A major IoT security order has been launched, and it is a journey for Guoshu

On November 1, Shida Group announced that its subsidiary Zhongke Rongtong won the bid for the video surveillance (PPP) project in Kezhou, Xinjiang. The total amount of the bid was about RMB 87 billion, including project construction costs, equipment maintenance and operation costs, etc., and the project cooperation period was 10.5 years. The construction content of the winning project includes BOT+OM, a construction project such as video surveillance and security network platforms in Kerzhou. The project that won the bid this time ranked second among the security projects in Xinjiang, marking that Zhongke Rongtong has entered the leading IoT intelligent security camp.

Kerzhou has a very special geographical location in Xinjiang (see figure below). It is bordered by 6 Central Asian and South Asian countries, Kyrgyzstan, Tajikistan, etc. to the west, and the Kashgar region to the east. The border line is about 1,200 kilometers. It has 254 passageways leading to Waigankou and 2 national-class ports. Border security requirements are very complex. This time, nearly 900 million orders were spent on Zhongke Rongtong, which is proof of the strength of Zhongke Rongtong in the field of IoT border intelligent security. It is also an important step in the implementation of Shida Group's IoT strategy.

The project is an important measure for Kerzhou to handle all kinds of emergencies, crack down on all kinds of terrorist* violence crimes, prevent the occurrence of preventable cases, and maintain social stability. Since the operating period is as long as 10 years, we believe that Zhongke Rongtong will continue to occupy an important market position in Kerzhou's future informatization construction and achieve stable revenue returns.

Third Quarterly Report: Steady Endogenous Growth

Shida Group released its report for the third quarter of 2017. The company achieved revenue of 3.77 billion yuan in the first three quarters, an increase of 66% over the previous year; Guimu's net profit fell 33%, and the year-on-year decline in profit was mainly due to non-recurring profit and loss of 74.88 million yuan in the same period last year (disposal of Loshida's assets). Judging from a non-deducted perspective, non-net profit was 66.68 million yuan, an increase of 54% over the previous year. The main reason for the increase in performance was the different scope of consolidation of corresponding financial statements. Shenzhen Xingfei was merged into the scope of merger of listed companies in May 2016; we estimate that the company's comparable endogenous growth rate is actually between 10-15%.

China Airlines plans adjusted to focus on the main business

The company changed its original plan to acquire 100% of Xuhang Network's shares in cash. The company no longer buys 100% of Xuhang Network's shares, but instead transferred 4% of Xuhang Network's shares held by Zhoushan Youtai. The corresponding share transfer amount was 29.4 million yuan. The reason for the change is that China Southern Airlines Network may do an independent IPO. We believe that although Xuhang Network's plan has put downward pressure on the company's performance over the past two years, it has made the company's strategic goals more focused on the mobile IoT strategy, and has also reduced the company's cash pressure.

Continued optimism about the implementation of the Sino-US border security strategy

In 017, China Science and Technology Rongtong strengthened overall border control planning and construction, actively participated in government PPP projects; and promoted intrusion prevention pilot construction and smart city construction in the energy, public security and other industries with partners. In terms of new products, projects such as low altitude defense and lightning integrated perimeter intrusion prevention continue to advance, and new products such as perimeter security radar and perimeter intrusion detection and warning have been put into use. We believe that as the country continues to advance its “smart frontier” strategy, the performance of China Science and Technology Rongtong from 2017 to 2019 will show explosive growth.

Profit forecasting and valuation

We forecast that the company will achieve net profit of 25/340 million in 2017-18, and the corresponding dynamic PE is 29/21x. Based on the high level of prosperity in the border security industry and the company's good commercialization capabilities, the purchase rating was maintained.

Risk warning: Industry sentiment is falling short of expectations.