Company Overview Lekai New Materials is a leading enterprise in the field of magnetic recording and thermal recording materials in China. It is mainly engaged in R&D, production and sales of new materials such as thermal magnetic tickets and magnetic strips. The company achieved operating income of 119 million yuan in the first half of 2017, a year-on-year decrease of 9.07%; net profit attributable to shareholders of the parent company was 10,000 yuan, a year-on-year decrease of 12.83%. On October 18, the company released its three-quarter report. From January to September 2017, it achieved operating revenue of 100 million yuan, a year-on-year decrease of 4.15%; net profit attributable to shareholders of the parent company was 684.389 million yuan, a year-on-year decrease of 10.61%. The decline was smaller than the semi-annual report. The Q3 quarter achieved revenue of 61.5079 million yuan in a single quarter, an increase of 7.07% year on year; net profit to mother was 22.856 million yuan, a decrease of 5.84% year on year. The gross sales margin was 61.15%, and the net sales margin was 37.88%, a slight decrease from last year, but it is still at the historical average. The company reviews are deeply involved in the R&D and production of thermal magnetic tickets. The market-leading steady development company is the first to engage in and is currently the largest manufacturer of thermal magnetic tickets in China. Thermal magnetic tickets are mostly used in railway tickets, parking lots, commercial retail, etc. Among them, China, Japan, France, Germany and other countries are mainly used for railway tickets. With the rapid development of high-speed rail in China and the increase in the penetration of thermal magnetic tickets, the market size of thermal magnetic tickets is also gradually expanding. The company's thermal magnetic ticket sales have also maintained a growth rate of nearly 10% in the past three years, and production has now reached full capacity. This industry has a high technology industry and is very difficult to develop. Currently, there are few domestic manufacturers engaged in R&D and production of this product, while foreign manufacturers are mainly involved in product distribution and other fields, and competition with the company is low. Furthermore, compared to several technologies such as ordinary paper tickets, IC cards, and RFID, the technical and cost advantages of thermal magnetic tickets make them still dominate in the field of train ticket applications in the future and are not easy to be replaced. The decline in the magnetic stripe business dragged down the company's performance in the first three quarters, mainly due to the impact of the decline in the thermal magnetic ticket and magnetic stripe business. The decline in the thermal magnetic ticket business was mainly due to seasonal effects of customer demand and orders. The decline in the magnetic stripe business was due to the implementation of EMV migration. Demand for magnetic stripes for bank cards declined, and the gross margin of the magnetic stripe business also declined by about 10 percentage points in the 2017 mid-year report. However, the company is still impressive in terms of demand for magnetic strips for non-bank cards in commercial retail, etc., and by expanding the variety and sales of magnetic stripe products in the non-banking industry, the future impact of EMV migration will also be manageable. As a result, we believe that the worst period for the company's performance has passed. The expansion of thermal magnetic ticket production capacity broke through the bottleneck. The prototype company's thermal magnetic ticket was operating at full capacity with the new material layout. Therefore, the company announced the launch of a thermal magnetic ticket production expansion project on February 2017. It is expected to be put into operation by the end of 2018, and production capacity will expand from 2,200 tons/year to 3,200 tons/year. This move will break production capacity bottlenecks to cope with the incremental market brought about by the future development of railway passenger transport. In addition, the company also develops and produces decorative films and electromagnetic wave protective films for FPCs. The former is a film material with surface decoration functions, mainly used in the fields of heat transfer printing and in-mold decoration, such as surface decoration of automobiles, home appliances, mobile phones, computers, cosmetics, etc.; the latter is a functional film material for electromagnetic wave protection of flexible circuit boards, mainly used in mobile phone circuit boards, LCD modules, high-pixel cameras, automotive electronics, game consoles, etc. After years of technology accumulation, the company's electromagnetic wave protective film products were officially exhibited at the 26th China International Electronic Circuit Exhibition in March 2017. Profit forecast and valuation We forecast that the company's revenue for 2017, 2018, and 2019 will be 257 million yuan, 100 million yuan and 339 million yuan respectively, with growth rates of -1.66%, 11.94% and 17.90% respectively; net profit attributable to shareholders of the parent company will be 100 million, 112 million and 130 million yuan respectively, with growth rates of 11.67% and 16.21% respectively; fully diluted EPS per share will be 0.81, 0.91, and yuan, respectively, corresponding to PE 34.9, 31.3, and 26.9 times, in the future The first “gain” rating was given within six months. Risks suggest that the impact of the migration is expanding; the release of new production capacity falls short of expectations; and sales of new products fall short of expectations.