among them, sales expenses increased 16.3% year on year, sales expenses fell 3.3 percentage points; management expenses increased 104.2% year on year, and management expenses rate decreased 0.9 percentage points year on year, continuing to show good cost control ability. Looking at the details of management expenses, the rapid growth rate of management expenses is mainly due to a significant increase in total remuneration and technology development costs. Looking ahead to 2013, we anticipate that the company will still adopt more effective cost control measures.

Maintain an “increase in holdings” rating. Considering that market demand for intelligent water resources and intelligent rail transit is expected to increase significantly in 2013, we predict that the company's EPS from 2013 to 2015 will be 0.24 yuan, 0.30 yuan, and 0.37 yuan respectively, with an average annual compound growth rate of about 29.5% over the next three years. The company's current stock price corresponds to a price-earnings ratio of about 32 times in 2013, and the valuation is quite reasonable. Considering that the company's total market capitalization is small (1.70 billion yuan), there is still plenty of room for growth in the future, so we maintain the “increase in holdings” investment rating. The reasonable price range is 7.20 yuan to 8.40 yuan. Corresponding to the price-earnings ratio of about 30 to 35 times in 2013, the target price for 6 months is 7.80 yuan.

Major uncertainties. Risk of delays in intelligent bidding for water resources; risk of delays in intelligent bidding for rail transit; risk of rising labor costs.