Incident: Kai Electric released its 2016 interim report. The company achieved revenue of 176 million yuan in the first half of the year, a year-on-year decrease of 12.55%; net profit to mother was 10.84 million yuan, a year-on-year decrease of 69.74%. Key investment points: Mid-term results declined due to factors such as fluctuations in operating income and increased management expenses. During the reporting period, the company achieved revenue of 176 million yuan, a year-on-year decline of 12.55%, mainly due to delays in revenue recognition. The implementation time span of rail transit projects is large, and the product delivery to inspection cycle is long, and the company's revenue will fluctuate to a certain extent from year to year. Net profit declined sharply due to factors such as employee salary adjustments, payment of some agency expenses for German mergers and acquisitions, and calculation of bad debts. Net profit of only RMB 10.84 million was achieved in the first half of the year, a decrease of 69.74% over the previous year. We expect the German merger and acquisition project to be completed in the third quarter, and the company's profit is expected to resume its upward trend in the fourth quarter. Ongoing orders are about 880 million, and urban rail products account for the majority. The company mainly provides automated control product systems for railways, urban rail transit and other fields. As of June of this year, the company has executed a total of about 880 million yuan of contracts, and urban rail automation accounts for about 70% of the 5 million or more contract projects. In the first half of the year, the revenue of the integrated monitoring system for urban rail transit reached 43.39 million yuan, an increase of 70.28% over the previous year, which also indicates that the urban rail business will continue to grow in the future. We believe that China's urban rail construction will accelerate during the “13th Five-Year Plan” period. Up to now, several cities have completed the 13th Five-Year Plan for urban rail transit. According to the “Rail World” report, the country has approved rail transit construction plans for 40 cities, with a total planned mileage of about 8,500 kilometers. The company will fully benefit from this trend. Epitaxial expansion has entered a new field of rail transit equipment. The company announced a major asset purchase plan in February this year and will acquire shares in the three companies in cash. Among them, RPS inherits the core competitive advantage and brand influence of Germany's Baofu in the contact network business and power supply system business. It has a full range of German Federal Railway contact network systems and AC/DC power supply related technology and products; Tianjin Baofu is mainly engaged in the production of DC switch cabinet equipment for urban rail transit; and BB Signal is mainly engaged in railside signal equipment, railside detectors, etc. In the future, the company will accelerate the full integration of German RPS products and technology, launch the localization of the two product lines of the joint venture Tianjin Alpha UnionPay, and actively expand the new product line. The first coverage gives a “Recommended” rating. We expect the company to achieve operating income of 521/659/829 million yuan from 2016 to 2018, and achieve net profit of 0.83/1.20/147 million yuan. The corresponding EPS is 0.31, 0.44, and 0.54 yuan, respectively, corresponding to the current stock price PE, which is 58, 40, and 33 times, respectively. Considering that the urban rail and railway electrification industry has broad development space and the company's outstanding competitiveness, we are optimistic about the company's medium- to long-term development prospects and gave it a “recommended” rating for the first time. Risk warning 1. Rail transit construction falls short of expectations; 2. Accounts receivable risk; 3. M&A integration risk;