Incident: The company announced its 18-year annual report. During the reporting period, the company achieved operating income, net profit, and net operating cash flow of $1,454 million, $98.6 million, and $306 million, respectively, up 48.25%, -38.41%, and -11.66% year-on-year; achieved an EPS of 0.29 yuan, and plans to find a cash dividend of 0.15 yuan for every 10 shares. Comment: The revenue of the education business also increased by 89.44%, driving losses in the IT training business dragging down profits. In 2018, the company's education business and instrumentation business revenue was 1,161 million yuan (yoy 89.44%) and 276 million yuan (yoy -24.66%), accounting for 79.83% and 18.95% of total revenue respectively; the education business achieved net profit of 140 million yuan (11.34%), accounting for 142% of total profit, traditional business loss of 18.95 million yuan, and significant changes in the company's revenue and profit structure. With the completion of the divestment of manufacturing business, education business will become the company's core business in the future. Among them, in 2018, Hengqi Education achieved operating income and net profit of 1,087 million yuan and 121 million yuan respectively, an increase of 80.25% and 10.35% respectively. Failure to fulfill performance promises was mainly due to the holding subsidiary's traction loss of 65.38 million yuan, which dragged down the overall performance of Hengqi Education. The company's overall gross margin was 70.13% (+5.15pct), of which the gross profit margin for the education business was 74.74%; the three expense ratio was 50.22% (+12.85pct), of which the sales expense ratio was 26.18% (8.87pct), the management expense ratio was 20.69% (2.67pct), and the financial expense ratio was 3.3% (1.31%), mainly due to the increase in related expenses due to business adjustments. The annual report strengthens our perception and judgment of the company's fundamentals: Hengqi Education: Steady growth in core business revenue and adjustment of traction business layout. Core businesses in finance, self-examination, and art design are developing steadily, driving rapid revenue growth through product expansion and channel expansion; in terms of IT training business, in 2018, the company restructured and integrated leading campuses, resources, products, etc., and closed 21 loss-making campuses. Currently, there are only 8 left. It is expected that the impact and drag on performance of this business will decrease significantly in 2019. 1) Product Matrix: Multi-track layout broadens training boundaries. The types of financial courses have been continuously updated, iterative products have been extended to the middle and high-end markets, and international training courses have been introduced. In 2018, the sales rebate amount for financial business orders was 811 million yuan, an increase of 18.91%, accounting for 64.25%; the self-examination category, art design category and online training business developed rapidly. In 2018, the sales rebates for self-examination, art design, and online education business orders were 225 million yuan, 196 million yuan, and 289 million yuan, respectively. 2) Network layout: 70 new terminal campuses were added. By the end of 2018, Hengqi Education had 397 terminal campuses of various types in 24 provinces and cities and more than 170 cities across the country, an increase of 14.08%, including 338 Hengqi Education, 51 Tianhu Education, and 8 Traction. Without considering the closure of the 21 traction campuses, Hengqi Education actually added 70 new terminal campuses in 2018. 3) Number of trainees and customer unit price: the number of participants increased by 38.15%, and the customer unit price increased by 11.86%. In 2018, there were 178,800 student registrations, an increase of 23.5%; order sales rebates of 1,263 billion yuan, an increase of 38.15%; and the transaction price per transaction was 7,394 yuan/person, an increase of 11.86%. CUHK Talents: The number of registered members and customer unit prices have risen sharply, fulfilling performance promises. In 2018, Big Talent achieved operating income and net profit of 94.11 million yuan and 27.48 million yuan respectively, with increases of 48.15% and 17.50% respectively, fulfilling performance commitments. Relying on the users and traffic accumulated on its online platform, CUHK talents are deeply integrated with Hengqi Education, continuously expanding their brand and resource advantages, and promoting rapid growth in the number of registered members, turnover, and customer unit prices. In 2018, Big Talent achieved 2,725,400 new registered members, an increase of 76.16%; online transactions of 398,900, an increase of 25.83%; order sales rebates of 99.63 million yuan, an increase of 60.41%; and the unit price of transaction customers was 249.7 yuan/person, an increase of 27.48%. Investment suggestions: The company has successfully divested its traditional manufacturing business and transformed into a pure vocational education target. Hengqi Education is based in the field of accounting training and has a multi-track product line, driving a sharp rise in the number of trainers and course unit prices. Core businesses in finance, self-examination, and art design are developing steadily. After subsequent IT training business adjustments, the profitability of Hengye Education will continue to improve. The company's net profit for 2019-2020 is estimated to be 162 million yuan and 198 million yuan respectively, corresponding to EPS of 0.47 yuan and 0.57 yuan, respectively, corresponding to PE 23 and 19 times. We gave a valuation of 30X for 2019, corresponding to a six-month target price of 14.10 yuan, and maintained a “buy-A” rating. Risk warning: changes in vocational education policies, the expansion of Heng Enterprise's offline outlets falling short of expectations, online and offline enrollment falling short of expectations, and the risk of management and integration of its various education standards.