1. Analysis of the business situation of East China CNC (1) The advent of the high-speed rail era has brought good development opportunities to the company. On August 10, 2009, Wang Zhiguo, vice-minister of the Ministry of Railways, revealed that the railway construction investment plan for the next 3 years has been finalized. The investment plan for railway construction is about 2 trillion yuan, with an average annual investment of more than 700 billion yuan. Wang Zhiguo explained that in 2009, the Ministry of Railways plans to complete an investment of 600 billion yuan to build 5,600 kilometers of main railway lines, including 2,500 kilometers of dedicated passenger lines. Wang Zhiguo said that the total operating mileage of China's railways will reach 110,000 kilometers by then, including 13,000 kilometers of high-speed railways with a speed of 200 kilometers per hour or more. The electrification rate and double line rate will reach more than 50%. The main railway corridors will achieve separate transportation of passengers and goods, and the “bottleneck” of China's railway transportation will basically be broken. According to statistics, China's railway fixed asset investment from January to October 2009 reached 442.8 billion yuan, and the industry expects the annual railway fixed asset investment to be close to 700 billion yuan, with a year-on-year growth rate of over 65%, which is basically similar to last year's growth rate. From January to October 2009, the railway completed a total of 4,705 kilometers of new tracks, and the investment and construction progress greatly exceeded expectations. According to the “Medium- to Long-Term Railway Network Plan”, by the end of 2009, China will surpass India and become the second-largest country in the world in terms of railway operating mileage. At present, China's high-speed rail technology has reached the world's advanced level. Construction of the “four vertical and four horizontal” high-speed rail trunk lines with a design speed of 250-350 kilometers per hour has been fully launched, and there have been four subways and urban rail construction. By 2012, “four vertical and four horizontal” passenger lines will be completed one after another. At that time, 13,000-kilometer passenger lines and intercity railways will be put into operation, and the era of high-speed rail is making waves. (2) Huadong CNC is a leading company in the field of CNC machine tools for high-speed rail equipment. It is the only domestic machine tool enterprise with completely independent intellectual property rights for CNC systems, and the only domestic enterprise capable of producing Borg plate grinders. The Borg board is one of the special track boards for high-speed railways, and is widely used on newly built railways in China (including the Wuhan-Guangzhou High-Speed Railway, which has already been opened to traffic). As of the 2009 three-quarter report, 80% of the company's CNC machine tool sales revenue comes from Borg plate grinders. Among them, winning the Beijing-Shanghai high-speed railway machine tool order of 350 million yuan is having an effect. With the advent of the era of high-speed rail in China, the company will surely enter a new path of rapid development. 2. Analysis of the financial situation of Huadong CNC (1) The dividend policy is stable, and the potential for future dividends is high. On February 27, 2009, the company revised the relevant dividend policy in the “Articles of Association”, which states: “The company can distribute dividends in cash or stocks, and can make mid-term cash dividends. The company's profit distribution policy shall maintain continuity and stability for those that were profitable for the year but did not propose a cash profit distribution plan.” In 2008, when the company went public, a cash dividend of only 1 yuan was distributed for every 10 shares. As of the 2009 three-quarter report, the company's capital reserve and monetary capital are still as high as 2.35 yuan and 2.03 yuan per share, respectively, and the undistributed profit per share is 1.24 yuan. The company's dividend potential for 2009 is huge. (2) The company has good profitability and growth capacity. The financial data disclosed in the company's 2009 three-quarter report shows that compared with the relevant data of the previous year, the company achieved operating income of 423 million yuan, total profit of 106 million yuan, and net profit attributable to shareholders of listed companies of 92 million yuan from January to September 2009, up 33.97%, 154.01% and 155.44% respectively over the same period last year. The company's comprehensive gross margin increased 11.96 percentage points over the previous year, showing the company's good profitability and growth. Furthermore, the performance forecast announcement issued by Huadong CNC “The company's net profit attributable to the owners of the parent company is expected to increase 120-150% year-on-year in 2009” provided a footnote for the company's good growth. (3) Strong ability to generate cash flow from operating activities Due to the company's high brand awareness, gross profit margin, net interest rate, and turnover ratio of accounts receivable are much higher than those in the same industry. Therefore, the cash flow generated by the company's operating activities is highly proportional to net profit, and the hematopoietic function is very strong. 3. Risk analysis of Huadong CNC (1) Management expenses are growing too fast. According to the 2009 three-quarter report disclosed by the company, the total management expenses of the company from January to September 2009 were 31.75 million yuan, and the increase of 18.12 million yuan in the same period last year was 75%. The main reason is that in order to adapt to market changes and demand, the company continues to increase investment in R&D, actively carry out technological innovation, and the increase in R&D expenses is large. At the same time, with the expansion of the company's scale, the company has introduced some high-level professionals, technical research and development and management talents, and employee wages and benefits have increased to a certain extent. Although the increase in the company's management expenses from January to September 2009 was much higher than the increase in revenue, we believe this is a stage that growing companies must go through. As the company enters a mature period, the company's expenses as a share of revenue will stabilize. (2) Other risk factors The company's projects under construction have increased significantly. As projects under construction are converted into fixed assets one after another, the company's depreciation expenses and subsequent expenses on fixed assets will increase significantly, putting some pressure on the company's operations. The increase in the company's intangible assets will also lead to an increase in amortization expenses. 4. Performance Forecast and Rating The Company's earnings per share for the third quarter of 2009 were 0.77 yuan. According to the company's performance forecast and our forecast, earnings per share for 2009 are expected to be around 1 yuan. With a dynamic price-earnings ratio of 50 times, and considering the potential for the company's share capital expansion, we estimate that the company's target recovery price within 6 months is 60 yuan, giving the company an “increase in holdings” rating.