The consolidated performance of the subject matter of M & An increases, and the net profit is in line with expectations.

1) in the first half of the year, the company realized operating income of 636 million yuan and operating cost of 351 million yuan, an increase of 54.08% and 37.65% respectively over the same period last year; net profit of 131 million yuan, an increase of 199.33% over the same period last year, corresponding to 0.16 yuan of fully diluted EPS, in line with market and our expectations; of which Q2 realized operating income of 395 million yuan, an increase of 44.69% over the same period last year, and net profit of 99 million yuan, an increase of 242.21% over the same period last year. The main reasons for the increase in operating income and net profit are Xinhua Vanguard, Vanguard, value still Interactive and Aurora Mobile Limited Network.

2) the company released its performance forecast for the first three quarters of 2017. The net profit for the first three quarters is expected to be 199 million to 265 million yuan, an increase of 50 percent over the same period last year. The corresponding EPS is from 0.24 yuan to 0.32 yuan, of which Q3 net profit is between 99 million yuan and 165 million yuan.

The expense rate is declining, and the synergy effect of the industrial chain is highlighted.

In the first half of the year, the company's sales expenses and management expenses were 35.5697 million yuan and 69.6479 million yuan respectively, an increase of 65.22% and 60.24% over the same period last year. The rates of sales expenses and management expenses were 5.59% and 10.95% respectively, down 1.64 and 0.2 percentage points compared with 7.23% and 11.15% in the same period in 2016.

The proportion of income in the cultural sector continues to increase, and the manufacturing business has been transferred.

During this period, the company has completed the transfer of manufacturing business, and the transformation in the field of culture has been continuously promoted. In the first half of the year, the revenue of the machinery manufacturing industry was 208 million yuan, accounting for 32.70%; the income of the culture sector was 428 million yuan, accounting for 67.30%, which continued to rise from 58.88% in 2016; of which the game promotion and film and television sectors achieved revenue of 191 million yuan and 172 million yuan, respectively, accounting for 57.08%, which is the main source of income for the cultural sector, and the transformation of the main industry is firm and effective.

Investment suggestion

We estimate that the annual EPS of the company in 2017-18-19 is 0.62 + 0.78 + 0.92, corresponding to the corresponding 23-18-15 times PE, which is significantly lower than the average valuation level of the film game sector over the same period. We continue to be optimistic about the possibility of the company's business integration and the layout of the industrial chain, with reference to the comparable company's valuation level, give the company a reasonable valuation of 18.6 yuan over a six-month period (corresponding to a 17-year, 18-year, 30-PE) and maintain a "buy" rating.

Risk hint

The risk of policy regulation, the risk of M & An integration is not as expected, the risk of marketability of film and TV series and so on.