Main points of investment:

The company announced its 2018 report: the annual operating income was 468 million yuan, down 14.78% from the same period last year, and the net profit belonging to shareholders was 26.4039 million yuan, down 60.8% from the same period last year, which was lower than our previous forecast (45 million yuan). Deducting non-net profit of 21.1793 million yuan, an increase of 4142.02% over the same period last year. In this period, the company strictly controlled the management expenses and sales expenses, the management expense rate decreased from 0.76pct to 17.16%, and the sales expense rate decreased from 0.93pct to 4.84%. Due to the capitalization of the special loan interest of the Dayong ancient city project and the decline of the working capital loan scale, the company reduced the financial expense interest expenditure, the financial expense rate decreased to 0.89%, and the overall gross profit margin increased to 31.52%. The company made a large investment income from the disposal of its subsidiaries for 17 years, and this part of the non-recurrent profit and loss decreased significantly, resulting in a substantial increase in non-net profit deduction.

The reduction in ticket prices has led to a decline in revenue, and passenger flow is basically the same as last year. For the whole year, the company received a total of 5.9649 million ticket buyers, an increase of 0.25%, which was basically the same as last year. Among them, the number of green passenger ticket buyers decreased by 2.85%, while Baofeng Lake and Shili Gallery sightseeing trams increased by 12.72% and 8.29% respectively. Affected by the construction of Wulingshan Avenue, traffic control has been implemented on the section of Baizhangxia and the section from the city to Forest Park in Wulingyuan District, and tourist buses have been banned, causing travel agencies to change their routes and itinerary, resulting in the isolation and closure of Yangjiajie ropeway relative to the core scenic area, resulting in an 11.7% drop in the number of tickets purchased by Yangjiajie ropeway in 2018. In July 2018, tickets for the Wulingyuan Scenic spot in Zhangjiajie (including environmentally friendly car tickets) were reduced by 8% from 245 yuan in peak season / 120 yuan in off-season to 225 yuan in peak season / 115 yuan in off-season. The unit price of environmentally friendly passenger tickets dropped from 57 yuan per person to 51 yuan per person, a reduction of 13%. As a result, the operating income of environmentally friendly passenger transport was 170 million yuan, down 15.15% from the same period last year. Zhangjiajie China Travel Service (Zhangjiajie) was also affected by this policy to close its sales department and its revenue fell by 28.27%.

The ancient city of Dayong is expected to open this year, which is expected to contribute to profit increment. At present, the main construction of Dayong Ancient City has been basically completed, the equipment has been booked and produced, and the core service project large-scale folk performing arts "meeting Dayong" and Flying Cinema have been basically completed and are expected to be put into operation in October this year. The Dayong ancient city project has a total investment of 2.2 billion yuan, with an estimated annual operating income of 425 million yuan and a net profit of 185 million yuan. The main purpose of the construction project of Dayong Ancient City is to solve the pain points of the lack of local and company's own leisure and entertainment projects, and to help the company transform from a traditional operating unit of scenic spots into an integrated scenic spot of leisure, vacation and sightseeing. After completion, the company's income structure is expected to be improved.

Profit forecast and investment suggestions: the reduction of ticket prices is the main reason for the decline in the company's income in this period. in the current depressed state of domestic tourism, passenger flow maintains positive growth, and the operation of scenic spots is normal. With the refinement of the company's operation and management, the expense rate continued to narrow significantly during the period, and the loss decreased after the stripping of the unprofitable sector. In 2019, the company plans to receive 7.1575 million tourists, an increase of 19.99%, and planned revenue of 540 million yuan, an increase of 15.29%. Adjust the 2019Universe in 2019 and add the profit forecast in 2021. It is estimated that the EPS in 2019-2021 will be 0.10max 0.12max 0.12 yuan respectively (the original estimate is 0.13max in 2020), and the corresponding PE will be 63-52-52 times, maintaining the "overweight" rating.

Risk tips: 1. The risk of passenger flow in scenic spots affected by force majeure; 2. The progress of the Dayong ancient city project is not as good as expected risk, etc.