Company News The company released the 2018 Q1 quarterly report. Q1 achieved revenue of 216 million yuan, an increase of 20.02% over the previous year; imputed net profit of 30.95 million yuan, an increase of 15.21% over the previous year; and deducted non-attributable net profit of 28.83 million yuan, an increase of 41.30% over the previous year. The matter reviews the increase in the quarterly revenue growth rate. The share of Q1 revenue after deducting rapid growth in performance in Q1 is generally low throughout the year. The annual share of Q1 revenue in 2015-2017 was 13.70%, 18.28%, and 15.83%, respectively. In 2018 Q1, the company achieved revenue of 216 million yuan, an increase of 20.02% over the previous year, and the revenue growth rate increased for three consecutive quarters. Q1 gross margin was 54.58%, down 1.83pct from the same period last year; current sales, management, and finance expense ratios were 13.01% (-2.28pct), 28.39% (-2.45pct), and 0.62% (+0.49pct), respectively, and cost control was effective. The company's performance maintained steady growth. Q1 achieved imputed net profit of 30.95 million yuan, an increase of 15.21% over the previous year, and an imputed net interest rate of 14.32% (-0.60 pct); after deducting non-attributable net profit of 28.83 million yuan, an increase of 41.30% over the previous year. The company is steadily developing the ultra-high resolution digital splicing wall system business, while actively promoting preschool education business. It enhances the profitability of preschool education business by building the service capabilities of education platforms, increasing the management depth of entry into the park, building a C-end product and sales channel system, investing in incubating children's industry ecosystem companies, and continuing to invest in mergers and acquisitions to increase the number of service parks. The company expects net profit attributable to 2018 H1 to be 93.38 million yuan to 124.51 million yuan, with a year-on-year growth rate of -10% to 20%. 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 6 kindergarten chains, 1,349 brand franchise schools (including 475 flagship schools), and 3,039 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 primary schools, 3 brand-franchise elementary schools, 1 trusteeship early education school, 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 bridging project for young children, and 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 high-end kindergartens in the Beijing region. On October 30, 2017, Keri Education began a consolidated list, contributing 13.81 million yuan in revenue, 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 deductions in 2018-2020 will not be less than 1,400/14800/2016 million yuan, respectively. The investment proposal maintains the profit forecast. It is estimated that the net profit attributable to the company in 2018-2020 will be 2.89/3.59/434 million yuan, 0.32/0.39/0.48 yuan for EPS, and 29/23/19 times for PE (calculated at the 2018/5/2 closing price of 9.03 yuan/share). The company is the 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 (Inner Mongolia's leading preschool education). 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.