Incidents:

The company recently released its 2018 semi-annual report. In the first half of 2018, the company achieved operating income of 156 million yuan, an increase of 36.94% over the previous year; achieved net profit of 39 million yuan, an increase of 50.29% over the previous year; and realized net profit of 34 million yuan after deducting non-return mother's net profit, an increase of 34.38% over the previous year. Among them, Q2 achieved operating income of 94 million, an increase of 44.11%; net profit returned to the mother was 102 million, an increase of 40.28% over the same period.

Opinions:

1. Abundant orders drive performance growth as expected, and will continue to benefit from Greater Bay Area construction, consumption upgrades and infrastructure recovery in the future

The increase in performance was generally in line with expectations. In the first half of 2018, the company achieved revenue of 156 million yuan, YOY +36.94%, net profit of 39 million yuan, YOY +50.29%, not 34 million, YOY +34.38%. The increase in performance was due to the expansion of business scale and the increase in contract volume;

There was a sharp increase in new orders in the second quarter, and there are currently plenty of orders on hand. There was a significant increase of 41% year-on-year and 103% month-on-month growth in the second quarter. By the end of the reporting period, the number of signed and uncompleted orders in hand was 996 million, corresponding to 3.9 times the revenue for the full year of 2017 and 6.3 times 2018 H1 revenue. Abundant orders on hand will fully guarantee the company's future performance growth;

Leading enterprises in the industry will fully benefit from construction, consumption upgrades and infrastructure recovery in the Greater Bay Area in the future. The company is a well-known architectural interior design enterprise. It has special grade A qualifications for architectural decoration engineering design, and has built benchmark projects such as Shanghai Ruibo Lujiazui Financial Center, and subway station projects such as Suzhou Line 2/4 and Qingdao Line 2. It has been named “China's Most Influential Design Team” by various agencies 13 times in 9 consecutive years, and was selected as “China's Most Influential Interior Design Agency of 2014-2015” by the Interior Design Branch of the Chinese Society of Architects and selected as “2016 China's Top 10 Interior Design Institutions” by the China Interior Decoration Association. Looking at the business area, it is expected that the future will benefit from the construction of the Guangdong-Hong Kong-Macao Greater Bay Area. The company is located in Shenzhen, and its South China business share has remained at over 40%, ranking first in the region. It has built many important projects such as the Shenzhen Galaxy Era, the Shenzhen Ping An Financial Center, and the Shenzhen 1/5/7/11 Line. It is expected to take the lead in benefiting from the construction of the Greater Bay Area with its advantages of deep cultivation within the region. Looking at the business sector, it is expected that the future will benefit from consumption upgrades and infrastructure recovery. The company's business covers commercial, hotel, office, rail transit and emerging health care fields. The revenue of the four traditional segments increased 15%/98%/39%/17% respectively in the first half of the year, and will continue to benefit from public consumption upgrades in the future. At the same time, after the Politburo meeting set the tone for a recovery in infrastructure investment in the second half of the year, the NDRC recently accelerated approval of subway projects and approved four Suzhou lines and Shaoxing Line 1, totaling 118.8 billion projects. The company previously undertook Suzhou Line 2/4 station projects one after another, and is expected to reverse orders in the first half of the year with project advantages. Revenue growth rate in the subway sector compared to 17 years The growth rate declined throughout the year.

2. Profit levels have increased, and operating cash outflows have increased

Gross margin increased steadily, and the expansion of business scale led to an increase in the period rate. The company's interior design industry has individualized and differentiated characteristics, and gross margin is at a high level in the field of design segmentation. During the reporting period, the gross margin of the company's commercial/office/hotel interior design business increased by 0.4 pct/3.8 pct /5 pct respectively. The overall gross margin was 52.9%, up 1.3 pcts from 2017 H1/2017 respectively. The sales/management/finance rates were 5.3%/18.9%/-0.06%, respectively, with year-on-year changes of 0.1 /4.4 pct/-0.6 pct respectively. It was determined that the main factors were the expansion of the business scale, the increase in the volume of business orders, and the company's interest expenses without loans during the reporting period. The total period rate was 24.27%, up 3.9/4.2 pct from the full year of 2017 H1/2017, respectively.

Lower tax rates and increased investment income have led to a significant increase in overall profit levels. The income tax rate was 15.6%, down 9.1 pct from the previous year. The company obtained the “High-tech Enterprise Certificate” at the end of 2017 to enjoy the relevant preferential tax policies and paid corporate income tax at a rate of 15%. Net investment income during the reporting period was 2.6 million, an increase of 260/2.9 million respectively over 2017 H1/2017. The net profit margin was 25.08%, an increase of 2.2/0.2 pct respectively over 2017 H1/2017, a significant increase over the previous year.

