Incident: On the evening of November 29, the company issued two major announcements: 1) It plans to divest Edconn at a price of 320 million yuan: The company recently signed the “Equity Transfer Agreement on Beijing Edconn Advertising Co., Ltd.” to transfer 100% of Edconn's shares to Zhoushan Yide at a price of 320.24 million yuan. 2) Adjust and update the share repurchase plan: The total repurchase amount is 250 to 500 million yuan (previously 200 to 500 million yuan), of which the repurchase price does not exceed 10.00 yuan/share (previously 15.00 yuan/share), and the number of shares repurchased is about 25 million to 50 million shares (previously 13.3334 million shares to 333333 million shares), accounting for about 4.30% to 8.60% of the company's current total share capital (previously 2.29% to 5.74%). The repurchase period is expected to be within 12 months from the shareholders' meeting to review the share repurchase plan The source of funding is own or self-funded. The repurchased shares shall be transferred or cancelled within three years after the announcement of the change in shares.

Commentary:

1. It is proposed to divest goodwill impairment risk projects and focus on core business development. There was basically no goodwill pressure in 2018.

The target of EdConn's acquisition in the first half of 2016 was search engine marketing. Its main business was search engine marketing. From 2015 to 2017, it achieved a cumulative net profit of 77.3013 million yuan after deducting non-return mother's net profit, and completed 101.58% of the promised net profit. The original net profit promised for 2018 and 2019 was 45.63 million yuan and 50,193 million yuan. The target is to achieve a net profit of 9.248,800 yuan in the first half of this year. There is some pressure to meet the performance promises. After the company transfers EdConsell, risk items can be effectively eliminated. Furthermore, the proceeds from the transfer of 100% of Edconn's shares will be used to supplement the company's working capital, which will help the company optimize its industrial layout and concentrate resources on developing the company's core business. In fact, one of the core risks of the marketing industry in 2018 was the performance of M&A targets after the gambling period. However, the targets of the company's acquisitions were still in the gambling period in 2018, and the performance of other marketing companies may be more guaranteed after the divestment of EdConsell. Furthermore, the company will adjust its organizational structure to enhance business collaboration through the penetration of business and management, and the integration effect is expected to gradually become apparent.

2. It is proposed to launch a repurchase of 250 million to 500 million dollars, which shows that the company is optimistic about future development prospects.

The company believes that the current stock price does not properly reflect the company's actual operating conditions, so it plans to launch a repurchase plan based on approval of the company's prospects and to enhance investors' investment confidence. The key points of this repurchase plan are: 1) The number of shares repurchased this time accounted for 4.30% to 8.60% of the share capital. Compared with the repurchase plans of many other listed companies (the previous Chinese media repurchase limit was about 2.9% of the total share capital, and Perfect World's repurchase limit was about 2.1% of the total share capital), the repurchase was strong. 2) There are various possibilities for repurchase purposes, including equity incentives. According to the announcement, potential repurchase uses include 1. Intended for subsequent employee stock ownership plans or equity incentive plans, 2. Converting convertible bonds issued by listed companies, 3. Cancelling and reducing registered capital in accordance with law. We believe that when the economic environment is bad, the company dared to make big purchases. On the one hand, it was because the stock price was too low and the valuation was relatively safe; on the other hand, it was also related to the company's further streamlining of its internal management mechanism and the initial success of the content marketing transformation. In fact, the company has been in a transformation stage over the past few years. The business has expanded from traditional media agents to marketing services+video content+digital copyright operations. Driven by mergers and endogenics, revenue and profit have maintained relatively steady growth over the past three years. From 2015 to 2017, it achieved revenue of 2,494 million yuan (+15.95%), 3.822 million yuan (+53.25%), and 4.187 million yuan (+9.56%), respectively; it achieved net profit of 88 million yuan (+24.73%), 142 million yuan (+60.25%), respectively, 231 million yuan (+63.25%).

3. Performance increased steadily in the first three quarters of this year, and the impact of the economic downturn was limited.

According to the three-quarter report, the company's revenue for the first three quarters was 4.195 billion yuan, an increase of 39.09% over the previous year, and the net profit of the mother was 200 million yuan, an increase of 5.31% over the previous year. At the same time, the company announced that the net profit growth range for the full year of 2018 was 231 million yuan to 347 million yuan, with a growth range of 0% to 50%, and performance growth was relatively stable. Currently, one of the market's concerns is the impact of the economic downturn on the marketing industry, but the actual impact on the company is not significant, mainly because the company has continuously strengthened its marketing capabilities in recent years, and the number of customers is expected to increase.

4. The three major business segments continue to be integrated, and the synergy between content and marketing may be underestimated.

The company brought vitality to business growth through mergers and acquisitions when the traditional TV advertising business was weak. On the content side, the company acquired Zangwei Technology, Guanda Film and Television, and Keyi Communications, seizing high-quality literary reading platforms, film and television content production resources, and content marketing resources; on the marketing side, the company acquired Zhihai Yangtao to lay out digital marketing. At present, a diversified business pattern of marketing services+video content+digital copyright operation and services has been formed. Furthermore, the company established Buru Culture in a joint venture with Zhejiang Xinlan Network this year, which is another in-depth cooperation in content and marketing. The joint venture is expected to take advantage of the company's content advantages and Xinlan Network's advantages in communication channels to develop business in short videos, artist brokering, derivatives, etc., to provide a guarantee for the company's continuous, rapid and stable development. At present, the company continues to make efforts in content marketing and has achieved good results. In 2018H1, it collaborated with advertisers, film and television companies to launch the rich-flavored liquor “Taste of Flowers” (TV series “The Legend of the White Snake”), the special rice wine warming heart-warming wine “The Legend of the White Snake” (TV series “The Legend of the White Snake”). Among them, the cumulative number of broadcasts of “Fire Is Like a Song” reached 8.11 billion, the number of topics discussed reached 320 million, and “The Legend of the White Snake” had a cumulative broadcast volume of 1.16 billion. The high level of interest in the two TV series boosted sales of the two alcohol products. In terms of promoting variety shows, Coca Cola

Meijuyuan co-sponsored the fourth season of “Extreme Challenge”, and 39 Pharmaceutical designated the sponsor of “24 Hours”, all of which achieved impressive results. Furthermore, the company is currently experimenting with an innovative model to set up a joint venture, deeply linking talents and building content and brand platforms with excellent third parties. In early October, Simei Innovation and Simei Vision, which accounted for 70% of the company's investment, both obtained “business licenses”, which will bring more interest to the company in the future.

5. Profit forecast and valuation:

We forecast that the company's net profit attributable to the mother in 2018/19 will be 25/30 million yuan respectively, and the corresponding PE will only be 16/13 times, respectively, giving it a “Highly Recommended - A” rating.

6. Risk warning:

The performance of the target of the acquisition was achieved or not met; risk of mergers and acquisitions integration; risk of a clear decline in the prosperity of the advertising industry