Incident: On October 29, 2016, the company released its three-quarter report. In the first three quarters of 2016, the company achieved operating income of 294 million yuan, an increase of 0.57% over the previous year; realized net profit of 96.91 million yuan, an increase of 81.02% over the previous year; after deducting non-net profit of 28.72 million yuan, a year-on-year decrease of 44.82%. Key investment points: In the first three quarters of 2016, the company's net profit increased dramatically; the company has sufficient orders and is optimistic about later development. In the first three quarters of 2016, the company's revenue was 294 million yuan, up 0.57% year on year; net profit was 96.91 million yuan, up 81.02% year on year. Net profit increased significantly, mainly due to the company's non-recurring profit and loss of 68.19 million. Non-net profit of 28.72 million yuan was deducted, a year-on-year decrease of 44.82%, mainly due to the decline in operating profit, increased expenses due to mergers and acquisitions, and increased preparation for bad debts. In the first three quarters, the comprehensive gross margin of the company's projects decreased by about 2% compared to the same period last year, resulting in a decrease of about 5 million yuan in operating profit. The company paid an intermediary service fee of about 9 million yuan to carry out mergers and acquisitions; about 5 million yuan in handling fees for issuing international guarantees; and about 3.37 million yuan in advance processing fees for payment of mergers and acquisitions loans. The amount of bad debt accrued in the current period increased by about 8.75 million yuan compared to the same period last year. As of September 30, 2016, the execution of the contract amount was approximately RMB 2,060 billion, of which approximately RMB 1,045 million was domestic and RMB 1,015 billion overseas. Railway investment remains high, and investment in urban rail transit is accelerating. The Development and Reform Commission and the Ministry of Transport jointly issued the “Three-Year Action Plan for the Construction of Major Transportation Infrastructure Projects”. From 2016 to 2018, in terms of urban rail transit, the focus was on advancing the preliminary work of 103 projects to build more than 2,000 kilometers of urban rail transit, involving an investment of about 1.6 trillion yuan. China's standard for declaring urban rail transit construction has dropped from an urban population of more than 3 million to more than 1.5 million people. Benefiting from rail transit construction plans, the company's traditional business revenue is expected to maintain high growth in the next two years. The company's domestic urban rail projects have expanded from the initial Beijing-Tianjin-Hebei region to Shenzhen, Hefei, Chengdu, Guangzhou, Changsha, Nanchang, Wuhan, Ningbo, Shanghai and other parts of the country, and the competitiveness of the company's products is increasing. It acquired RPS, Tianjin Baofu, and BB Signal at a low cost to enter the high-speed rail traction power supply contact network business. It is expected to obtain domestic orders and achieve rapid growth in the company's profits. On October 25, 2016, the company issued an announcement regarding the completion of the asset transfer of the major asset purchase. 49% of the shares of Tianjin Baofu purchased by the company have all been registered under RPS, 100% of RPS and BB Signal's shares have been registered under the name of KeyViagermany, a wholly-owned subsidiary of the company, and the company directly or indirectly holds 100% of the shares in RPS, BB Signal and Tianjin Baofu. RPS has a full range of high-speed electrified railways (350 km/h grade), passenger lines (200 km/h grade) and general speed electrified railway traction power supply network technology, as well as traction power supply system design capabilities and manufacturing capabilities for some key products. RPS inherits the core competitive advantage and brand influence of Germany's Baofu in the catenary business and power supply system business. It has a full range of German Federal Railway contact network systems and AC/DC power supply-related technologies and products, and has system design, preliminary design, in-depth design, installation, supervision and system integration capabilities. With the exception of the DC switch cabinet of the joint venture Tianjin Baofu, which is a primary equipment, the main product structure of Kai Electric Power is a control, protection, monitoring and scheduling system, which is secondary equipment. As a result, RPS products, technology and the company complement each other extremely well. Tianjin Baofu was originally a joint venture between a listed company and German Baofu. It mainly develops, produces, and sells DC switch cabinets and other electrical equipment suitable for urban rail transit and railways, and has successively undertaken key projects such as Beijing Metro Line 15 and Beijing Metro Line 6. In the first half of 2016, Tianjin Baofu achieved a net profit of 4.52 million yuan. BB Signal is mainly engaged in trackside signal equipment, trackside detectors, etc. Profit forecasts and investment ratings Railway investment remains high, rail transit investment accelerates, and on-hand orders remain high. After the acquisition is completed, it is expected to enter the high-speed rail traction power supply contact network business. The company's EPS for 2016 to 2018 is estimated to be 0.42 yuan, 0.42 yuan, and 0.57 yuan respectively. The corresponding valuations are 46 times, 46 times, and 34 times, respectively, maintaining a “buy” rating. Risk warning: Railway and rail transit orders fell short of expectations, and contact network order expansion fell short of expectations.