Matters: Company announcement: On April 16, 2018, the company announced its 2017 annual report. During the reporting period, the company achieved revenue of 1,137 billion yuan, an increase of 8.27% over the previous year; realized net profit attributable to shareholders of listed companies of 190 million yuan, an increase of 4.21% over the previous year. Our comments on this are as follows: Comments: The preschool education business is growing steadily, the DLP business is running smoothly, and the profit performance is lower than expected due to incentive reward payments. By business, the company's preschool education business achieved revenue of 479 million yuan, an increase of 21.31% over the previous year, and gross profit remained stable; the company's DLP large screen business achieved revenue of 658 million yuan, an increase of 0.41% over the previous year, and gross profit fell 2.24 percentage points; during the same period, the company confirmed that the performance of the Hongying subsidiary was 50 million yuan in gambling rewards. Overall, the company's profit in 2017 fell short of expectations due to the impact of performance on gambling rewards and the slowdown in overall business scale growth. The preschool education business has gradually entered a period of adjustment. Hongying is focusing on product development, and cradle is expanding in scale. By the end of 2017, the company formed an offline operating entity with Hongying, Cradle, Kerr, and Dingqi Preschool Education. The company has a total of 6 kindergartens chain, 50 managed kindergartens, 4 cooperative kindergartens, 4,922 affiliated kindergartens, covering 83 special courses, 280 Antescu franchises, 2 trusteeship primary schools, 3 branded primary schools, 1 directly-managed early education institution, and 122 early childhood education institutions. Judging from the profit growth rate of core brands, Hongying achieved a profit of 76 million yuan in 2017, a year-on-year decline of nearly 26%, but still surpassed the corresponding year's bet of 22 million yuan; the cradle achieved profit of 107 million yuan, an increase of 78% over the previous year. We judge that in 2018, Hongying will further slow down the growth rate of the number of parks and focus on product sales, which account for more than 70%; the cradle will continue to expand high-end brands and hosting services, and maintain the national expansion trend on the basis of coverage in 26 provinces and cities. Steadily advance the M&A strategy and focus on the company's internal and external growth. The company completed the implementation of the 942 million additional issuance plan in 2017, and currently has more than 1.1 billion yuan in cash on hand. We judge that in 2018, the company will continue its strategy of deep cultivation of endogenesis and steady outreach. For the endogenous business segment, on the basis of the steady operation of the DLP business, the preschool education business as a whole is expected to continue to achieve profit growth of more than 25% in 2018-19; for the external sector, in the medium term, the company is expected to use 900 million dollars in fundraising capital plus various debt instruments to accelerate mergers and acquisitions integration. In 2018, it is expected that this part of the business will increase by about 0.8 billion yuan. In the medium term, this part of the business is expected to maintain growth of about 15-20%. Risk factors: the risk of scaling up the business model; the risk that the content output falls short of expectations; the risk that the teacher team and management team cannot follow up with expectations; the risk of unfavorable mergers and acquisitions integration. Earnings forecasts, valuations and investment ratings. We are optimistic about the company's business upgrade path and rising competitive barriers under extended cooperation. Considering the company's one-time fee treatment for excessive performance and gambling subsidiaries, the company is likely to implement the same reward for the cradle in 2018 (expected reward size of 0.4-50 million). Also, considering the slowdown in the growth rate of the preschool education business and the impact of the price limit policy, we lowered the company's 2018-19 EPS forecast to 0.28/0.42 yuan (original forecast: 0.41/0.46 yuan), adding 0.47 yuan to the 2020 profit forecast, corresponding to PE 34/23/21X. Downgraded to “Overweight” rating.