The investment suggests that Qingdao Shuangxing's M&A fund sign a Kumhu Tire acquisition agreement. Once the merger and acquisition is successful, it will not only be a huge opportunity, but also a huge challenge for Qingdao Shuangxing. We believe that the two sides are more likely to achieve complementary advantages, accelerate Double Star Tire to the world, help the company achieve a global layout, promote the company's leapfrog development, and promote the rise of the national tire industry. The company's 2016-2018 EPS is expected to be 0.15, 0.25, and 0.34 yuan respectively, and the corresponding PE is 58X, 36X, and 26X respectively, maintaining the “highly recommended” rating. Key investment events: Qingdao Shuangxing received a notice from it to initiate the establishment of the Qingdao Starway Equity Investment Fund Center (Limited Partnership) (“Starway Fund”) (hereinafter referred to as “Starway Fund”). Qingdao Starway International Investment Co., Ltd., a holding subsidiary of Xingwei Fund, signed a “Stock Sale Agreement”. Qingdao Xingwei International Investment Co., Ltd. will invest 955 billion won (about US$834 million) to acquire 42.01% of Kumho Tire's shares as the buyer of the “Stock Exchange Agreement”, provided the agreed prerequisites are met. If the acquisition is successful, it will gain a relative controlling position. The significance of Qingdao Shuangxing's acquisition of Kumhu Tire for both parties: 1. First, let's look at what Qingdao Shuangxing is currently lacking. What quality does Kumhu Tire have in the domestic tire industry? Technically, the distance between foreign tire companies is gradually shrinking. Especially in the middle and low end markets, it is already close in quality and technology to foreign countries. However, in the brand, channel, and vehicle front assembly markets, the gap is huge. If the Qingdao Double Stars rely on their own strength, it will take quite a while to catch up. However, Kumho Tire is far ahead of domestic tire companies in terms of brands, channels, vehicle front assembly kits, and international market layout. 2. Let's take another look at what Kumho Tire lacks, and what does Qingdao Double Star have. In addition to financial issues, Kumho Tire's shareholders are currently very scattered (the top two shareholders are financial institutions, holding less than 30% of the total shares) and lacks a strong shareholder support (Volvo faced the same situation before Geely's acquisition). Furthermore, although Kumho Tire has a certain brand power and a global presence, there is still a considerable gap with world-class companies. In the future tire market, China is the market with the most potential, yet Kumho Tire's competitiveness in China is not very outstanding. One advantage of Qingdao Double Star is that it can support Kumho's development as a strong shareholder by relying on the strong financial strength of the domestic capital market. Another advantage over Kumho Tire is its localization advantage close to the Chinese market. 3. If Qingdao Double Star and Kumhu can learn from each other's strengths and make up for their shortcomings and cooperate smoothly, it is hoped that they will develop collaboratively and move towards new prosperity together. Regardless of the outcome, this acquisition will be a very noteworthy target for both Double Star and Kumho. Because once the acquisition is realized, it will only be the beginning of a story for both Shuangxing and Kumho, which will bring huge opportunities and challenges to both. I believe the future evolution and development will also be exciting, so it should not be missed. From the perspective of both parties' interests, we still believe that the opportunities outweigh the challenges. Kumho Tire is the second largest tire manufacturer in Korea and the 14th largest tire manufacturer in the world: Kumho Tire was founded in 1960 and is the second largest tire manufacturer in Korea and the 14th largest tire manufacturer in the world. The company operates globally, and its tire products are sold to more than 180 countries around the world. Kumho Tire has 9 production sites around the world, distributed in Korea (3), China (4), Vietnam (1), and the US (1); the company has 5 R&D centers around the world, distributed in Korea (2), the US (1), China (1), and Germany (1); the company also has 9 overseas sales companies. Currently, the company's tire business revenue in Korea accounts for 32.7% of the company's total tire business revenue, North America accounts for 22.7%, China accounts for 12%, Europe accounts for 14.5%, and Latin America accounts for 4.5%. Kumho Tire operates globally and is an internationally renowned tire company. According to 2015 data, Kumho Tire's revenue is about 16.8 billion yuan, Qingdao Double Star's revenue is 3 billion yuan, and Kumho is 5.6 times that of Double Star. In 2015, Kumho's tire production capacity was 69 million sets, Qingdao Double Star was 10.8 million sets, and Kumho was 6.4 times that of Double Star. The current strength of Qingdao Double Star is not only far from international first-tier tire companies, but it also lacks advantages compared to leading domestic companies. If Kumho is successfully acquired, Qingdao Double Star's competitive strength will reach a new level. Not only will it gain a domestic lead, but it is also expected to gain a place in the international market. Accelerate Double Star Tire to the world, help the company achieve a global layout, promote the company's leapfrog development, and promote the rise of the national tire industry. Kumho Tire continues to lose money and seeks equity transfers: In recent years, Kumho Tire's business performance has been poor due to debt restructuring and declining business in China. In 2015, Kumho Tire achieved operating income of 3,044 billion won (about 16.8 billion yuan) and net profit of 69.4 billion won (about -380 million yuan). The company's operating income continued to decline for three years, and there was a loss in net profit. In the first three quarters of 2016, Kumho Tire achieved operating income of 2156.7 billion won, a year-on-year decrease of 4.4%; realized net profit of 54.9 billion yuan, and increased losses. In the first three quarters of 2016, the company's business revenue in China fell 14.6% year on year, and business revenue in North America fell 9.4% year on year. Kumho Tire continues to lose money, and its shareholders are seeking equity transfers. Qingdao Shuangxing acquired Kumhu Tire through its Industrial M&A Fund (Star Micro Fund): At the end of 2016, Qingdao Shuangxing invested RMB 900 million as a general limited partner, and jointly initiated the establishment of the Qingdao Xingwei Equity Investment Fund Center (limited partnership) (limited partnership) (limited partnership) with Qingdao Guoxin Capital Investment Co., Ltd., Qingdao International Investment Co., Ltd., Qingdao SDIC Dehou Investment Management Co., Ltd., and Qingdao Guoxin Innovation Equity Investment Management Co., Ltd. The total size of Star Micro Fund does not exceed RMB 10 billion. It mainly invests in domestic and foreign tires, automobiles, and upstream and downstream related industries. Some of the high-quality assets it invests will be used as reserve resources for industry integration by Qingdao Shuangxing. Today, Qingdao Xingwei International Investment Co., Ltd., a holding subsidiary of Star Micro Fund, and the creditors of Kumho Tire, represented by Korea Development Bank, signed a “Stock Sale Agreement”. Qingdao Xingwei International Investment Co., Ltd. will invest 955 billion won (about US$834 million) to acquire 42.01% of Kumho Tire's shares on the premise that the agreed prerequisites are met. If the priority purchaser does not exercise their right of priority transfer within 30 days, Qingdao Shuangxing will successfully acquire Kumho Tire and become its largest shareholder. Although there are still uncertainties such as approval after the signing of the agreement, it is close to a successful acquisition. Risk warning: declining demand for tires; uncertain final acquisition structure; impact of China-Korea relations.