Investment proposal: The performance of the Chutian Expressway (600035) toll road is growing steadily. Future business is two-wheel drive, and synergy effects can be expected in the highway and vehicle networking business. Multiple interests are bound through employee stock ownership plans, and the performance compensation agreement for the target (Miki Intelligence) target of the acquisition is reasonable, which is beneficial to the long-term development of the company. Furthermore, there are expectations of further extension of mergers and acquisitions and state-owned enterprise reforms. According to estimates, after the restructuring, the company achieved net profit of 420 million, 450 million, and 490 million yuan respectively; EPS in 2016-2018 was 0.29 yuan, 0.31 yuan, and 0.34 yuan, respectively. The PE corresponding to the current stock price was 18.3X, 16.8X, and 15.4X, respectively. After the additional distribution, the company's market value is expected to reach 9 billion. For the first time, it was covered and given a “Recommended” rating. Key investment points The road network effect has been strengthened, and toll road performance is growing steadily: the Chutian Expressway's main business is toll road investment, construction, and operation and management. It has toll rights for the three major highways, including the Hanyi section of the Shanghai-Chongqing Expressway (mileage 278.869 km), the Mazhu Expressway (mileage 84.39 km), and the Huangxian section of the Wuhan Urban Ring Expressway (mileage 55.97 km). The company's revenue mainly comes from vehicle toll revenue, and its performance has been rising steadily. In Q2 2016, we achieved revenue of 630 million yuan, an increase of 5.33% year over year. Net profit of 220 million yuan was achieved in Q2 2016, an increase of 28.40% year-on-year after excluding the impact of the company's absorption of the special tax treatment of consolidated subsidiaries in 2015. The operating performance was in line with market expectations. With the strengthening of regional road network effects, there is still room for significant increases in traffic and revenue on the Dasui Expressway and Huangxian Expressway in the future. Two-wheel drive, highway cash cow accelerates Miki's smart IoT business layout: According to Ericsson, the compound annual growth rate of the Internet of Things will reach 23% from 2015 to 2021, and the IoT terminal will reach 16 billion by 2021, and the IoT market has broad prospects. In 2011, the Ministry of Industry and Information Technology issued the “12th Five-Year Plan for the Internet of Things” to accelerate the development of the IoT industry. Chutian Expressway adheres to the “one main, multiple, two-wheel drive” strategy. While strengthening and improving the main highway operation business, Chutian Expressway quickly enters the mobile smart terminal and IoT application terminal industry. In July 2016, Chutian Expressway announced that it plans to acquire 100% of the shares of Shenzhen Miki Intelligent Co., Ltd. and raise no more than 410 million yuan in supporting capital. Miki Intelligence is committed to the R&D, design and manufacture of mobile communications and products, providing tablet and smartphone solution design and machine production services, and R&D and production of IoT communication products. Miki Intelligence has a complete R&D and quality management system, and is deeply established in the field of the Internet of Things. Currently, it has received orders from companies such as ZTE and Beidou Guoxin. Meanwhile, the Chutian Expressway toll road project has solid assets, and is expected to achieve 700 million cash flow (including Miki Intelligence) in the next year. The abundant cash flow of Chutian Expressway will accelerate Miki Smart's perfect layout in the Internet of Things, Internet of Vehicles, etc., and push the overall business to expand the IoT application terminal industry chain to the fields of the Internet of Vehicles, smart homes, wearable devices, and smart cities. The business prospects are broad. The synergy between Chutian Expressway operation traffic data and Miki intelligent vehicle networking technology can be expected: the Internet of Vehicles is an important application of the Internet of Things, which will significantly reduce traffic congestion and traffic accident losses and improve traffic efficiency. According to GSMA and SBD, the global connected car market will reach 40 billion euros in 2018. According to China Investment Advisors, the compound annual growth rate from 2013 to 2017 reached 31.5%. In 2017, China's connected car market will reach 25.09 billion yuan, and the connected car market has huge potential. Chutian Expressway entered the “intelligent transportation” field through the acquisition of Miki Smart. The synergy between Chutian Expressway operation traffic data and Miki intelligent vehicle networking technology is remarkable. In the future, the Chutian Expressway will use road operation traffic data to assist Miki to design and develop software and hardware products such as intelligent traffic, intelligent monitoring, and real-time traffic data sharing through routes such as highway data sharing and service area platform utilization. “Intelligent transportation” will also help the Chutian Expressway improve highway management efficiency, improve service quality, and open up new profit growth points. Multiple interests are bound, and the performance compensation agreement is reasonable, which is beneficial to the long-term development of the company: The acquisition plan aims to raise 394.1216 million yuan (directors, supervisors, and executives account for 45.91%, and other core employees account for 54.09%) through the 2016 employee shareholding plan (Guangfa Yuanchi Chutian Expressway No. 1 Targeted Asset Management Plan). The shareholding plan will bind the interests of shareholders, executives, and core employees for a period of 3 years. The controlling shareholder, Hubei Trading Group, and other subscribers are optimistic about the prospects of listed companies after the restructuring. They will increase their holdings through a locked price offering (4.64 yuan/share), and promise to secure new shares of Chutian Express for 3 years to promote long-term stable development. Furthermore, according to the “Performance Compensation Agreement”, the original shareholders of Miki Smart jointly promised that Miki Smart's net profit for 2016 to 2019 will not be less than 98 million yuan, 118 million yuan, 140 million yuan, and 170 million yuan. If it falls short of the performance promise, the difference between actual net profit to mother and net profit commitments will be compensated, greatly reducing the risk of acquisition. If Miki Intelligence's cumulative net profit during the compensation period is higher than the cumulative net profit commitment, 50.00% of the excess will be used as a reward (the total reward should not exceed 20% of the transaction price of the underlying asset). The performance compensation agreement is efficient and reasonable, and will fully motivate Miki Intelligence's management. Risk warning: The downward pressure on the macroeconomy is increasing, and the risk of regional traffic falling; the integration of highway operation and traffic data with Miki smart vehicle networking technology falls short of expectations.