Bid winning situation: Recently, China has made positive progress in welding materials for important nuclear power equipment. Shandong Nuclear Power Equipment Manufacturing Co., Ltd. (hereinafter referred to as “National Nuclear Equipment”), which belongs to “National Nuclear Power”, organized the first batch of E9018G-H4 electrodes produced by the domestic company Shanghai Atlantic Welding Materials Co., Ltd. to be used for the first time to weld third-generation nuclear power AP1000 steel safety housings (SA738B steel plates), marking a breakthrough in the localization of welding materials for third-generation nuclear power equipment manufacturing. This is also the first time that a domestic welding materials company has produced welding materials for nuclear power and nuclear power islands, which is of great significance to the localization of nuclear power equipment. http://www.smnpc.com.cn/shownews.aspxid=4152 Investment highlights: Achieving a breakthrough in localization of nuclear power and nuclear island welding materials for the first time is of great industrial significance. Welding is a key process in the manufacture of nuclear pressurization equipment, and welding joints are also often a weak link in nuclear pressurization equipment. Therefore, welding materials and welding processes for pressurized equipment in nuclear reactors occupy a very important position in the design, construction and safety assessment of nuclear power plants, and are directly related to the feasibility and safety of nuclear power plant construction. Precisely because of the high requirements for safety, nuclear welding materials have higher entry barriers than ordinary welding materials. Currently, only 4-5 domestic companies, including Atlantic and Shanghai welding materials factories, can supply them. However, at the same time, since there is still a certain gap between the quality and quality of domestic welding materials and foreign welding materials, nuclear island welding materials in core regions such as pressurized water reactors (PWR) and steam generators (SG) are basically dependent on imports, mainly supplied by international giants such as ISA in the US, so there is still huge room for localization. According to rough estimates, domestic enterprises and international enterprises currently supply 1/3 and 2/3 of domestic demand for nuclear welding materials, respectively. The welding material for the third-generation nuclear power AP1000 steel safety shell (SA738B steel plate) that won the Atlantic bid this time achieved a breakthrough in the localization of nuclear power island welding materials for the first time, which is of great industrial significance. According to our understanding, the gross margin of ordinary nuclear welding materials is 25%-30%, while the gross margin of nuclear island welding materials is expected to be as high as 40%-50%. According to estimates of a total investment of 80-100 billion yuan in nuclear power over the next 10 years, the annual demand for nuclear welding materials is expected to reach 2-4 billion yuan, and the market space is huge. It is expected that the performance for the third quarter will continue to grow steadily, and it is conservatively estimated that the first three quarters will achieve an EPS of 0.50 yuan. The company achieved revenue and net profit of 1.01 billion yuan and 40 million yuan respectively in the first half of 2009, down 11.8% and 7.6% from the previous year, and achieved an EPS of 0.33 yuan, exceeding our previous expectations. The sharp increase in fixed asset investment and infrastructure construction under the 4 trillion dollar investment led to a marked recovery in the company's comprehensive gross margin and net profit margin level for welding materials. The gross margin rebounded to a high of 15.2% in the middle of last year, up 2.6 percentage points from last year's full year. The net profit margin increased to 4%, up 1.5 percentage points from the end of last year. With the deepening of infrastructure construction in the second half of the year, the company's welding materials profitability is expected to further improve. We expect the company to achieve net profit of 60 million yuan in the first three quarters, an increase of 6.5% over the previous year. The convertible bond flux-cored wire project contributed revenue in 2010. The company announced the issuance of convertible bonds, which are expected to raise 265 million yuan to invest in a 40,000-ton flux-cored wire project, which is expected to be gradually completed and put into operation over the next year. In addition to the current production capacity of 10,000 tons of flux-cored wire (production of 50,000 tons in the first half of the year), the company is expected to form a production capacity of 50,000 tons by the fourth quarter of 2010, which will contribute 550 million yuan in revenue and gross profit of over 90 million yuan. It will become a new performance growth point for the company over the next two years. Production of various types of welding materials exceeded 180,000 tons in the first half of the year, and is expected to reach 350,000 tons throughout the year, so prosperity is high. Currently, the company has a production capacity of 360,000 tons, which is basically at full capacity. Strong downstream demand and the company's product structure adjustments, the company's profitability in the second half of the year is expected to exceed that of the first half of the year. The target price was raised to 20.7-22.5 yuan, and it is recommended to actively increase holdings. Without considering the performance contribution brought about by the explosive growth of the nuclear power industry, we have temporarily maintained the 09-11 EPS at 0.68, 0.90, and 1.09 yuan. The current stock price corresponding to 09 and 10 PE is 24 times and 18 times, which is at the low end of the midstream manufacturing valuation. We gave the company 23-25 times PE in 10 years, and the target price was raised to 20.7-22.5 yuan, so we recommend actively increasing our holdings.