Incident: On the evening of August 7, 2020, the company announced that it signed a “Smart Industry Big Data Operation Center and Artificial Intelligence Integrated Application Platform” with the People's Government of Hechuan District of Chongqing (hereinafter referred to as “Hechuan District Government”) and Chongqing Hechuan Information Security Industry Development Co., Ltd. (hereinafter “Hechuan Information”, of which the Hechuan District State-owned Assets Administration Commission holds 80% of the shares) of the “Smart Industry Big Data Operation Center and Artificial Intelligence Integrated Application Platform”, Hechuan District New Smart City Investment and Operation Project. The company is expected to invest 300 million yuan to build a smart industry big data center (PaaS platform) and artificial intelligence integrated application platform (AI) platform (AI) platform (AI) platform (Hechuan) AISaaS service), and various SaaS application upgrades and new construction projects for smart cities in Hechuan District are carried out through the FEPC model. It is estimated that the Hechuan District Government will invest 5-7 billion yuan to implement the project by purchasing services on an annual basis. At the same time, the company set up a joint venture with Hechuan Information (the company holds 80% of the shares), which will conduct market-based operation of data generated by various SaaS applications in smart cities in the future.

The smart city sector is being laid out to the next level, and the largest cooperation agreement in the company's history is expected to accelerate profitability in the future. According to the company's prospectus, in the past, the company's smart city customers were mainly the Tongzhou Branch of the Beijing Municipal Public Security Bureau and the Economic and Information Technology Bureau of Dongchangfu District of Liaocheng City. The annual revenue of the smart city sector in 2019 was 85.85 million yuan (accounting for 16.7% of the company's revenue in 2019, gross margin was 52.06%). According to the prospectus, the largest order in the company's history is the “Chongqing Hechuan District Ecological Environment Blockchain and Smart Environmental Construction and Operation Service” project. The amount is only 210 million yuan. The estimated amount of 5-7 billion yuan in this cooperation agreement will update the largest cooperation agreement amount in the company's history. Even if it is achieved over 5 years (1-140 million yuan per year), it is expected to accelerate the company's future profitability.

Smart city data operations further broaden business imagination, and the smart environmental protection and smart city sectors are expected to flourish on both fronts. This cooperation agreement stipulates that in the future, data generated by SaaS applications in smart cities in Hechuan District will be marketed and operated through joint ventures after cleaning and desensitization, and “user payments” will be implemented. Using Hechuan as a sample, it is expected that similar markets across the country will expand in the future. The smart environmental protection sector, where the company is currently developing, is centered on data operation. Through the benchmark effect (Tongzhou project), it has successfully continuously developed the national smart environmental protection market. The implementation of this cooperation is expected to achieve the dual strength of the smart environmental protection and smart city sectors, further consolidating the company's strength in the high-value segment of the card industry chain based on data analysis and operation.

Raise profit forecasts and maintain the “buy” rating. We raised our profit forecast for the company. We expect the company to achieve revenue of 789 million yuan, 1,194 million yuan, and 1,643 million yuan in 2020-2022. The corresponding net profit attributable to the mother was 240 million yuan, 392 million yuan, and 568 million yuan respectively. Looking at the long term, as the government gradually pays attention to smart environmental informatization, especially data operation services that can achieve multi-departmental data linkage and collaboration, we expect the company's data operation service revenue to be 2.09 billion yuan, and the long-term market capitalization space is expected to reach 25.1 billion yuan, corresponding to 12 times the PS valuation.

Risk warning: increased risk of market competition; risk of technological innovation; risk of declining gross margin; risk of deviations in assumptions and estimates.