Matters: On January 5, the company issued an announcement that the subsidiary “Hengrun Group” plans to change its entire subsidiary to a limited company. On January 19, the company issued an announcement stating that the subsidiary “Hengrun Group” held a shareholders' meeting and joint stock company inaugural meeting on January 19, 2020. The meeting reviewed and passed a number of proposals, including the “Report on the Preparation Status of Shanghai Hengrun Digital Technology Group Co., Ltd.”, “Proposal on the Establishment of Shanghai Hengrun Digital Technology Group Co., Ltd.”, and the “Audit Report on the Establishment Costs of Shanghai Hengrun Digital Technology Group Co., Ltd.”, and the restructuring plan was determined. The cultural tourism sector is growing rapidly, and performance promises have been exceeded. Since 2015, the company has actively integrated emerging businesses during the second start-up period and expanded the cultural tourism sector through mergers and acquisitions. The cultural tourism business has developed rapidly. The cultural tourism sector's revenue share has increased from 7.31% in 2015 to 15.75% in 2018. The company completed the acquisition of Hengrun Group in 2015. Hengrun Group has strong competitiveness in the fields of theme parks, science and technology expo venues, 4D movies, VR, etc., to provide users with overall solutions for various high-tech creative digital interactive entertainment experiences. It is a high-end equipment and system integration service provider for cultural tourism themed projects, focusing on R&D, design, production and integration of immersive amusement equipment systems, mainly for theme parks, tourist attractions, science fair venues, government offices and other commercial venues. The main products include flying domes, orbital rides, cinemas and other indoor and outdoor venues. High-tech interactive experience equipment. The company integrated its traditional garden business with Hengrun Group's cultural and technological advantages, and got involved in cultural tourism from the ecological environment. Since the company completed the acquisition in 2015, Hengrun's business scale has grown rapidly. From 2016 to 2018, its revenue growth rates reached 39.73%, 103.30% and 16.72%, respectively. The completion rates of deducting non-return net profit commitments in 2015-2018 were 104.94%, 106.55%, 164.15% and 152.24%, respectively. Operating income and net profit reached respectively in 2018 735 million yuan and 140 million yuan. Hengrun Group has strong technological strength, lays out cultural tourism markets at home and abroad, drives the cultural tourism market through scientific research and development and display of achievements, and provides high-tech cultural products and operation services for themed cultural tourism projects of well-known domestic enterprises throughout the industry chain. It has won wide and high market recognition, and future performance development is worth looking forward to. The conditions for a spin-off listing are basically satisfied, which is expected to help improve the overall valuation. In August 2019, the Securities Regulatory Commission held a press conference to state that listed companies are allowed to split their subsidiaries and land in A shares. On December 13, 2019, the Securities Regulatory Commission officially issued “Certain Provisions on the Domestic Listing Pilot for Listed Companies to Split Their Subsidiaries” (later known as “spin-off regulations”). The spin-off regulations clarify the conditions and procedures for domestic spin-off and listing. Judging from the spin-off and listing conditions, it is mainly divided into 7 parts, including strict requirements for the company's listing time, profit level, scale, asset structure, and shareholding ratio. Judging from the various conditions of the company and Hengrun Group, they basically meet the requirements of the spin-off and listing regulations. In December 2019, Lingnan Co., Ltd. responded to investors on an interactive platform saying that the company will actively prepare for a spin-off and listing. The current restructuring of Hengrun lays the foundation for them to choose a development path that conforms to shareholders' interests and strategic plans at the right time. It is conducive to improving the corporate governance structure of Hengrun Group, raising the standard level of operation, and also providing a possible precondition for future spin-offs and listings. The implementation of the spin-off and listing policy has expanded direct financing channels for enterprises. If the spin-off and listing proceeds smoothly, Hengrun Group can use the capital raised to expand its business scale. At the same time, it will help Lingnan Co., Ltd. focus on developing its main business and increase its overall business scale, growth and profit level. After the shareholding system reform of Hengrun Group is completed, considering the possibility of its spin-off and listing, the value of its main high-tech cultural tourism business sector is expected to be revalued, which may have an effect on improving the overall valuation of Lingnan shares. All business segments develop collaboratively, and sufficient order growth can be expected. At present, the company is vigorously expanding ecological and environmental protection and cultural tourism business around the main garden business, laying out fields such as cultural tourism, water, water environment, soil restoration, etc., improving the ecological industry chain, continuously increasing the business share of the ecological, environmental protection and cultural tourism sector. Through resource allocation and order structure improvement, the company realizes collaborative development among various sectors, helps enterprises improve their overall competitiveness and profitability, and the ecological environment and cultural tourism orders are quickly implemented, and the Pan-Entertainment PPP strategy continues to gain strength. In 2019, the company leaned key resources towards developed coastal regions such as the Guangdong-Hong Kong-Macao Greater Bay Area, received an increase in the share of EPC projects and high-quality operation projects, and continued to receive high-quality orders, winning bids for key projects such as landscape construction for Guiwan Park in Qianhai, Shenzhen, and Siyang, Huangshan, Xiuning, and Lianzhou. According to our summary of company announcements, since 2019, the company has signed new orders for major projects of about 7.782 billion yuan, close to 88% of the company's 2018 operating income. The company's order reserves are relatively abundant, providing a certain guarantee for the release of the company's performance. The company continues to diversify its layout. Against the backdrop of pressure on the ecological environment construction industry, the company supports the company's overall profit resilience during the industry slump period through the development of water, water environment, and cultural tourism businesses, which will help achieve higher quality growth and greater performance elasticity during the future industry recovery period. In 2018, the company launched a restricted stock incentive plan and plans to grant 149.372 million restricted shares to 217 of the company's middle managers and core business executives. According to the restricted stock exercise conditions, the company's net profit growth rate after deduction is expected to be 60%, 30%, 30%, and 20%, respectively, in 2018-2021. In terms of speed, the growth rate of the company's performance in 2019-2021 will fall to less than 30%. The relatively rapid growth achieved on the basis of a high base is expected to improve the quality of growth. Valuation and investment advice. Revenue is expected to be 8.976 billion yuan, 11.758 billion yuan and 14.698 billion yuan respectively in 2019-2021, with year-on-year growth rates of 1.5%, 36.9% and 20.1%; net profit of 722 million yuan, 988 million yuan and 1,186 billion yuan respectively, with year-on-year growth rates of -7.3%, 36.9% and 20.1%; EPS of 0.47, 0.64 and 0.77 yuan respectively; and dynamic PE 13.8 times, 10.1 times and 8.4 times, respectively. The company's “secondary entrepreneurship” strategy is gaining momentum. Currently, the company's “Big Ecology+Pan Amusement” layout covers the business sector pattern of water management, ecological environment restoration, and cultural tourism. The synergy between the three business segments is obvious, helping the company grow rapidly in the context of future industry recovery and the construction of the Guangdong-Hong Kong-Macao Greater Bay Area. At the same time, the subsidiary is mainly engaged in high-tech cultural tourism business, so the spin-off listing is expected to advance or help improve the overall valuation. The company has sufficient capital, sufficient orders in hand, and good growth. Maintain the company's “buy-A” rating. The target price is 7 yuan, corresponding to about 15 times PE in 2019. Risk warning: Risks such as spin-off and listing not progressing as expected, performance falling short of expectations, and policy changes.