Investment Logic Company divested its original main business and injected new energy-saving transformation business into the metallurgical industry: 1. In 2016, the company divested its original loss-making paper business, issued 350 million shares to Shenwu Group at a price of 9.29 yuan/share, and purchased 100% of the shares of Jiangsu Metallurgical Design Institute at a price of 9.29 yuan/share. On October 10, the Jiangsu Institute officially completed the asset settlement and later changed the name to Shenwu Energy Saving. 2. The Jiangsu Institute is a technical solution provider and engineering contractor for industrial energy saving and environmental protection and comprehensive resource utilization. Its three major businesses are comprehensive utilization of bulk industrial solid waste resources, comprehensive utilization of mineral resources, energy saving and environmental protection; the Jiangsu Institute promised net profit of 300 million, 400 million, and 500 million yuan respectively in 2016-2018, with guaranteed performance growth; 3. After the restructuring, the company's holding company is Shenwu Group, a leading enterprise in the field of energy saving and environmental protection. Since then, Shenwu Energy has become a listed company engaged in steel, non-ferrous and solid waste treatment under Shenwu Group. The “13th Five-Year Plan” and solid waste environmental tax help the heavy industry increase its demand for energy saving and emission reduction: the company's development direction is atmospheric haze treatment, carbon dioxide emission reduction, and nitrogen oxide emission reduction, involving heavy industries such as black and non-ferrous mineral resources and solid waste treatment. The company responds to the national call for energy saving and emission reduction. On the industry side, first, the “13th Five-Year Plan” and “Environmental Tax” introduced in December 2016 will force enterprises to increase energy saving and emission reduction requirements for solid waste projects. An environmental tax on solid waste such as non-ferrous metals and steel will be levied on New Year's Day 2018 (25 yuan per ton). Taking the Jinchuan Phase I project as an example, the annual processing of 800,000 tons of smelting slag can generate annual sales of 670 million yuan and an annual profit tax of 200 million yuan; if not treated, an environmental tax of 0.2 billion yuan will be charged. Furthermore, smog has been normalized in recent years, and industrial solid waste is one of the main causes of smog, and carbon trading was fully launched in 2016. Overall, affected by national policy adjustments, enterprises are paying more attention to energy saving and emission reduction, and market demand has increased across the board. The Jiangsu Institute has high technical barriers, helping enterprises reduce costs and energy consumption, and has sufficient orders on hand: the company's downstream steel and non-ferrous industries are in high demand for refining process upgrades, and the Jiangsu Institute wins with technology. 1. The Jiangsu Institute has obtained a total of 84 patents. 2. Core technology - Regenerative rotary bottom furnaces, regenerative hydrogen shaft furnaces, and regenerative gas melting furnaces have obvious advantages, which can help industrial enterprises save energy and reduce emissions and reduce environmental treatment costs. Regenerative rotary furnace technology has been industrialized. Compared with traditional technology, treating steel solid waste can save 70kg of standard coal/ton products, save about 25% of energy savings, and reduce CO2, SO2, and NOX emissions by 25%. 3. The technology is highly expandable. It only needs to adjust parameters and design plans, so it can be applied to minerals of different quality. 4. The Jiangsu Institute has orders of more than 5 billion yuan, and the amount of the intended contract for the evaluation in 2017-2020 exceeds 6 billion yuan. Existing contracts and intended contracts have formed a high margin of safety for the company's future performance. The Jinchuan project was successfully put into operation, the demonstration effect was remarkable, and the potential project can be expected to be implemented. The company's Jinchuan Phase I copper tailings comprehensive utilization project passed the inspection and put into operation on December 26. First, the project has good economic and environmental benefits. The total payback period is estimated to be 4.89 years, with an internal return of 18.68%; the project processes 800,000 tons of copper tailings per year, producing 276,900 tons of iron powder briquettes and 341,000 tons of ZnO powder per year. Second, the demonstration effect of the project is remarkable. It is expected to become a global demonstration project for colored slag treatment. It will play a demonstration role in global treatment of copper, nickel, aluminum, lead and zinc refining, etc., which will facilitate the implementation of the company's subsequent orders. Investment recommendations We believe that after the company injected new energy-saving transformation businesses into the metallurgical industry, asset profits were stable. Demand for energy saving and emission reduction in the heavy industry has increased under supply-side reforms and environmental taxes. With high-barrier technology, the company is expected to win new orders. At the same time, there are sufficient orders in hand to ensure that the Jiangsu Institute fulfills its performance promises. The valuation company's on-hand orders exceed 5 billion yuan. Based on the 2-3 year construction cycle and completion percentage, the company is expected to achieve net profit of 3.07/597/916 million yuan in 2016-18, EPS of 0.49/0.93/1.46 yuan/share, and the corresponding PE is 79X/41X/27X, giving a “buy” rating for the first time. The release of risk production capacity fell short of expectations; there is a large dependence on the controlling shareholder Shenwu Group. From 2013 to 2015, related sales between the Jiangsu Institute and related parties such as Jinchuan Shenwu and Shenwu Environmental Protection were 3.3019 million yuan, 48.5838 million yuan, and 566.5854 million yuan respectively, accounting for 1.13%, 45.54%, and 86.52% of current revenue, respectively. Meanwhile, from 2013 to 2015, the Jiangsu Institute's related procurement amounts for Shenwu Group and Hubei Shenwu were 0.46 million yuan, 5.0655 million yuan, and 42.385 million yuan, respectively. The Jiangsu Institute is expected to account for no more than 30%, 25%, and 20% of sales in 2016-18, but related sales to Jinchuan Shenwu will continue. If the company is unable to step up its market development efforts and fail to fulfill the promises issued by Shenwu Group and Wu Daohong, its actual controller, to reduce related transactions, then there is a risk of associated transactions.