Investment recommendations Lingnan Co., Ltd. announced 2019 and 1Q20 results: 2019 revenue of 7.96 billion yuan, year-on-year profit of -10.0%, net profit of 330 million yuan, and -57.9% year-on-year. Due to revenue falling short of expectations, 2019 results were lower than previous reports and our expectations; 1Q20 revenue was 300 million yuan, -72.5% year over year, and net loss of 170 million yuan. 1Q results were in line with previous forecasts and our expectations. Considering the company's current high valuation, we downgraded the company to a “neutral” rating. Here's why: 2019 and 1Q20 net interest rates were under pressure. In 2019, the company's gross margin decreased by 1.4ppt year on year; management/R&D/finance expense ratios increased by 0.4/1.2/0.7ppt, respectively; total asset and credit impairment losses increased 63% year over year, mainly due to increased bad debt accruals; and annual net interest rate decreased 4.7ppt to 4.1% year over year. In 1Q20, the company's gross margin decreased by 8.1ppt to 20.9% year on year; due to the decline in revenue scale, the total cost ratio for the period increased by 47.0ppt year on year; net margin decreased by 60.0ppt year on year. Cash flow has clearly recovered, and attention is being paid to order improvements. The net operating cash inflow of the 3Q-4Q19 company increased by 308% and 431%, respectively, and the net cash outflow from investment narrowed by 46% and 27%, respectively. Free cash flow gradually recovered, which we believe is expected to drive the company's orders to improve. In 2019, the company announced a total of 7.33 billion yuan of successful bid orders, -68% year over year; while 1Q20 announced that the total number of winning orders was 4.1 billion yuan, +23% year over year. We recommend continuing to pay attention to order improvements. The current valuation is too high. Although the company's free cash flow has clearly recovered, the company's current valuation is high: the company's current price corresponds to 18.0x 2020e P/E, which is higher than that of Oriental Garden and Dongzhu Ecology (traded at 13.2x/11.3x 2020e P/E respectively). What is our biggest difference from the market? We are more cautious about the company's valuation hub. Potential catalyst: The company's profit growth is under further pressure. Profit forecast and valuation Taking into account the impact of 1Q20 earnings due to the pandemic, we lowered our net profit forecast for 2020 by 13% to $380 million, and introduced a net profit forecast of 460 million yuan for 2021. The current price corresponds to 18.0x 2020e P/E. Due to the reduction in profit forecasts and considering that the company's current valuation is higher than that of its peers, we lowered our target price by 22% to 4.42 yuan (18.0x 2020e P/E, 0% space) to a neutral rating. Risk orders increased markedly, and free cash flow continued to be strong.