Incident: 1. The company recently announced that the investment to establish Baoding Small Loan Company was approved. 2. The company announced a year-on-year decrease of 72.7% in net profit in 2013. Comment: Using small loan companies to enter the quasi-financial industry. The company received approval from the Finance Office of the Zhejiang Provincial People's Government on the 17th and agreed to launch a pilot project for Baoding Microfinance Co., Ltd. in Yuhang District. The registered address is Tangqi Town, Yuhang District, with a registered capital of 200 million yuan, of which the company plans to invest 60 million yuan as the main sponsor, accounting for 30% of the registered capital of the proposed microfinance company. The government allows lending leverage of 1:1.5 times. Currently, the net interest rate of local microfinance companies is 10%-40%. It is conservatively estimated that microfinance companies will contribute about 30 million yuan in net profit for the full year and receive 9 million yuan to the company according to the equity method. The main business is about to bottom out and pick up. The company's operating income in '13 was 217 million yuan, down 33.5% year on year; net profit in '13 was 1,331 million yuan, down 72.7% year on year, and basic earnings per share was 0.08 yuan. The performance is in line with the 50%-80% decline previously forecast. 2013 was the lowest point of the company's performance in five years. As the downstream improves, we judge that the company's performance will bottom out and pick up. The company's advance accounts for the first three quarters increased by 30.4% year-on-year, which to a certain extent indicates an improvement in the company's orders. Generally, ships need to be scrapped for 30 years, and most shipowners did not make new purchases in '11 to 12, and when they reached the shipyard's break-even point, prices for new shipbuilders were no longer reduced, so shipowners began purchasing to supplement inventory. This kind of inventory replacement was maintained for at least 2 years. Shipbuilders ushered in a peak order period in 13-14, and Baoding Heavy Industries, which provided spare parts, ushered in a peak order period in 14-15. By '15, the company's new project was launched again. Company Strategy: Increase shipping, offshore and military business. The company is a leading large-scale casting and forging manufacturer in the domestic shipbuilding, offshore and military industries, and is the only domestic enterprise certified by the world's top ten mainstream classification societies. The company's future strategy: increase the share of shipping, offshore, and military businesses; downstream electricity, construction machinery, etc. 1: Ship parts lag behind the recovery in ship orders. The global shipping and shipbuilding markets picked up markedly in 2013, and new ship prices rebounded steadily. In 2013, the market share of China's three major shipbuilding indicators remained the world leader. Shipbuilding completion volume, new orders received, and handheld orders accounted for 41.4%, 47.9%, and 45.0% of the world's total, respectively. In 2013, the country completed 45.34 million dwt of shipbuilding, a year-on-year decrease of 24.7%; undertook orders for new ships of 69.84 million dwt, a year-on-year increase of 242%; and hand-held ship orders of 131 million dwt, an increase of 22.5% over the previous year. Shipbuilding industry orders reversed the continuous decline in 2011 and 2012, showing significant growth. Since the number of orders for newly accepted ships has been greater than the number of completed shipbuilding for 8 months, the number of orders for hand-held ships from shipping companies has rebounded month by month, ensuring the normal production of key shipyards over the next 1-2 years. In 2014, as the pressure on large shipyards to take orders eases, ship prices will slowly rise. Some large shipyards with sufficient order reserves are in short supply, and some orders will shift to small and medium-sized shipyards. Considering the sharp rebound in shipping industry orders in 2013 and the low base for that year, industry revenue is expected to rise steadily from mid-2014. However, the ship parts industry where Baoding Heavy Industries is located is lagging 1-2 years behind ship orders and beginning to recover in 14 years. The company's performance is expected to rise sharply and enjoy a period of rapid growth of more than 3 years. Downstream 2: The offshore business has large orders, becoming the company's second growth point. In recent years, due to the saturation of offshore business orders from South Korea and Singapore, global orders have been transferred to China, so a large number of domestic offshore orders have been received. In 2013, China undertook 52 units of various types of marine engineering equipment (including modifications) and 11.5 billion US dollars, accounting for 45.2% and 23.8% of global transactions of 115 units and 48.2 billion US dollars, respectively; 104 offshore engineering vessels and 3.5 billion US dollars. The 52 large-scale offshore equipment handled by China's offshore enterprises includes 33 jack-up drilling platforms, 6 semi-submersible drilling platforms, and 10 residential platforms/ships. In 2014, with the gradual commencement of these offshore projects, the demand for offshore castings and forgings will also increase. Currently, the company's offshore business orders are growing rapidly, and it has supplied directly to national oil wells. The gross margin of the offshore business is close to 40%, and the order volume is large, which will become the company's second growth point. Downstream 3: The military industry business has shown strength, and is about to begin scaling up. According to the company's interim report announcement, the company continues to regard military certification as one of its key tasks. The company obtained the “Weapons and Equipment Quality Management System Certification” in December 2012. During the reporting period, the company mainly carried out confidential qualification certification work. Currently, the secrecy system has been in trial operation for a period of time, and has been submitted to the relevant competent authorities for review and acceptance. The company is expected to obtain a military product manufacturing license in the first half of 2014. Due to the high gross margin of the military products business and the large order volume, it is expected that the military products business will begin to expand in the second half of 2014. The commencement of fund-raising projects brought about an increase, but depreciation also increased accordingly. According to the company's December announcement, the “crane hook assembly construction project with an annual output of 2,000 sets” has completed preliminary work such as engineering construction, equipment installation and commissioning, and trial production, and is now officially completed and put into operation. Furthermore, the company's fund-raising project “Construction Project for 20,000 tons of large-scale casting and forging parts per year” is nearing completion. Production and sales of some projects have already begun, which has guaranteed 14 years of performance growth. However, due to the investment in new plants and equipment, depreciation for 14 years will increase by an additional 20 million yuan. Investment Suggestion: Profit Forecast and Investment Suggestion: The company is a leading high-end casting and forging company in China. Downstream ships will begin to reverse the 14-year period, and the performance will increase dramatically. The offshore and military business will soon expand, and the orders will be large, and the performance will be very flexible. The company currently has a market capitalization of only 1.8 billion yuan and cash on hand of 210 million yuan. It is predicted that the company's EPS for 2014-2015 will reach 0.30 and 0.50 yuan respectively, and the corresponding PE will be 39 and 24 times, respectively, giving it an “increase in holdings” rating for the first time. Risk warning: 1. Risk of increased competition; 2. Risk of declining gross margin; 3. Risk of increased depreciation dragging down performance.