The investment proposal estimates EPS for 2013-2015 to be 0.37 yuan, 0.48 yuan, and 0.66 yuan respectively, corresponding to PE of 36.5 times, 27.6 times, and 20.3 times. They are optimistic about the company's overall competitiveness in the energy saving protection industry and the long-term growth of the industry, and were given a recommended rating for the first time. Key investment points A leading enterprise in the industrial energy saving protection industry: The company's main business includes two major contracts for wear and corrosion protection and waste heat power generation projects, mainly providing integrated protection and energy saving services for downstream electricity, cement, chemicals, steel and other enterprises. Judging from the data for the first half of this year (not taking into account shareholding income in the waste heat power generation sector), the anti-wear and corrosion business accounts for about 75% of revenue and 60% of profits, and is still the main source of revenue and profit at present. The advantage of “comprehensive qualification+technology+service network” creates core competitiveness: Downstream customers in the energy saving protection industry are mostly large industrial enterprises, which have high requirements for protection quality, and usually require suppliers to provide one-stop comprehensive solutions from overall design, procurement and supply of equipment materials, project implementation to post-maintenance. Furthermore, the geographical dispersion of downstream customers, especially in the field of protection, also has a huge impact on the continuous production and operation of enterprises, requiring suppliers to be able to respond quickly, so the service network requirements of enterprises are high. The company is the first enterprise to enter the field of protection in China. After years of accumulation, the company has 10 invention patents, 13 utility model patents and dozens of proprietary technologies in protective equipment and materials; it has first-class qualification for metal thermal spraying industry, second-level qualification for professional contracting of anti-corrosion and insulation engineering (currently the highest qualification in the industry), second-level qualification for furnace engineering; and has a service network of 14 regions and 6 logistics distribution centers across the country, and has gradually expanded to Southeast Asia and other regions. We believe that this kind of “comprehensive qualification+technology+service network” requirement in the industry poses a high barrier to new entrants and small enterprises, and that after a long period of accumulation, the company has outstanding core competitive advantages, and is expected to continue to consolidate and expand its market share. Downstream companies' profits are stabilizing, and demand for wear and corrosion resistance is expected to be released centrally. The company's traditional wear and corrosion resistance business may still face short-term pressure. Downstream companies' overcapacity profits will decline, and the demand cycle for wear-resistant and anti-corrosion business will be extended. Normally, a 3-year replacement project will be extended to 4 years or longer, but as the economy stabilizes, especially the profits of large enterprises, the demand for wear and corrosion resistance, which has been suspended, is expected to be clearly released in the next 1-2 years. We believe that the market's expectations of the impact of the elimination of backward production capacity on the industry are slightly pessimistic. According to the requirements of the “12th Five-Year Plan” energy saving and emission reduction plan, the phased out production capacity of electricity, steel, and cement will reach 20 million kilowatts (2.4% of the installed capacity in 2012), 48 million tons (accounting for 4.8% of the 2012 steel production capacity), and 370 million tons (accounting for 12.3% of the cement industry's production capacity in 2012). We believe that the impact of production capacity contraction on overall wear and corrosion resistance demand is relatively limited. Conversely, the concentration of production capacity on large enterprises is beneficial to the protection rate upgrade. Furthermore, we are still optimistic about the long-term space of the protection business. The driving force for this growth is mainly due to the continuous support of national industrial policies, the continuous increase in corporate safety and protection awareness, the increase in the overall protection rate (the protection ratio was only 35% in 2010) driven by downstream industrial restructuring, and the rapid growth in demand in new protection fields including chemicals, military, marine, and aviation. The rapid development of the waste heat power generation business has become a new driving force for the company's performance growth: since anti-corrosion customers usually also need to use waste heat, the two have commonalities in customer resources. The company quickly entered the field of waste heat power generation by using its customer advantages in the field of anti-corrosion and corrosion resistance, and renewed the 4.5MW pure low temperature waste heat power generation project for the Shanxi Southwest Lou Group 2500T/D cement clinker production line in just half a year, Fujian Dingxin Nickel Industry's sintering waste heat AOD furnace steam power generation project and Fujian Sanjin Steel's 12MW waste heat power generation project. Among them, Nanlou Group is a contract energy management project, which is expected to contribute 1,400 revenue and 6.5 million profits to the company every year; the Dingxin Nickel Project is a general engineering contract model, with a total project amount of 120 million yuan, accounting for 57% of 2012 revenue. The project will confirm most of the project payments within this year, and is expected to be completed and entered into the contract energy management model in the first half of 2014, contributing stable profits to the company. In addition, Beijing Xinli Zhuzheng, in which the company is a shareholder, signed two major business contracts with Ningxia Shenyin Special Steel Co., Ltd. in the first half of the year. The total contract amount reached 120 million yuan. The project will be implemented in 2013 and profits will be gradually confirmed. Based on 30% gross margin, it is expected to contribute 7.2 million investment income. Although it is also affected by the downturn in the downstream industry, due to the company's low base, the future expansion of the waste heat power generation business is expected to maintain a relatively rapid pace, thus becoming another major source of performance for the company after anti-corrosion protection, laying the foundation for the company to expand and strengthen in the field of energy saving protection. Equity incentives show the company's confidence: The equity incentive plan completed by the company during the year was based on net profit after deduction in 2012. The increase in non-net profit after deduction in 2013-2015 was not less than 200%, 290%, and 400%, and the return on net assets was not less than 5%, 7%, and 8%. Based on net profit after deducting non-net profit in 2012, the terms of reference require the company to reach 36 million, 46.8 million, and 60 million in 2013-2015, with a three-year compound growth rate of 70%. After deducting the impact of the low base in 2012, the compound growth rate will also reach 29% in the next 2 years, demonstrating the company's confidence in high growth in the next few years. Risk warning: Risk of downstream industry protection requirements falling short of expectations, risk of accounts receivable recovery.