Event: Tianzhou Culture released its 2018 semi-annual report, the company achieved operating income of about 400 million in the first half of the year, an increase of 11.66% over the same period last year, and a net profit of 136 million, an increase of 24.05% over the same period last year. After deducting non-recurring profit and loss, the company achieved net profit of 80.34 million, down 22% from the same period last year. The reason for the big difference between net profit and deducted non-net profit is that the equity purchased in the previous period received a fair value premium, which contributed 51 million of the profit.

The game business as a whole is stable. In the first half of the year, the company's game business achieved operating revenue of 294 million, a significant increase from 234 million in the same period in 2017. however, the gross profit margin of the game business in the first half of 2018 was 48.41%. As a result of the expansion of the game intermodal transport scale and the decline in the overall growth rate of the game industry, the company's gross profit margin has dropped significantly compared with 77% in the same period in 2017. Specifically, the company operated 58 games in the first half of the year, among which self-developed works such as "forgetting Immortals", "Crouching Tiger, Hidden Dragon 2", "the rise of the Qin Empire" and "OL" have won good market reputation and good running water. In the second half of the year, the company's reserve projects include "draw Sword Youth", "Front High Energy H5", "strife in troubled Times", "Kings of the three Kingdoms" and other projects are expected to be launched, which will further promote the growth of the company's scale. On the other hand, the company has successively invested in Hainan Adventure and 49 Tour to further supplement all aspects of the game industry and expand the game business territory.

New progress has been made in educational exploration. Tianzhou Culture is gradually promoting the transformation from traditional business to modern education business. in the first half of this year, the company's Tianzhou founder has signed agreements with nearly 10 primary and secondary schools in the province to provide modern digital education services; on the other hand, the company began to stack "soft services" in the traditional education publishing business, including the launch of personalized services such as micro-courses and online tutoring. In the field of travel and study, the company cooperates deeply with a series of domestic and international dozens of units, such as Peking University, Toronto Public Education Bureau of Canada, Harvard University of the United States, etc., to establish a research and tourism base, carry out a number of research and tourism routes and put into operation.

Profit forecast and investment advice. It is estimated that the EPS of Tianzhou Culture from 2018 to 2020 is 0.24,0.25,0.28 yuan respectively, and the corresponding PE is 19 times, 18 times and 16 times respectively. Considering that the games the company has stored in the second half of the year are expected to be online, and the information-based education products are also expected to make a breakthrough in the future and rapidly increase the gross profit margin of the business, it will be covered for the first time and given an "overweight" rating.

Risk hint: the risk that the game approval progress is not as expected; the risk that the paper price will rise further rapidly; the risk that the company's game project schedule is not as expected.