Matters: The company released a quarterly report on April 25: the first quarter of 2018 achieved revenue of 566 million yuan, an increase of 20.72% over the previous year; realized net profit of 50 million yuan, an increase of 27.97% over the previous year; and realized net profit of 49 million yuan, an increase of 36.09% over the previous year. Comment: There has been a marked increase in gross margin. After deducting non-net profit, the expense ratio is expected to decline. The first quarter achieved revenue of 566 million yuan, an increase of 20.72% over the previous year. The gross margin was 64.09%, an increase of 3.63pct over the previous year. The upward trend is obvious. It is expected that the share of small-pitch LED and other businesses with low gross margins will decline, and the revenue structure will be optimized. Video conferencing is expected to achieve steady growth and maintain a high level of gross margin. It is expected that the video surveillance business will maintain a good growth rate and perform better than the industry average. We believe that the first is that the company's customers are mainly positioned as the government and key industries, which are less affected by real estate infrastructure; the second is that the company's overseas business accounts for a relatively low share. Net profit after deducting non-attributable profit was 49 million yuan, an increase of 36.09% over the previous year. Considering the impact of temporary factors such as an increase in the financial expense ratio of 0.29 pct (mainly due to fluctuations in the US dollar exchange rate) and an increase in the share of asset impairment losses, the actual net deduction level performed better. Furthermore, due to the large increase in personnel last year, employee remuneration increased by 32.75% year on year, resulting in a total increase of 3.27 pct in the three cost rates of sales, management, and R&D. As revenue increases quarterly, this impact may gradually weaken. The annual cost rate is expected to be lower than in the first quarter, and bring better net profit performance. The improvement in cash flow is obvious; it is actually better than it seems. Cash received from the sale of goods and the provision of labor services was 644 million yuan, an increase of 40.78% over the previous year, significantly higher than the revenue growth rate. Net operating cash flow was -31 million yuan, an increase of 41 million yuan over the previous year, and also showed a clear improvement trend. In addition, notes receivable at the end of the period were $78 million, an increase of 766.41% over the previous year and an increase of 63.36% over the previous year. It is expected that they will basically be bank acceptance drafts. There is a clear difference between bank acceptance notes and accounts receivable. Their liquidity is close to cash. If the notes receivable and the cash received are taken into account together, the actual improvement in cash flow is even more obvious. Video conferencing is gaining momentum, and video surveillance has potential. We believe that the company's video conferencing is expected to continue to grow rapidly: first, the industry's prosperity continues to improve, the scope of industry applications continues to expand, and the level 1 and 2 networks are also gradually being extended to level 3 and 4 networks; demand for high-end video conferencing products such as immersive web presentation or cinema-style network presentation is expected to be released; furthermore, video conferencing as an efficient means of communication is increasingly promoted by policies. Second, the competitive landscape continues to improve. With the development of domestic information security and video integration applications, the trend of localizing video conferencing and substitution is expected to become even more obvious. Third, the comprehensive competitiveness of the company's products, comprehensive applications, and solutions continues to improve. It is expected that the Department of Public Prosecution and Law will continue to maintain relatively rapid growth in the traditional areas of strength, and has potential in education, medical care and other fields, that is, in terms of channel decline. In addition, the company's cloud video conferencing has a certain scale and is expected to benefit from the release of potential demand in the B-side market. Video surveillance continues to maintain a positive trend, which fully proves the competitiveness of the company's products and good channel expansion results. In the era of intelligence, the video surveillance industry is facing more new demands, and industry space is expected to further open up. With its strong software and hardware capabilities and good collaboration with video conferencing, the company is expected to benefit fully. Investment advice. We maintain our forecast that the company's net profit for 2019-2021 is 430 million yuan, 557 million yuan, and 689 million yuan respectively, corresponding to PE of 18 times, 14 times, and 11 times, respectively. Referring to the company's historical valuation and comparable companies, we gave it a target PE of 25 times in 2019, corresponding to the target price of 29.86 yuan, maintaining a “strong push” rating. Risk warning: New business development falls short of expectations, and competition in the industry is intensifying.