Incidents:

The company issued an announcement on April 4:

1) The company signed a “Supplementary Agreement” with the Youth Film Studio and the Jiangsu Zhangjiagang Free Trade Zone Management Committee based on the “Cooperation Framework Agreement” signed between the Zhangjiagang People's Government and the Beijing Film Academy. The cooperation includes the joint construction of the “Beijing Film Academy Youth Film Talent Training Base” and the “Beijing Film Academy Industry-University-Research Creation Practice Base” and the “Beijing Film Academy Film and Television Culture Town”.

“Zhangjiagang” (tentative name) special film and television cultural industry projects, joint construction of the “Youth Film Studio Film and Television Production Center”, and the joint organization of film festival forum activities around the integration of film academy resources;

2) The company expects to achieve net profit of 20.9 million to 22.7 million yuan in the first quarter of 2018, an increase of 130%-150% over the previous year. It is expected to achieve net profit of 17.92 million to 19.72 million yuan after deduction, an increase of 245%-280% over the previous year.

Commentary:

1. Jointly establish a talent training model integrating industry and education to achieve educational cooperation that combines social value and commercial value. The first project of this collaboration focuses on the field of culture and education, and cultivates film and television talents through joint construction of talent training bases and creative practice bases. The film and television industry is highly practical and has outstanding vocational education attributes. The “Modern Vocational Education System Construction Plan (2014-2020)” clearly lists the cultural industry represented by film and television production as a key talent training area. This collaboration is a strong alliance of top teaching and industrial resources in the industry. It will establish a classic model for integrating industry and education in the film and television field, in line with the direction of policy support, and is also expected to become a first-class domestic film and television talent training platform, highlighting social value. At the same time, the smooth operation of the base will provide the company with an important talent reserve, and local governments also promise full support in terms of land, subsidies, etc., so whether at the level of project operation or business strategy, it has important strategic and commercial value for the company.

2. The company's high volume and price have risen sharply, and it is expected to become a first-tier production company, and its performance stability will increase markedly. The sharp increase in the company's first-quarter performance was mainly due to the second round of “A Beautiful Life” and the first round release of “Love You Heal Me”, which contributed to a sharp increase in the company's first-quarter performance over the same period last year. At the same time, after three years of accumulation and planning, the company is preparing sufficient and subsequent reserve projects. Performance stability has increased markedly, breaking the seasonal shackles of the project system. It is expected that in the second quarter, there will be confirmed revenue from projects such as “Operation Red Sea”, “Grandma's Dumpling Restaurant”, and “Police Flower and Police Dog 2”. We expect the company's semi-annual report performance to increase significantly. The first broadcast ratings of “A Beautiful Life” broke 1 on Oriental TV and Beijing TV in March 2018. It maintained the first and second ratings for TV during the same period, and received a good reputation. It became the star of the ratings of the first year of 2018, fully validating the company's strong ability to produce quality dramas. In addition, Wu Yi, the chairman of Tianyi Film and Television, a subsidiary of Lugang Culture, was one of Huayi's top three gold medal producers. She was the producer of “Soldier Assault” (2007 ratings champion, highest rating of 9%, average rating of 7%, pioneering a new era of domestic military series), “My Team Leader, My Group” (the highest rating was over 2%, the average rating was close to 2%), and “Wang Dahua's Revolutionary Life” (the highest rating was over 2%), and had strong experience in producing quality dramas. Tianyi had strong experience in producing quality dramas. It has many high-quality producers, directors, and screenwriters to ensure that the company has strong dramas Production ability to continuously create quality series. The company expects to launch premium series such as “One Step to Heaven” and “Decisive Court” in 2018, and is expected to launch the blockbuster drama “Cao Cao” in 2019 (estimated cost of a single episode is 10 million yuan, the price of a single episode exceeds 20 million yuan), “Dear Dad”, “Thunder Rose”, etc., based on the company's outstanding ability to produce premium series, the continuous rise in the copyright price of series driven by fierce competition on video sites, and the diversification of premium content monetization models. The above projects are expected to help the company's TV drama business performance continue to grow rapidly.

3. “Operation Red Sea” validates the company's outstanding film investment and production capabilities, and the film business is expected to drive rapid growth in performance. According to Yien.com data, “Operation Red Sea” has a cumulative box office of 3.608 billion, making it the second-highest grossing film in the country after “Wolf Warrior 2” (5.678 billion). Previously, Century Changlong, a subsidiary of Lukang culture, participated in “Journey to the West: Return to the West” (with a box office of 956 million dollars, 10th in the box office of historical domestic animated films) and “Tomb Raider Notes” (with a box office of 1,004 million dollars, No. 8 in the national box office in 2016), which fully reflects the company's highest grossing movies Strong film investment, production and distribution capabilities. “Operation Red Sea” accounts for 10% of Lugang's cultural investment, and is directly invested by the company headquarters. It is the fourth largest investor. Excluding box office split and promotion expenses, it is expected to bring the company more than 90 million yuan in revenue in 2018. Moreover, in 2018, the company will continue to invest or distribute many movies such as “Guide to Europe”, “The Player Behind the Scenes”, and “A Good Drama”. The film business is surprisingly well-regulated and is expected to grow beyond expectations.

4. Lay out the field of online dramas to create new growth points for performance. Lugang Internet, a subsidiary of the company, participated in projects such as the TV drama “Aurora Love” in 2017, contributing to the company's profits. Projects such as the boutique web drama “Touching the Money” (36 episodes, with an investment cost of nearly 200 million yuan) and “The Nineteen Games” are expected to be launched one after another in 2018 and 2019 to help the company further lay out the field of online drama and create new growth points for its performance.

Investment suggestions: Through cooperation, the company will jointly build a film and television talent training base, which is in line with policy support and will enrich its own talent pool; the company's outstanding film and TV series investment, production and distribution capabilities are continuously verified, and the company's future high-quality reserve projects are abundant. “Cao Cao” and other major dramas push the company's industry position to the next level; at the same time, the company's film and television investment team has risen to the next level, which is expected to boost the company's industry influence and rapid performance growth; Wu Yi, chairman of Tianyi Film and Television, has increased the company's shares by 4.89% through centralized bidding transactions in the secondary market, and will continue according to the plan The increase in holdings, which are deeply tied to the company, shows determination to drive the company's performance growth and is beneficial to the company's second-level market performance. Furthermore, the company's textile business is steadily rising, and downstream big brand customers such as Zara and Uniqlo are continuously expanding, which will provide the company with good cash flow and financial support. We expect the company to achieve net profit of 250 million to 350 million yuan in 2017 and 2018, with corresponding earnings per share of 0.28 yuan and 0.39 yuan respectively. Refer to similar comparable companies that gave a 30X valuation for 2017 EPS, corresponding to a six-month target price of 8.40 yuan, and gave a “buy-A” rating.

Risk warning: The risk that the progress of the company's TV series project is lower than expected, and the box office of the company's film project is lower than expected.