Core opinion events: On the evening of April 17, 2019, the company released its 2018 annual report. It achieved annual revenue of 765 million yuan, an increase of 34.31% over the same period of the previous year; realized net profit attributable to shareholders of listed companies of 140 million yuan, an increase of 26.12% year on year; net profit attributable to shareholders of listed companies after deducting non-recurring profit and loss was 130 million yuan, an increase of 22.73% year on year. Investment advice: The company's main business currently focuses on the three fields of financial IoT, smart justice, and public safety. The company first started with financial IoT, and currently has more than 1,000 bank network monitoring centers; in terms of public safety, the company expands public safety business boundaries and targets high-quality orders, and the scale of business will continue to achieve high growth; in the field of smart justice, the smart social, prison, and drug rehabilitation markets will reach an inflection point, and the delay in implementation will not change the trend of intelligent upgrading. Runan Technology, the holding subsidiary of the company, as a nationwide provider of smart justice solutions, has significant business development advantages in terms of accumulation of technology, products, and market development. Get Expectations. Currently, the “smart justice+public safety” business has entered a period of explosion, and the company has launched benchmark projects in various fields. Future demonstration effects will gradually become apparent, driving the company's long-term performance growth. The company is expected to achieve operating income of 1,062 billion yuan, 1,422 million yuan and 1.922 billion yuan, net profit of 199 million yuan, 253 million yuan and 312 million yuan respectively, EPS of 0.49 yuan, 0.62 yuan and 0.76 yuan respectively. Corresponding PE is 32X, 25X and 20X, maintaining the “Highly Recommended” rating. The company's performance is in line with expectations, and the “smart justice+public safety” business has entered an explosion period: in 2018, the company achieved revenue of 765 million yuan, an increase of 34.31% over the same period, mainly due to excellent business performance in the fields of safe city operation services and judicial security, which led to the company's overall revenue growth. The company's current business is mainly divided into the three fields of finance, safe city, and administration of justice. Among them, the financial business maintained steady development, with operating income of 482 million yuan, accounting for 8% of the annual revenue, which fell from 78.26% last year to 62.93%; Ping An City operation business achieved rapid development in 2018, achieving revenue of 138 million yuan, an increase of 226.11% over the previous year, accounting for 18% of total revenue, and an increase of 11 percentage points over the same period. The revenue mainly comes from the Chongqing Yubei project signed by the company in August 2016 and 2017 The Tongzhou project signed in November of this year confirmed 49.1529 million yuan and 37.77706 million yuan respectively. At the same time, the “Dapeng New Area “Xueliang Project” (Phase II) first batch of high-definition and intelligent power distribution equipment procurement contracts signed by the company and the Dapeng Branch of the Shenzhen Public Security Bureau had a cumulative confirmed revenue of 25.0292 million yuan in 2018, which also contributed to the rapid growth of the company's Ping'an City operation service business; the judicial security business mainly comes from the subsidiary Runan Technology, which achieved revenue of 68.5827 million yuan in 2018, a year-on-year increase. 94.78%, accounting for an increase in revenue from 6.18% last year to 8.96%. With the gradual development of Runan Technology's business in the judicial field, this share is expected to increase. As can be seen, the share of major business segments in the main business is gradually being optimized, which also reflects the company's strategy of focusing on the development of safe cities and judicial security services. According to the newly disclosed results report for the first quarter of 2019, the company expects to achieve net profit of 9.60 million yuan to 11 million yuan, an increase of 51.61% to 73.72% over the same period. The main reason for the increase is also due to the increase in the company's public safety business revenue. Gross margin declined slightly due to fluctuations in Ping An City. After deducting equity incentives, net profit due to mother increased by more than 40%: The gross margin of the company's main business in 2018 was 46.46%, a slight decrease from 49.07% last year, mainly affected by the decline in gross margin of Ping An City operation services. As can be seen from projects such as Yubei, Tongzhou, and Dapeng that the company has signed, the gross margin is expected to remain stable in the future. In terms of the cost ratio, the sales expense ratio in 2018 was 8.06%, down 1.27pct from the previous year; the management