Investment highlights: The company released its 2016 annual report and 2017 quarterly report: 2016 operating income was 4.928 billion yuan (YoY +64.60%), and net profit attributable to shareholders of listed companies was 9534 million yuan (YoY +55.62%). The sharp increase in revenue and net profit was mainly due to the company's integration of industry production capacity and significant growth in tire production and sales. The net profit of 2016Q4 was 14.26 million yuan (YoY -25.45%, QoQ -47.30%), and net profit after deduction was -9.95 million yuan, which was lower than expected, mainly due to the sharp rise in prices of rubber and other raw materials since October 2016. In 2016, the company's non-recurring profit and loss was 35.13 million yuan, of which it received government subsidies of 34.25 million yuan. 2017Q1 achieved operating income of 1,094 billion yuan (YoY +1.17%) and net profit attributable to shareholders of listed companies of 24.62 million yuan (YoY +1.31%, QoQ +72.60%), in line with expectations. Raw material prices have skyrocketed, and 2016Q4 performance has been severely affected. From October 2016 to February 2017, the price of tire raw materials rose sharply. The price of natural rubber soared from 1,1550 yuan/ton in October last year to 20,000 yuan/ton in February 2017, an increase of 73%; the price of synthetic rubber soared from 11,000 yuan/ton in September to 23,000 yuan/ton, an increase of 109%. The price of raw materials has skyrocketed, while the transmission of tire prices has lagged behind, and 2016Q4's performance has suffered greatly. Raw materials have declined rapidly recently, and the tire industry is expected to reverse in the second quarter. The price of natural rubber plummeted from a high of 20,900 yuan/ton in February to 13,900 yuan/ton at present, a drop of 50%; the price of synthetic rubber plummeted from a high of 25,100 yuan/ton in February to 14,300 yuan/ton, a drop of 76%. The rate of reduction in tire prices is relatively lagging behind the rate of decline in raw materials, and the performance of the tire industry is expected to reverse in the second quarter. Establishing an industrial merger and acquisition fund refers to high-quality overseas targets. On November 22, 2016, the company announced that it will invest 900 million yuan to participate in the establishment of the Qingdao Starway Equity Investment Fund, mainly investing in domestic and foreign tires, automobiles and upstream and downstream related industries. The M&A fund uses a limited partnership model, with a total size of no more than 10 billion yuan. The company pledged 900 million yuan as a limited partner, Qingdao Guoxin Capital and Qingdao International Investment each pledged 395 million yuan and 50 million yuan as limited partners, and Qingdao SDIC Dehou and Qingdao Guoxin Innovation each pledged 5 million yuan as general partners. According to South Korean sources, Double Star has received a no-action notice from creditors. Kumho Tire's priority purchase rights holders have given up exercising their priority purchasing rights, and Double Star will become Kumho Tire's final purchaser. Qingdao Xingwei used 954.98 billion won to acquire a total of 66.37 million shares of Kumho Tire Co., Ltd. held by Korea Development Bank and other sellers represented by Korea Development Bank, accounting for 42.01% of the total shares issued by the target company. Kumho Tire has obvious advantages over domestic companies. If the acquisition is successful, Double Star is expected to become a new domestic tire leader. The relocation of production capacity has been carried out in an orderly manner, and the net interest rate of the new Huangdao plant has increased dramatically. The “automotive aftermarket” layout is worth looking forward to. The relocation of production capacity was carried out in an orderly manner, and the net interest rate of the new plant increased dramatically. After the relocation, an intelligent model factory with a production capacity of 4 million sets of all-steel tires and 6 million sets of semi-steel tires will be built, and the net interest rate level will be greatly increased compared to the old factory. The company has adopted the O2O+E2E innovative business model to enter the “automotive aftermarket”. Currently, it is being laid out in an orderly manner, with initial results. Profit forecast and investment rating: Performance continues to grow at a high level. Participation in the establishment of M&A funds is expected to integrate high-quality resources at home and abroad, and is expected to become a new domestic tire giant. Maintain the increase in holdings rating, maintain the 2017-18 profit forecast, and add the 2019 profit forecast. The estimated EPS for 17-19 is 0.23 yuan, 0.39 yuan, and 0.45 yuan, respectively, and the corresponding PE for 17-19 is 32 times, 19 times and 16 times, respectively. Risk warning: Domestic and foreign markets are fiercely competitive, industry integration falls short of expectations, and market development falls short of expectations.