Report Highlights Incident Description ST Special Tracking Report. The incident commented that asset sales were combined with government subsidies, and losses are expected to be reversed in 2016: the company's performance has been losing money for 2 consecutive years, and stock trading has also been subject to a special “delisting risk warning” since May 3, 2016. However, as of the first three quarters of 2016, the company still lost -90 million dollars in performance. However, after the company sells assets and receives government subsidies, the 2016 performance is expected to change the situation and reverse losses. Specifically, the company has received 59.78 million yuan in shantytown rehabilitation subsidy funds from the Ministry of Finance, and the transfer of some of its shares in Ordnance Equipment Group Finance Co., Ltd. affected profit and loss of 67.3775 million yuan. Thus, the company expects to achieve profit of 4 million yuan to 10 million yuan in 2016 and a loss of 213 million yuan in the same period last year. The operating efficiency of the main business needs to be improved: industry demand recovered in 2016, and the performance of special steel companies also bottomed out and rebounded one after another to achieve profit. In this context, companies are still constrained by high cost rates, and their main business is unable to reverse losses. Ultimately, they rely on government subsidies and asset sales to reverse losses to achieve performance. We found that the company's gross margin did not lag behind the industry average, yet the company's expense ratio was far above the industry average. As a result, under the drag of costs, the company's net interest rate also lags far behind the industry average. For example, the gross margins of the company, the steel sector, and the special steel sector were 10.24%, 10.11%, and 9.63% respectively in the first three quarters of 2016, indicating that the company's product market competitiveness had a certain advantage, but the cost rates of the three were 25.22%, 7.94%, and 15.73%, respectively, indicating that the company's cost control was poor. In the end, under the drag of high cost rates, the company's net interest rate was only -13.21%, while the net interest rate for the steel sector was 1.23% and the net interest rate for the special steel sector was -7.15% for the same period. It can be said that a company's performance is limited by internal operating efficiency, and transformation or following the trend becomes a way out. Although planning for important matters has come to an end, there are still expectations of transformation: since the end of 2015, four representative companies have successfully transformed, covering fields such as computers, finance, power generation, environmental protection, and e-commerce. These fields have the characteristics of good prospects, steady operation, and light assets. The company is also trying to seek transformation based on its own business conditions. Judging from the relevant announcements, the field of transformation involves the financial industry, but since the conditions for transformation are not yet ripe, it was eventually terminated. However, the company announcement also stated that “in the future, the company will continue to follow the company's development strategy, actively create favorable conditions to further improve the industrial layout, find new profit growth points, and ensure the company's health and sustainable development.” It can be seen that the transformation expectations are still strong. The company's 2016 and 2017 EPS are expected to be 0.01 yuan and 0.03 yuan respectively, maintaining the “increased holdings” rating. Risk tips: 1. Industry demand fluctuated more than expected.