expense ratio was 14.49%, down 1.02 percentage points over the same period. In 2018, the company's R&D investment amount was 48.3867 million yuan, which increased slightly during the same period, accounting for 6.32% of the company's total revenue. Of these, R&D investment with a capitalization rate of 11.43% was capitalized. Management expenses include 15.614,600 employee equity incentives. If this part of the impact is deducted, net profit to mother will reach 156 million yuan, an increase of more than 40% over the same period. With the acquisition of Guanwang Technology, Ping An City has sufficient orders in hand, and business growth can be expected: In September 2018, the company acquired 53% of Guanwang Technology's shares. In the future, it will use Guanwang Technology's rich implementation cases and application scenarios in intelligent video image analysis technology and vehicle characteristic big data systems to deeply integrate public safety and smart public security to achieve comprehensive market coverage within the industry. In addition, the existing Yubei District Public Safety Video Surveillance Project Service (Smart Skynet) and the Beijing Tongzhou District Public Safety Video Surveillance Construction Network Application Project are also being implemented. The Yubei project has unconfirmed revenue of 142.8517 million yuan, the Tongzhou project has unconfirmed revenue of 47.8354 million yuan, and a strategic cooperation framework agreement has been signed with the Xinji Government on smart city construction. There are sufficient orders in hand, laying a good foundation for future business growth in Ping An City. Relying on Runan Technology, we are fully developing the prison, community corrections, and drug rehabilitation markets: The subsidiary Runan Technology received a finalist notice for the “Cloud Business Partner Recruitment Project” initiated by China Telecom Corporation Guangdong Branch on November 6, 2018, informing that Runan Technology has been identified as a provincial partner in the cloud integration category and cloud application category. The construction of the Xueliang Project was first written into the Central Committee Document No. 1 in 2018, and the Xueliang Project once again entered the Central Committee Document No. 1 in 2019. In November 2018, the Ministry of Justice requested that the integrated construction of prison community corrections be effectively strengthened to open up a new situation of community corrections work in the new era. As various tasks advance, the judicial sector market prospects can be expected. There are 713 prisons across the country. According to current estimates, the budget for each prison platform is about 30 million yuan, and the market size can reach about 214 billion yuan. There are more than 3,000 nursing homes and drug rehabilitation centers in total. Based on an investment of about 8 million each, there is also a market space of nearly 24 billion dollars. In terms of social corrections, there are around 800,000 social corrections personnel across the country. If the operating model of Shenzhen Smart Social Corrections is followed, it is estimated that operating service revenue will reach more than 1 billion yuan per year, which is an objective market space. The financial sector will maintain steady development based on the high market share of financial security software platforms: in terms of financial services, the company continued to expand its share of the financial IoT market in 2018. The number of bank network monitoring centers already built and under construction reached more than 1,000, and the market share of financial security software platforms is about 30%. At the same time, the company is the only software platform supplier for agricultural credit cooperatives in 9 provinces, and a shortlisted supplier for agricultural credit cooperatives in 16 provinces; financial customers span all types of banks such as large state-owned banks, national joint-stock commercial banks, local commercial banks, urban credit cooperatives, rural credit cooperatives, etc.; in 2018, the business of banks such as agricultural commercial banks/rural credit cooperatives, Huaxia Bank, Agricultural Bank, Minsheng Bank, and postal companies maintained a certain amount of revenue. According to the company's announcement, in 2018, the company's products and services were once again successfully shortlisted for the head office of the Agricultural Bank of China, the head office of the Industrial and Commercial Bank of China, and agricultural commercial banks in Hubei Province. In 2019, it was also shortlisted for China Minsheng Bank Co., Ltd. and Bank of China Co., Ltd. Banking financial institutions are mandatory security construction sites, and demand continues to be stable. Overall, the company's financial business is expected to maintain steady development in 2019. Risk warning: The administration of justice informatization construction process falls short of expectations; Runan Technology's offsite business expansion falls short of expectations; financial security competition intensifies.