Incident: Fengxing Co., Ltd. released its 2016 semi-annual report: During the reporting period, the company achieved operating income of 126 million yuan, a year-on-year decrease of 46.32%, and achieved net profit attributable to shareholders of listed companies of 11 million yuan, a year-on-year decrease of 41.98%, a year-on-year decrease of 150.67% after deduction, and basic earnings per share of 0.12 yuan, a year-on-year decrease of 58.62%. Key investment points: A leader in the traditional wear-resistant materials industry. Due to upstream and downstream pressure, the company's market share in the field of metal wear-resistant materials has remained number one for many years. The high-performance wear-resistant ball section produced can greatly reduce material loss, improve grinding efficiency, reduce ball loading, and reduce equipment operating load, thus meeting the energy saving and emission reduction goals of downstream enterprises. Major customers include Huaxin Cement, China Resources Cement, China Gold, Zijin Mining, Impala Platinum, China Steel Group, and Sinoma International, which participate in the formulation of industry standards in many countries. However, since this year, the prices of scrap steel, high-carbon ferrochrome, and pig iron among the main upstream raw materials have increased rapidly in March-April and July-August, along with a decline in production. At the same time, major downstream customers in cement, building materials, metallurgical mines and other industries are also facing declining demand due to loss of production capacity and inventory, leading to a decline in mid-report performance, which is greater than previously anticipated. Epitaxial Auto Parts will enhance the company's profitability and ability to operate continuously by issuing no more than 32 million shares at a reserve price of 34.03 yuan/share. Xiongwei Seiko, the target of the transaction, achieved net profit of 90.38 million yuan and 23.94 million yuan respectively in 2015 and the first quarter of 2016, with a continuous and stable cash flow, and promised net profit of not less than 115 million yuan, 125 million yuan and 135 million yuan respectively, and a cumulative net profit of not less than 375 million yuan. If achieved, it would significantly enhance the company's profitability and sustainable operation capacity. The target of the transaction is a second-tier supplier of high-quality auto parts. Major Seiko's main customers with technical barriers include high-quality auto parts companies such as Johnson Controls, Faurecia and Brose in the car seat field, and Autoliv in the automotive safety device field. The company has a fully automatic riveting robot production line, and the stamping production line has complex mold application capabilities such as continuous molds and multi-station transfer molds, and also has its own mold R&D and design capabilities. Profit forecast and rating: The initial coverage increase rating is based on the principle of prudence. When the private increase is not finalized, the dilution of share capital and the factors affecting performance are not yet considered. The company's earnings per share for 2016/2017/2018 are estimated to be 0.25/0.14/0.10 yuan, respectively. If the increase is successfully completed, the company's earnings per share for 2016/2017/2018 are estimated to be 0.69/0.73/0.76, corresponding to the current PE share price of 67/63/61, giving an increase rating for the first time coverage. Risk warning: the risk that the non-public offering will not be successfully completed; the risk that the profitability of the traditional wear-resistant materials business will continue to decline.