The first quarter results were announced to have bottomed out and rebounded. The company achieved operating income of 126 million yuan in the first quarter, up 10.32% year on year, and net profit attributable to listed companies was 9.62 million yuan, down 49.7% year on year, equivalent to earnings of 0.05 yuan per share. However, the company achieved a total operating profit of 10.49 million yuan in the first quarter, a significant increase from 4.65 million yuan in the fourth quarter. The gross margin has bottomed out. The company's gross margin for the fourth quarter was only 20.97%, which rebounded to 32.72% in the first quarter, but still lower than the level of 36.89% in the first three quarters of 2009 and 34.41% in 2008. Due to the impact of the economic crisis, the price of some orders accepted by the company in the second half of 2009 was low. These orders were the main reason for the low gross margin of the company in the fourth quarter and the first half of '10. It is expected that this portion of low-priced orders can be absorbed in the second quarter. We expect the company's gross margin to return to a normal level of around 35% in the second half of the year. There are many additional depreciation expenses in 10 years. The company's IPO fund-raising projects were basically completed at the end of 2009. The prospectus disclosed that depreciation expenses would be added by 22 million yuan after these projects were put into operation. The actual investment in the company's fixed assets exceeded the original estimate. The annual additional depreciation expenses may be around 25 million yuan, accounting for about 4.7% of 2009 sales revenue. Considering this factor, the company's gross margin in the first quarter was basically normal and even exceeded the original level. Furthermore, in the fourth quarter and the first quarter, these fund-raising and other technical improvement projects have just reached production, and low consumables such as tooling and tools are used along with new equipment, and the one-time investment expenses are high, which affects the gross profit margin of the products. There has been an increase in financial expenses. Since there were many projects under construction in 2009, some interest expenses can be included in fixed asset investments for capitalization, so the 10-year financial expenses will increase year-on-year. Demand in the metallurgical industry is stable, and there is plenty of room for expansion in other industries. As the number of new metallurgical projects decreased, gearbox orders for new construction projects decreased more, while the proportion of orders for spare parts and gearboxes increased. In addition to the metallurgical industry, the company is also actively expanding demand in other industries such as cranes. Currently, orders in the new industry are mostly small batches of various products, and there is some pressure on production. The company also indicated that it plans to integrate a special series for cranes, hoping that the generalization rate of gears will reach 60% to facilitate mass production. The implementation of the wind power gearbox project will bring new room for growth to the company. The additional wind power gearbox development project is the focus of market attention. The wind power gearbox project was approved by the Development and Reform Commission in April and is currently awaiting review by the Development and Review Committee. The company has the basic conditions for designing and producing wind power gearboxes, and the company already has some accumulation in the field of wind power gearboxes. The company is cautious about wind power gearbox projects. Currently, the planned production capacity is only 400 million yuan, accounting for about 7% of the total domestic market size in 2009. At present, the company's wind power gearbox prototype has been successfully tested (1.5MW wind power gearbox). The next step is to pass the certification by a third party (Verification and Evaluation Center). After the certification is completed, it will be operated online for 2 months for further testing. If additional power generation can be successfully implemented in 2010, it is expected that the wind power gearbox project can be produced on a small scale in 2011 and mass-produced in 2012. The high-speed rail gear project is a future reserve project. The company and Changzhou Changzhao Group have some high-speed locomotive gear orders (250km/h). Currently, the amount is small, around 10 million yuan. As a new mode of transportation in modern society, high-speed railways have good prospects for industrial development, and gearbox manufacturers such as South High Gear and Heavy Gear are also targeting this direction. However, the technical requirements for high-speed rail locomotive gears are high, and there is a long testing and use cycle. Currently, the company undertakes a small amount of high-speed rail locomotive gear business. The company will develop and manufacture high-speed rail locomotive gears, hoping to become a new economic growth point for the company in the future. Small companies and big industries have great potential in the field of industrial gearboxes. Currently, the company's main business is concentrated in the metallurgical industry, but metallurgical industry gearboxes account for only about 10% of the entire industrial gearbox field. The company is vigorously developing markets in other industries, such as cranes, wind power, high-speed rail gears, etc. The design and manufacturing technology for modern industrial gearboxes began to be introduced from abroad in the 1980s. Currently, the overall level of China's industrial gearbox industry is still lagging behind, and there is still a lot of room for growth. The company's revenue in 2009 was 534 million yuan. There is a big gap between the revenue scale of enterprises such as Heavy Gear (more than 3 billion), Hangqi (1.5 billion), and South Gaoqi (5.6 billion), and there is still plenty of room for development. The rise in raw material prices had a negative impact on gross profit. Among the company's raw materials, castings and forgings account for about 30% of the cost, and motors and bearings account for about 35-40% of the cost. Assuming that the price of steel will rise by 30%, the price of castings and forgings will rise by 10%, and the price of motors and bearings will rise by 5%. (In 2009, the average price of castings and bearings for the main raw materials decreased by 2.62% and 5.34% compared to the same period last year). Other expenses remain unchanged, and the company's overall cost will rise by about 5%. Regardless of product price increases, it will affect gross margin by 3 percentage points. The company said it has completed the preparation of commonly used steel materials and locked in prices with prepayment to avoid some of the risks. The valuation is basically reasonable, and the additional price is attractive. The company expects net profit for the first half of the year to fall by less than 30% year on year, that is, earnings per share for the first half of the year will be about 0.18-0.26 yuan. We expect the company's EPS for 10-11 to be 0.55 yuan and 0.68 yuan (not considering additional diluted share capital). Currently, the corresponding dynamic price-earnings ratio is 31 times and 25 times. The valuation is basically reasonable, maintaining a neutral rating. However, the company's additional issuance price is clearly attractive. The company plans to issue no more than 55 million additional shares, and the reserve price for the increase is only 12.02 yuan, which is clearly attractive. The company's production capacity has been greatly expanded through the expansion of production in 2009. Once downstream demand improves, the company's performance will increase markedly. We recommend paying close attention to the company's downstream market development and changes in demand.