Revenue from the expansion of business scale has now declined quarterly, the payout ratio has increased, and operating cash outflow has increased: during the reporting period, pay-as-you-go project costs increased simultaneously after the expansion of the company's business scale, but there was a certain lag in the collection point as agreed in the design contract. As a result, the company's payout ratio was 74.8%, down 9.5 pcts/12 pcts from 2017 H1/2017/2018H1. The past 4 quarters showed a quarterly downward trend. At the same time, the payout ratio was 39.7%, a change of 9.9/, respectively, from the 2011/2017/2018H1. 1.5 pct/-28 pcts, up year on year. Q2 improved from Q1. Net operating cash flow of -6.5 m increased from -2.3 m in the same period last year. Furthermore, net fundraising cash flow of -0.6 billion increased compared to the same period last year of 190 million dollars. This is due to the company's implementation of the 2017 annual equity allocation plan to distribute cash dividends to shareholders during the reporting period; net investment cash flow of 120 million yuan increased compared to -1.2m inflow of the same period last year, mainly due to the use of the company's idle capital to purchase wealth management products during the reporting period.

3. Improving the operation and management of the project system internally and completing the shareholding plan will fully unleash the vitality of performance and accumulate customer resources externally to consolidate the leading edge of the industry

The project-based operation management system has helped release production capacity. It has now matured and successfully exported to the industry. The company has vigorously implemented organizational changes in recent years. It has initially established a project-based operation management system with a project management core and a self-developed enterprise operation management platform (ERP) as the operating carrier to release production capacity and speed up the design progress. At present, the company's ERP system R&D results have initially matured and have good practical operability. At the same time, the company has exported ERP system platforms to some enterprises in the industry.

The completion of the shareholding incentive plan will fully unleash the performance vitality of design companies. The company announced in 2018.1 that the stock option incentive plan was granted and completed registration. The incentive targets were 3 deputy general managers, middle and senior management personnel of the company and its subsidiaries, and core technology (business) cadres (61 people), for a total of 64 people, accounting for 3% of the total share capital at the time of the announcement;

Customer resources have been accumulated and abundant, consolidating the leading edge of the industry. Architectural interior design projects have the characteristics of brand accumulation. The more projects completed in a certain segment, the more obvious the advantage of customer resource accumulation in this field. With outstanding design capabilities and strong brand advantages, the company has good cooperative relationships with well-known domestic real estate developers such as Huarun, Wanke, Poly, Longhu and Xinghe, as well as urban rail transit constructors and operators such as Shenzhen Metro Group Co., Ltd., Suzhou Rail Transit Group Co., Ltd., and has accumulated strong market influence in the field of building interior design services such as commercial buildings, hotel buildings, office buildings, rail transit buildings, etc. At the same time, the company is actively expanding the market business service radius of municipal companies. It has successively set up branches in Shenzhen, Hong Kong, Beijing, Dalian, Shanghai and Wuhan. The project footprint has spread across nearly 100 large and medium-sized cities across the country, forming a customer resource network initially covering the whole country.

Conclusions:

The 37%/50% increase in the company's revenue/return during the reporting period was basically in line with expectations. Gross margin increased steadily, tax rates declined, and investment income. Although interest rates increased during the period, the overall profit level increased significantly. The expansion of the scale of the business has led to a quarterly decline in revenue, an increase in the payout ratio, and an increase in operating cash outflows.

The company's new orders suddenly picked up in the second quarter, and there are plenty of orders currently on hand. Improving internal project operation management and completing shareholding plans will fully unleash the vitality of performance, and the accumulation of external customer resources will consolidate the leading edge of the industry. It is expected that the future will fully benefit from construction, consumption upgrades and infrastructure recovery in the Greater Bay Area.

The company's revenue from 2018 to 2020 is estimated to be 346 million yuan, 461 million yuan and 594 million yuan respectively; earnings per share are 0.88 yuan, 1.09 yuan and 1.3 yuan respectively. The corresponding PE is 22.3X, 17.8X and 15X respectively. The corresponding PE is 22.3X, 17.8X and 15X respectively. It is covered for the first time and given a “recommended” rating.

Risk warning: macroeconomic fluctuation risk, real estate regulation risk, market development risk