Event description Zhongneng Electric released its 2013 quarterly report: From January to September, the company achieved operating income of 289 million yuan, an increase of 35.09% over the previous year; realized operating profit of 39.86 million, an increase of 16.07% over the previous year; realized imputed net profit of 3.03 million, an increase of 7.06% over the previous year; and basic earnings per share of 0.21 yuan. Looking at a single quarter, the company achieved operating income of 133 million yuan in July-September, up 64.58% year on year; realized operating profit of 16.35 million, up 29.68% year on year; realized imputed net profit of 15.1 million, up 7.91% year on year; and basic earnings per share was 0.07 yuan. Incident review The company's revenue growth rate in the third quarter increased significantly compared to the first half of the year, mainly due to the recovery in the railway market and a significant increase in winning bids in the first half of the year. Currently, equipment such as railway box transformers is gradually entering production and delivery times, driving rapid growth in business revenue. In addition, the company's complete high and low voltage equipment has also maintained good sales within the power grid. The company's operating profit growth rate is lower than the revenue growth rate, mainly because the gross margin of railways and complete equipment is lower than that of traditional ring network cabinets, cables, etc., and the overall gross margin has declined structurally. The company's gross margin for the first three quarters was 37.37%, down 7.96 percentage points from the previous year. The company's railway business is mainly carried out by its subsidiary Wuchang Electronic Control. In the railway market, only a few enterprises, such as Wuchang Electronic Control, Teruide, and Xinlong Electric, can provide highly reliable intelligent prefabricated substations, and the market competition pattern is relatively stable. Affected by the train accident, the railway “Four Electric Power” tenders basically came to a standstill in the first three quarters of 2012. However, since the end of last year, the number of tenders for equipment such as box converters has rebounded markedly, and the company's new orders have increased markedly. As of the third quarter, Wuchang Electronic Control successfully turned a loss into a profit. In addition to railways, the company also successfully broke through the subway market in the first half of the year and won the bid for the Wuhan Metro Line 4 Phase II project. Production has now begun, but delivery has not yet been delivered. Considering that the parent company holds 51% of the shares in Wuchang Electronic Control, the company's minority shareholders' profit and loss during the reporting period increased significantly compared to the same period last year. Affected by this, the growth rate of net profit attributable to Zhongneng Electric was significantly lower than the growth rate of operating profit. The company's short-term growth depends on the recovery of the railway market, but long-term growth requires the continuous introduction of new products into the market. Judging from the disclosed research and development progress, the company is currently producing a number of products in small batches after type testing, such as power quality products, smart cable accessories, etc. The above products all have high added value and are expected to become new profit growth points for the company in the future. Give it a “carefully recommended” rating. The company implemented an equity incentive plan in 2012, where the conditions for unlocking/exercising the second phase were set as follows: the company's net profit growth rate in 2013 is not less than 60% compared to 2011; the weighted average return on net assets is not less than 9%. Judging from the performance of the first three quarters, it is very difficult for the company to meet the conditions for exercising authority. We expect the company's EPS in '13 and '14 to be 0.31 yuan and 0.38 yuan respectively, with corresponding price-earnings ratios of 27 times and 23 times, giving it a “careful recommendation” rating.