Main points of investment

Items:

The company announced its 2016 annual report that its operating income in 2016 was 663 million yuan, an increase of 84.17 percent over the same period last year, and its net profit was 110 million yuan, an increase of 67.58 percent over the same period last year. The profit distribution plan for 2016 is to distribute a cash dividend of 0.50 yuan (including tax) for every 10 shares. On the same day, the company announced the first quarter report of 2017, with operating income of 220 million yuan in the first quarter, an increase of 115.43% over the same period last year, and a net profit of 11 million yuan, an increase of 16.46% over the same period last year.

Peace viewpoint:

The performance of the annual report and the first quarterly report was excellent, but it was lower than expected: the annual report and the first quarterly report showed that the company's revenue increased by 84.17% and 115.43% respectively compared with the same period, and the homing net profit also performed well over the same period, but the growth rate was significantly lower than the revenue. The main reason for the rapid growth of the company's performance in 2016 is the rapid development brought about by the company's endogenous and extension development model. Tang Ren Digital, a subsidiary, had annual revenue of 117 million yuan and contributed net profit of 63 million yuan. At the same time, public security product revenue increased by 241.96% year-on-year and contributed revenue of 273 million yuan, but principal product revenue decreased by 57.60% compared with the same period last year, making the performance lagging behind expectations. In the past 16 years, due to the strengthening of the company's market development efforts, the manpower and travel investment of sales staff has increased significantly, with sales expenses totaling 101 million yuan in 16 years, an increase of 133.79% over the same period last year, which has had a certain impact on the growth of net profit. The reason why the growth rate of Q1 net profit in 2017 is obviously lower than that of revenue is mainly due to the obvious seasonal differences in the information security industry. Generally speaking, under the development model of endogenesis and extension, the company's Q1 performance in 16 years and 17 years is better, but the overall performance in 16 years is lower than we expected.

Significant development of online game products, acquisition of pickled pepper sizhi: as early as 2013, the company began to explore online game business, and gradually completed the transformation from a single information security business to a business structure based on information security and online games. During the reporting period, the company's revenue in cultural and entertainment products increased significantly, with revenue of 127 million yuan, an increase of 141.92% over the same period last year, and the proportion of revenue gradually climbed to 19.17%, and the gross profit margin of cultural and entertainment products was as high as 88.24%. It plays an important role in contributing to the company's net profit.

In the past 16 years, the company's game platform has added 15 games; the cumulative number of registered users of the subsidiary Tang Dynasty Digital Tang Tour has reached 8.47 million, with an average of 140000 monthly active users and 16000 monthly fee-paying households. At the beginning of 2017, the company completed the 100% equity acquisition of Paojiaosizhi, which belongs to the mobile Internet game publisher and platform operator, and has the Piaojiao Mutual Entertainment platform based on Paojiao.com, Paojiao Game Center and Pickle tools. The follow-up development in the online game industry is bound to become a new driving engine for the company's performance growth.

We have made a major breakthrough in the field of network security and obtained the highest qualification for the integration of national secret-related information systems: as one of the enterprises in the industry that were earlier involved in network information security, the company is a leading provider of overall solutions for network content and behavior audit and supervision in China, and has always maintained a leading position in the field of public network security audit. During the reporting period, the company grew rapidly in public security, with a total revenue of 273 million yuan, an increase of 241.96% over the same period last year. A series of products such as network security audit, wireless Internet information security in public places and real name authentication login system were developed in the public security field. The subsidiary Ren Zixing Science and Technology Development has obtained the Class A qualification certificate of secret-related information system integration issued by the State Secrets Bureau, which belongs to the highest level of secret-related information system integration qualification in countries of the same industry. enterprises that have obtained this certificate can engage in secret, secret and top secret information system integration business nationwide, and the qualification is extremely rare. We believe that the acquisition of the Class A qualification will further accelerate the company's traditional business in the country, improve market competitiveness and consolidate its leading position in the industry.

With the dual business structure of information security and online games, the industry has a bright future: the company continues to focus on cultivating network security business while continuing to increase its advantages in public security and network resource management business. and the company has established a development strategy based on information security and online games. Network security has become a global problem. As of December 2016, the number of Internet users in China has reached 731 million, equivalent to the total population of Europe, the Internet penetration rate has reached 53.2%, and people are increasingly dependent on the Internet, which has created a strong demand for network security. At the same time, under the background that the cultural industry has become a pillar industry of the national economy, the state has continuously issued a number of policies to support the cultural industry, clearly emphasizing the need to increase support for the game industry. And in the 4G era, China's mobile Internet users and mobile Internet access traffic are growing rapidly, and Chinese people's demand for cultural and entertainment products is becoming more and more exuberant. In this environment, the mobile online game industry is developing rapidly.

Profit forecast and investment advice: we estimate that the net profit of the company from 2017 to 2019 is 152 million, 177 million and 211 million respectively, the corresponding EPS is 0.34,0.40,0.47 yuan respectively, and the PE corresponding to the closing price on April 25 is about 45.8,39.3,33.0 times respectively. We continue to be optimistic about the development prospects of various businesses and maintain the "recommended" rating.

Risk tips: integration risk after investment M & A; online game business expansion is not as expected risk; goodwill impairment risk.