Incident On November 29, 2016, the company held an on-site investor exchange meeting on industry transformation at its headquarters to clarify the company's “double transformation” strategic plan for industry transformation and product transformation. The review company has implemented a dual transformation strategy. One is product transformation, and the other is industry transformation. Product transformation has expanded coal mine safety monitoring products to environmental protection and other fields, and coal mine information and communication products to rail transit and military industries. The direction of industry transformation lies in the military industry. Taking advantage of the major trend of civil-military integration, the acquisition of Shikai Technology has taken the first step in military transformation. In the future, it will combine Euroka's machining capabilities, Fuhua Yuqi's data communication advantages, and M&A fund project reserves to achieve rapid growth in military business. Euroka parent company: Coordinating subsidiaries to leverage their respective strengths. Yuroka's original main business was coal mine safety monitoring products, and in the future, its positioning will be used as a holding platform, forming a pattern where Euroca holds and subsidiaries go hand in hand. Euroca's strengths lie in capital, space, and processing capabilities. Fuhua Yuqi has product development and technology accumulation in the communications field, and Shikai Technology has a military platform and complete qualifications. In the tripartite cooperation, Euroka acts as a mediator, giving full play to the strengths of various subsidiaries. Since this year, coal prices have recovered, and coal companies' profits have improved, favoring the company's demand for traditional products, which will take some time to spread. Fuhua Yuqi: The rail transit sector is based on products and is involved in operations, and the original coal mining sector has steadily attracted large customers. Fuhua currently has 4 product lines, namely rail transit communication systems, mining IoT systems, industrial safety big data systems, and 4G LTE digital systems. The company's basic position in railway communication is “based on products and involved in operation.” In the early stages, it developed various rail traffic communication products one after another, and later plans to cooperate with railway companies to participate in the operation of communication systems. Sales of general railway communication products, such as WIFI set-top boxes, etc., continue to be stable, and new equipment is gradually being added; high-speed rail wireless communication products are being tested, and there is plenty of room for development in the later stages. In the field of traditional coal mine communication products, the company focuses on serving coal mining enterprises with good economic benefits, such as Shenhua Group. Following the merger and acquisition of Shikai Technology in 2015, according to the board of directors, it will focus on developing corresponding solutions and products in the 4G LTE field in response to national defense informatization needs. Shikai Technology: The military industry is the main force. It already has promises to guarantee product performance, and products under development provide room for growth. Shi Kai is mainly engaged in the research and development and production of optoelectronic technology in military weapons and equipment. The products are missile guidance systems for precise attacks on tanks, ships, etc., as well as ancillary products such as maintenance equipment and operation training equipment. The company has a complete range of military personnel and is a designated production unit for anti-tank missile guidance systems in China. R&D capabilities In addition to the company's own technical team, relying on the Changchun Institute of Optoelectronics of the Chinese Academy of Sciences, the R&D consulting team is distributed across various research institutes across the country. Shi Kai promised to deduct 6,000/7300/86 million yuan in non-net profit for 16-18 years. Existing products have a high guarantee of performance commitment, and products under development provide room for growth. Xi'an Fund: Helping the military industry achieve high growth. The Xi'an M&A Fund was established this year, with a total scale of 200 million yuan and a term of seven years. It mainly engages in equity investment, mainly in the direction of civil-military integration, with other high-tech additions. The composition of the fund consists of China Lu Xin Venture Capital with an investment of 80 million, accounting for 40%, Euroca's investment of 78 million yuan, accounting for 39%, and the Xi'an Venture Capital Guidance Fund of 40 million yuan, accounting for 20%. The projects stored before and after the establishment of the fund are highly consistent with the direction of Yuroka's military transformation. The high growth of the military industry in the future will come in part from the fund's investment projects. Profit forecast We forecast 2016-2018 that the company's operating income was 2.43/4.05/496 million yuan, up 47%/67%/23% year on year respectively; net profit of 39/89/105 million yuan, up 66%/129%/18% year on year respectively; EPS was 0.06/0.14/0.17 yuan; corresponding PE was 154/67/57 times, respectively. Investment suggestions We believe that the company's product and industry transformation strategy has taken shape. Shikai Technology has become the main force in the military business. Existing and ongoing products can guarantee performance growth, and the military-civilian integration M&A fund provides a continuous expansion direction; Fuhua Yuqi's products are transforming the field of rail traffic, revenue and profit increased rapidly in the first three quarters of this year; the parent company used capital, space, and processing advantages to coordinate various subsidiaries to maximize benefits, and the improvement in downstream coal companies' profits is conducive to the recovery of product demand. We maintain the company's “buy” rating, with a target price of 14-16 yuan for 6-12 months. Risks indicate the risk of mergers and acquisitions integration, the risk of investment in the military industry falling short of expectations, and the risk of industrial fund investment projects.