Investment Highlights On August 21, 2017, Tuowei Information released its 2017 semi-annual report: During the reporting period, the company achieved operating income of 551 million yuan, an increase of 12.31% over the previous year, and realized net profit attributable to shareholders of listed companies/net profit of deducted from shareholders of non-listed companies of 1.30/116 million yuan, up 0.52%/19.99% from the previous year. The company's net operating cash flow was $17 million, a year-on-year increase of 133.39%. The three major businesses of K12 education, preschool education platforms, and mobile games continued to gain strength, and the company's revenue maintained a relatively rapid growth of 12.31%. During the reporting period, K12 Education achieved revenue of 284 million dollars, accounting for more than 50% of revenue, an increase of 10.39% over the previous year. The company is actively building “Tuowei Academy”, a one-stop learning platform for K12 education. The core content brand Lushan Masterpiece Essay Product charges users quickly. In addition, the company has built an AI brain innovation education platform and launched essay scoring and quality assessment products, which are applied to examinations such as the Secondary School Entrance Examination, English Level 4 and 6, and the National English Proficiency Level Test to further enhance the competitiveness of the learning platform. During the reporting period, the company's preschool education and mobile game businesses achieved revenue of 886/92 million yuan respectively, up 9.46%/15.20% year on year, contributing to stable cash flow. The overall gross margin of the education business has increased, but it is still in the development period. The company focuses on building K12 and preschool education platforms. The increase in the number of platform users has led to a decrease in marginal costs, and continuous platform upgrades have given the company more bargaining power in terms of customer unit prices. The gross margin of the company's education business for the first half year of 2016/2017 was 66.57%/68.29%. It is optimistic that the gross margin of the education business will continue to increase. In terms of expenses for the period, the company expanded its marketing team during the reporting period, with sales expenses of 79 million yuan, an increase of 53.89% over the previous year; employee remuneration expenses of 55 million yuan, an increase of 37.50% over the previous year. As the company's education business gradually matures, the cost rate for the period is expected to decrease. The increase in the company's operating income was greater than the increase in costs and expenses, so net profit continued to rise. The increase in net profit attributable to listed shareholders of 2017H1 company after deduction was 19.99%, far exceeding the prior increase (0.52%). The reason for this is that the non-operating income confirmed during the reporting period was lower than the same period last year. The company's net profit margin after deducting the net profit margin in 2015/2016 was 19.8%/21.0%, and the net profit margin after deducting the net profit margin will continue to increase. Profit forecast and rating: The company's business focus is on “Tuowei Academy (K12 education platform)”, “Cloud Baby (preschool education platform)” and education informatization. The number of registered users and fee-paying users of Tuowei Academy is growing rapidly; Yunbao serves nearly 20,000 kindergartens, and the market is huge; as one of the leading companies in education informatization, Yuntian Technology serves more than 140 local and municipal education bureaus. The market share of college entrance examinations and secondary school entrance examinations market share exceeds 50%/40%, and the examination and evaluation data processing volume exceeds 200 million people. We are optimistic about the expansion of the scale and improvement of operating efficiency of the company's three business segments in the future. The EPS for 17-19 is expected to be 0.26/0.30/0.37, respectively, and the corresponding PE price will be 36/31/26 times, maintaining the “increase in holdings” rating. Risk warning: The expansion of the company's education business falls short of expectations, and competition in the education information industry is incentivized.