1. Event Overview Recently, Lekai New Materials released its 2017 mid-year report: revenue was 11.1513 million yuan, down 9.07% year on year, net profit attributable to listed shareholders was 455.829 million yuan, down 12.83% year on year, net profit attributable to shareholders of listed companies was 43.73554 million yuan, down 12.75% year on year, basic earnings per share of 0.3712 yuan, and earnings per share after deductions of 0.3,562 yuan. 2. Analysis and judgment The interim report performance is slightly lower than expected. Demand from major customers will recover in the second half of the year 1. (1) The company stated in its 2017 semi-annual performance forecast that net profit attributable to shareholders of listed companies was 4706.26-52.2918 million yuan, down 0% to 10% from the previous year. Actual performance was slightly lower than forecast. (2) The gross margin for the first half of the year was 60.94%, down 1.66 percentage points from the previous year. The two main business segments: thermal magnetic ticket\ magnetic stripe revenue decreased by 6.23% and 20.75% respectively, the revenue share was 76.75% and 16.18%, respectively, and the gross margin was 67.47% and 42.31%, respectively, changing 0.05 and -10.29 percentage points respectively; (3) The cost ratio for the period was 16.49%, up 1.29 percentage points from the previous year, of which the sales expense rate/management expense rate/financial expense ratio was 4.12%/ 13.09%/-0.72%, down 0.04 percentage points, up 1.07 percentage points, and up 0.26 percentage points, respectively. 2. The company's second-quarter revenue was 5001.93 yuan, down 20.58% year on year; comprehensive gross margin was 61.12%, down 1.17 percentage points year on year, period expense ratio was 25.72%, up 6.15 percentage points year on year, and mid-term sales expense rate/management expense rate/financial expense ratio were 7.79%/18.97%/-1.04% respectively, up 1.29/4.36/0.50 percentage points respectively. 3. The main reasons for the decline in performance: 1) Thermal magnetic tickets were affected by seasonal changes in customer demand and orders, and sales declined slightly; 2) Demand for bank card magnetic stripes declined due to the implementation of EMV migration. 4. We believe that as the first thermal magnetic ticket manufacturer in China, the company is also currently the largest thermal magnetic ticket manufacturer in China. In the future, with the expansion of railway scale, the increase in railway passenger traffic, and the increase in the proportion of automatic ticket inspection, the penetration rate of thermal magnetic train tickets is expected to increase further, and it is expected that the company's thermal magnetic ticket products will resume growth. Looking at the short term, the second quarter is a low season for high-speed rail passenger traffic. The second half of the year has factors such as summer vacation, school start, Mid-Autumn Festival, and National Day. In addition, the country's rainy weather in the third quarter was higher than in previous years. Demand for high-speed rail passenger transportation will increase significantly compared to the first half of the year, and the company's thermal magnetic ticket shipments are expected to increase month-on-month. Reiterate views: Production line expansion solves production capacity bottlenecks, lays out new material development, and is optimistic about the company's future prospects 1. The company's main business, thermal magnetic tickets, reached 110% in 2016. In February 2017, the company launched the “Thermal Magnetic Ticket Production Line Expansion Project”, which is expected to be completed on December 31, 2018. Production capacity is expected to increase from 2,200 tons to 32,000 tons, an increase of 45.5%. At the same time, the company has invested heavily in research and development to actively expand the development of products such as decorative films, electromagnetic wave protective films for FPCs, and magnetic water treatment resins. 2. According to the “Medium- and Long-Term Railway Development Plan”, by 2025, the operating mileage of domestic railways will reach 175,000 kilometers, of which 38,000 kilometers of high-speed rail will reach 38,000 kilometers; by 2030, the scale of national railways will reach 200,000 kilometers, of which the scale of high-speed rail will reach 45,000 kilometers. 3. We believe that with the increase in the share of high-speed rail passenger traffic and the increase in orders, the new thermal magnetic ticket production capacity will lay the foundation for continued growth in performance. The expansion and extension of new products will open up new growth points for the company. 3. The profit forecasting and investment advice company is a leading enterprise in the domestic thermal magnetic paper and magnetic stripe industry. It is estimated that the company's EPS from 2017 to 2019 will be 1.01 yuan, 1.16 yuan, and 1.31 yuan respectively. Based on the company's industry position, the company will be given 35 to 40 times PE in 2017, with a reasonable valuation of 35.35 to 40.40 yuan for the next 6 months, maintaining the company's “highly recommended” rating. 4. Risk warning: 1. Decline in product prices; 2. Changes in railway ticket policies; 3. New product development falls short of expectations.