Company News The company released its 2017 annual report, achieving full-year revenue of 1,137 billion yuan, an increase of 8.27% over the previous year; and realized attributable net profit of 190 million yuan, an increase of 4.21% over the previous year. The company plans to pay 0.43 yuan (tax included) for every 10 shares. Incidental comment The revenue of preschool education continued to grow rapidly. The total number of schools was nearly 5,000. In 2017, the company's preschool education business achieved revenue of 479 million yuan, an increase of 21.31% over the previous year, and a gross profit margin of 57.88% (-0.08pct). The VW business achieved revenue of 658 million yuan, a slight increase of 0.41% over the previous year, and a gross profit margin of 51.92% (-2.24pct). The share of revenue from the preschool education business increased by 4.53pct to 42.11%. At the end of the deadline, the company's preschool education brands had a total of nearly 5,000 franchise parks, making it the company with the largest number of parks in the industry. Among them, trusteeship parks are concentrated in Tier 1 and 2 cities represented by Beijing. Overall, they are positioned at the middle and high-end, and have strong geographical location advantages and brand influence. During the reporting period, the company's management expense ratio increased by 3.99pct to 26.75%, mainly due to the payment of 50.15 million yuan in rewards for fulfilling Hongying's education performance promises. Excluding the impact of incentives, the management fee rate was about 22.34%, which is basically the same as last year; the sales expenses rate fell 3.18 pct to 12.44%, mainly due to a decrease in employee remuneration and engineering installation service fees, and the company's overall cost rate remained stable. Hongying Education's strategic transformation and exploring the “new hongying” of “trusteeship”. In 2017, Hongying Education's annual revenue was 262 million yuan, a year-on-year decrease of 8.49%; it achieved net profit of 75.71 million yuan, a year-on-year decrease of 26.05%, and fulfilled its annual performance commitment of 53 million yuan. By the end of 2017, Hongying Education had a total of 6 kindergartens, 1,349 brand franchise schools (including 475 flagship schools), and 3039 Youjiuyuan. (1) Service revenue was 62.4 million yuan, a year-on-year decrease of 36.08%, mainly due to the strategic transformation of Hongying's education. The focus is on going from volume to price, actively eliminating some less-connected franchise parks and low-end gardens, slowing down long-standing agent development, and launching the “New Hongying” project based on “managed franchise” to increase the depth of service to the park, thus achieving an increase in the value of single gardens, which is expected to become a new growth point in the future. (2) Product sales revenue was 199 million yuan, up 5.83% year on year, mainly due to a sharp increase in the number of Yujiuyuan, and the customer unit price increased 6.06% year over year to 17,500 yuan. The volume and price of Golden Cradle rose sharply, driving rapid performance growth. In 2017, Golden Cradle's annual revenue was 198 million yuan, an increase of 81.69% over the previous year; it achieved net profit of 107 million yuan, an increase of 76.78% over the previous year, and fulfilled its annual performance commitment of 66.3 million yuan. By the end of 2017, Golden Cradle had 20 trusteeship parks, 534 franchise parks, 2 trusteeship elementary schools, 3 branded elementary schools, 1 trusteeship early education center, 122 early education service centers, and 280 Antescu schools. (1) Service revenue was 169 million yuan, a significant increase of 80.72% year on year. Among them, hosting franchise revenue increased 55.74% year over year to 66.86 million yuan, mainly due to the increase in the full rate of trusteeship parks and additional teacher training revenue; brand franchise revenue increased 70.11% year over year to 6.54 million yuan, mainly due to an increase in the number of franchise parks and a 40% increase in customer unit prices to 350,000 yuan; and early education achieved revenue of 6.04 million yuan. (2) Product sales revenue was 29.42 million yuan, up 87.46% year on year, of which franchise park sales revenue was 21.17 million yuan, up 66.47% year on year. In March 2017, Golden Cradle launched Antescu, a project connecting young children. It opened 280 companies throughout the year, achieving service revenue of 29.02 million yuan and additional product sales revenue of 7.15 million yuan. With the acquisition of Kerr Education and Dingqi Preschool Education, the offline layout continued to expand during the reporting period, the company acquired 70% of Kerr Education's shares for 385 million yuan to lay out middle and high-end kindergartens in the Beijing region. On October 30, 2017, Keri Education began merging with revenue of 13.81 million yuan, consolidated net profit of 10.89 million yuan, and annual net profit of 42.33 million yuan, fulfilling the annual performance commitment of 38.46 million yuan. At the same time, the company acquired 70% of Dingqi Preschool Education's shares for 106 million yuan to expand the Inner Mongolia region. Dingqi Preschool Education began merging on November 1, 2017, contributing 5.25 million yuan in revenue and 3.3 million yuan in net profit. Dingqi Preschool Education promised that the total profit after deduction in 2018-2020 would not be less than 1,400/14800/2016 million yuan, respectively. The investment proposal takes into account the strategic transformation of Hongying Education and Ker Education and Dingqi Preschool Education for the full year of 2018. We adjusted the 2018-2019 profit forecast and added the 2020 profit forecast. The estimated net profit attributable to the company in 2018-2020 is 2.89/3.59/434 million yuan, 0.32/0.39/0.48 yuan for EPS, and 30/24/20 times for PE (calculated at the 2018/4/17 closing price of 9.37 yuan/share). The company is a leader in preschool education in the country. It has four major brands: Hongying Education (kindergarten membership in third- and fourth-tier cities), Golden Cradle (middle and high-end parks in Tier 1 and 2 cities), Ker Education (Beijing Middle and High School), and Dingqi Preschool Education (leading preschool education in Inner Mongolia). In the future, it will increase the value of a single park by promoting managed franchise services, and will invest an additional 918 million yuan in the construction of children's arts and sports training centers. At the same time, it has established cooperative relationships with kindergarten teacher pockets, smart arts, and reading books, etc., and the preschool education industry ecosystem is getting richer. Maintain the “Overweight” rating. Risks indicate policy risks, increased market competition risks, kindergarten operation and management risks, acquisition and integration risks, etc.