Results for the first quarter of 2017 and 2018 were in line with expectations

Lion Technology announced results: 2017 revenue of 973 million yuan, an increase of 168.26% over the previous year; net profit attributable to it was 80.37 million yuan, an increase of 126.55% over the previous year. Revenue for the first quarter of 2018 was 88.05 million yuan, a year-on-year decrease of 28.32%; net profit attributable to it - 5.56 million yuan, a year-on-year decrease of 246.56%. The company plans to pay a cash dividend of 1 yuan for every 10 shares.

Development trends

Xinjiang security construction led to rapid performance growth in 2017. The company achieved positive net cash flow from operating activities under pressure from system integration projects, while expectations for 2018 were improving.

(1) In 2017, driven by increased security construction in Xinjiang, sales revenue from security system engineering and equipment reached 642/907 million yuan respectively, up 419.43%/136.83%, respectively; the communication network engineering business maintained a stable trend, with revenue reaching 154 million yuan, an increase of 11.50% over the previous year.

(2) Profitability declined slightly due to asset impairment losses. Accounts receivable reached 523 million yuan, an increase of 110.99% over the previous year; losses of bad debts reached 33.55 million yuan, compared to only 19.04 million yuan in 2016.

(3) Despite the year-on-year decline in the company's net cash flow from operating activities, considering the sharp increase in security system integration projects in Xinjiang, the final net cash flow from operating activities was positive (13.13 million yuan) indicating that the company has strong repayment capacity.

(4) In 2018, the company expects to achieve revenue of 1.34 billion yuan, an increase of 37.69% over the previous year. Among them, the video surveillance business continues to maintain a rapid growth trend, and new business formats such as surveillance and maintenance, smart cities, IT operation and maintenance, and the Internet of Things have begun to realize revenue; net profit is predicted to be 110 million yuan.

Profit forecasting

Considering the slowdown in the growth rate of security construction in Xinjiang and the company's transformation to intelligent operation and maintenance services, we lowered the 2018/19e profit forecast by 22.2%/21.4% from 146/192 million yuan to 114/151 million yuan. EPS was 111/1.47 yuan respectively.

Valuation and advice

The company's current stock price corresponds to 29/22 times P/E in 18/19, maintaining the recommended rating, but due to the decline in the valuation of the security sector in Xinjiang, we lowered the target price by 6% from 47.0 yuan to 44.1 yuan, corresponding to 30 times P/E in '19. There is 36% room compared to the current stock price.

risks

The growth rate of security investment in Xinjiang has declined sharply; poor market maintenance has led to a significant decline in contract amounts; costs and expenses have risen rapidly; cash flow from operating activities has continued to deteriorate; market expansion and service content extension have fallen short of expectations; and shareholder bans have been lifted and large-scale holdings have been reduced.