I. Incident Overview

Recently, Furi Electronics released its 2016 annual report and profit distribution plan: 1) Achieved revenue of 7.096 billion yuan in 2016, an increase of 14.77% over the previous year, and net profit attributable to shareholders of listed companies was 63.7622 million yuan, a year-on-year decrease of 45.63%, after deducting non-net profit of 48,2448 million yuan, a year-on-year decrease of 269.32%. The basic earnings per share were 0.15 yuan per 10 shares, excluding earnings per share of -0.11 yuan; 2) It is proposed to distribute cash dividends of 0.2 yuan (tax included) for every 10 shares.

II. Analysis and Judgment

The performance of the 2016 report exceeded expectations, and the communications business and LED business became the main growth powers1. The annual report performance exceeded expectations. Wind unanimously expects the company's 2016 results to be 23.06 million yuan. (1) The company's comprehensive gross margin was 6.19%, down 1 percentage point from the previous year. (2) The three main businesses - communications and smart home appliance business/trade business/LED business, the year-on-year growth rate was 64.53%/-7.67%/-26.39%, respectively. The revenue share was 51.53%/40.71%/7.56% respectively, gross margin was 8.86%/13.99%/0.88% respectively, and gross margin changed 0/-3.63/-0.08 percentage points respectively. (3) The fee rate for the period was 6.12%, down 0.05 percentage points from the previous year. The sales expense rate/management expense rate/financial expense ratio were 1.30%/4.38%/0.44%, respectively, up 0.01 percentage points, 0.27 percentage points, and down 0.33 percentage points, respectively.

2. Prepare for asset impairment, and communications and LED contribute to the main performance. According to the annual report, the 2016 Q4 revenue was 2,156 billion yuan, an increase of 24.30% over the previous year, and the net profit of the mother was 9.84 million yuan, a decrease of 108.97% over the previous year.

The main reason for the increase in performance in 2016 was the sharp rise in the company's mobile phone ODM orders and the rapid growth of the LED packaging business. Due to the principle of prudence, the company accrued asset impairment provisions of 113.992 million yuan in 2016, an increase of 69.173 million yuan over the previous year, including 29.9 million yuan for Malley Optical's e-commerce reputation impairment, 35.86 million yuan for fixed asset impairment preparations for the Blueprint Energy-saving Wing Steel Project, and 9.7822 million yuan for individual accounts receivable bad debt.

The communications business successfully developed overseas markets and high-quality operators. ODM orders increased dramatically, and performance promises were fulfilled 1. During the reporting period, Zhongnuo Communications continued to optimize its customer structure, successfully developed overseas markets and high-quality operators in India, Southeast Asia, Europe, South America, etc., developed new products for overseas customers, developed a variety of mobile phones for Huawei, Lenovo and other customers. ODM orders from key customers such as Huawei grew rapidly, and mobile phone sales increased 44.2% year-on-year. In addition, Zhongnuo Communications invested 45.4 million yuan to build a new production line for high-end smart phones and acquired 51% of Xunrui Communications's shares. The manufacturing scale was further expanded, and R&D capacity and profitability were further improved.

2. Fulfilment of performance promises. According to performance promises, in 2016, Zhongnuo Communications and Xunrui Communications will achieve net profit of no less than 120 million yuan and 38 million yuan respectively after deducting non-return to the mother. Zhongnuo Communications achieved revenue of 3.668 billion yuan in 2016, an increase of 58.4% over the previous year, and net profit of 126 million yuan, an increase of 21.5% over the previous year, after deducting non-net profit of 121 million yuan. In 2016, Xunrui Communications achieved net profit of 40 million yuan after deducting non-net profit. Xunrui Communications is engaged in ODM design and mobile phone motherboard design for mobile phones. Its main customers include smartphone manufacturers such as Conca, Haier, Little Pepper, Bailifeng, and Weitu.

3. We believe that with the increasing concentration of the global smartphone industry and the rise of major mobile phone brands in China, with excellent ODM capabilities and customer resources, the communication business will continue to break through domestic first-tier smartphone customers and grow rapidly with customers. With the implementation of the “Belt and Road” policy and the release of the demographic dividend of overseas developing countries, the telecommunications business is expected to increase its share in overseas markets.

The LED business structure continues to be optimized, packaging orders have grown rapidly, and the industrial chain layout has been continuously improved1. During the reporting period, Yuanlei Technology successfully introduced major customers such as Sunshine Lighting, actively deployed new businesses such as flash, photographic light, ultraviolet light, infrared light, etc., strengthened research and development of new LED packaging products such as filament, COB, flash, etc., and invested 44.82 million yuan to build new production lines for filament LEDs, SMD LEDs, etc., and production capacity was further expanded. Affected by Malui Optoelectronics plant relocation and product strategy changes, LED application orders declined. The company increased its shares in Yuanlei Technology by RMB 26.5 million by 9% and currently holds 51% of its shares.

2. According to performance promises, Yuanlei Technology will achieve net profit of no less than 0.4 billion yuan after deducting the return to the mother in 2016.

Yuanlei Technology fulfilled its performance promise. In 2016, it achieved revenue of 379 million yuan, a year-on-year increase of 25.9%, net profit of 41,4894 million yuan, an increase of 18.2% over the previous year. After deducting non-net profit of 403.396 million yuan, filament LED became its new performance growth point.

3. We believe that the company will continue to increase investment in the LED business and optimize the layout of the LED industry chain. With the completion of the relocation of the Malay Optoelectronics plant, the LED business will continue to be the main growth point of the company's performance.

The share of domestic and foreign trade supply chain business in revenue has declined markedly, and the transformation has achieved remarkable results 1. During the reporting period, the company continued to optimize business processes and customer structure, improve the level of internal control management, strengthen cooperation with central enterprises, listed companies, and large private enterprises, actively explore markets, and further reduce operating risks. The domestic and foreign trade supply chain business achieved revenue of 2,884 billion yuan in 2016, accounting for 40.6% of total revenue. Revenue in 2015 was 3,093 billion yuan, accounting for 50.0% of total revenue.

2. We believe that with the continuous optimization of the three major business structures, the domestic and foreign trade supply chain business as a share of total revenue will continue to decline, and the communication business and LED optoelectronics business, which have significant competitive advantages, will be further strengthened.

The fixed increase was completed, and the balance ratio declined markedly. Liquidity increased. The company issued 76,166,375 shares privately in May 2016, raising a total of 654 million yuan, mainly to repay bank loans and supplement working capital.

III. Profit Forecast and Investment Suggestions

The company's EPS for 2017-2019 is expected to be 0.18 yuan, 0.22 yuan, and 0.25 yuan respectively. The PE corresponding to the current stock price is 66.3X, 54.4X, and 48.1X, respectively. Considering that the company is a key listing platform under the Fujian Provincial State-owned Assets Administration Commission and has expectations for state-owned enterprise reform, the company can be given 75 to 80 times PE in 2017, with a reasonable valuation of 13.50 yuan to 14.40 yuan over the next 6 months. It is covered for the first time, and the company is given a “careful recommendation” rating.

4. Risk Reminder:

1. Overseas market expansion falls short of expectations; 2. Industry competition intensifies; 3. Manufacturing costs are rising.