Net profit for the first half of the year increased 303% year on year, in line with expectations Kangqi Co., Ltd. announced its results for the first half of 2017: operating income of 847 million yuan, up 130.3% year on year; net profit attributable to the parent company was 109 million yuan, up 303.3% year on year (+234%), corresponding to earnings of 0.21 yuan per share, which was in the previous forecast range, mainly due to the steady development of the traditional resin lens business, and the increase in government subsidy revenue. On a quarterly basis, Q2/Q1 revenue +136%/+124%, net profit +203%/+504%. Development trend 1. The traditional eyewear business has steady revenue and is driving the revenue side to double. ① Lens business: Benefiting from factors such as product structure optimization and upgrading, brand promotion, and market development, the company's eyewear business performance continued to maintain a steady growth trend, with a year-on-year increase of 11%. ② Bank card value-added business: Achieved revenue of 440 million yuan and good operating conditions, of which Q2/Q1 contributed 2.4 billion yuan in revenue respectively. 2. The combination of flag intelligence accounts for major increases on the profit side. In the first half of the year, Banner Intelligence contributed 78 million yuan to net profit, constituting the main increase on the profit side. Among them, Q2/Q1 was 0.39/40 million yuan respectively. Profitability in the second quarter decreased slightly compared to the first quarter. Additionally, the company received 20.8 million in government grants. After deducting the impact of non-recurring profit and loss and consolidation, the company's traditional business net profit declined in the first half of the year. Overall, due to the high gross margin of Qi Ji Smart, the company's overall gross margin increased by 14ppt to 49%. At the same time, in order to meet the rapid development needs of new businesses, the cost ratio increased by 11ppt to 35% during the period. The company's net interest rate rose 5ppt to 13% in the first half of the year. 3. Actively lay out the blue ocean of financial outsourcing, and the results in the second half of the year are worth looking forward to. Using bank card value-added services as an entry point, Qiji Intelligence is expected to expand its business into fields such as bank consumption installment, marketing outsourcing, and investment and financing platforms. With advantages such as technology (big data research and development), product research and development, channels, and business models, it is expected that it will continue to benefit from the implementation of related financial service policies in the future. In addition, Qiji Intelligence promises that the net profit deducted for 2017/2018 will not be less than 245/345 million yuan. We believe that the first half of the year's performance was lower than expected, so the completion of the second half of the year's results still needs to be observed. 4. “Glasses Brand Service Provider+Financial Outsourcing Service” two-wheel drive opens up room for future growth. The company changed the name of its securities in July, highlighting the joint business layout of the two sectors. The dual main business strategy helps the company diversify operating risks and explore new profit growth points. Earnings Forecast We reduced our 2017 and 2018 earnings forecasts per share by 12% and 9% from RMB 0.62 and RMB 0.82 to RMB 0.54 and $0.75, respectively. Mainly because the performance of Banner Intelligence in the first half of the year fell short of expectations. Valuation and recommendations Currently, the company's stock price corresponds to 34 times P/E in 2017. Considering the profit forecast adjustments, we maintained the recommended rating, but lowered the target price by 8.0% to RMB 23.00, which has 24.8% upside compared to the current stock price. In the future, we need to pay attention to the progress of the Qiji Intelligence business and the fulfillment of profit promises. The risk flag indicates that intelligent performance continues to fall short of expectations; exchange losses; and international market risk.