Incident: On August 26, 2016, the company issued an interim report. Operating income was 176 million yuan, a year-on-year decrease of 12.55%; net profit attributable to mother was 10.84 million yuan, a year-on-year decrease of 69.74%. Key investment points: The company's profit declined in the first half of the year, mainly due to increased expenses and increased reserves for bad debts; the company's main business performance was stable, and some products achieved both revenue and gross margin growth; orders remained high, and later development was optimistic. In the first half of 2016, revenue was 175.6637 million yuan, 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%. It is mainly affected by factors such as payment of some intermediary expenses for German mergers and acquisitions, increased R&D expenses, and preparation for bad debts. Among them, management expenses increased by 9.84 million yuan or 31.16% year on year; intermediary service expenses paid by the company for mergers and acquisitions increased by 6.4685 million yuan year on year; R&D expenses increased by 3.5826 million yuan year on year; bad debt reserves based on age of accounts increased 7.52 million yuan or 290% over the same period last year. During the reporting period, the company's main business revenue was stable, and the comprehensive gross margin rose slightly to 42.77% year-on-year. The railway power supply integrated automation system achieved operating revenue of 46.64 million yuan, an increase of 19.23% over the previous year; gross margin reached 64.89%, an increase of 4.99 percentage points. The integrated monitoring system for urban rail transit achieved revenue of 43.39 million yuan, an increase of 70.28% over the previous year; gross margin reached 21%, an increase of 5.4 percentage points. However, the railway power supply and scheduling system was the largest source of revenue, with operating revenue of 6.09 million, down 26.57% year on year; gross profit margin was 49.52%, down 7.61 percentage points year on year. As of June 30, 2016, the company has executed a total of about 800 million yuan of contracts. It is still at a high level. Several projects have completed the main contract or are in the field commissioning stage. With the explosion of order execution and the advancement of new projects, the company's traditional business revenue is expected to maintain a compound growth rate of 30-40% over the next two years. Railway investment remains high, and investment in urban rail transit is accelerating. During the 12th Five-Year Plan period, the country invested 358 million yuan in fixed assets, of which in 2015, the national railway completed fixed asset investment of 823.8 billion yuan; according to the plan, during the 13th Five-Year Plan period, the scale of railway fixed asset investment will reach 3.8 trillion yuan, a slight increase over the previous year, and railway investment will remain high. 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. As the country promotes rail transit construction and reduces requirements for rail transit construction, a large number of cities are expected to solve the problem of congestion through urban rail transit. Rail transit investment is expected to increase rapidly in the next few years. 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 December 22, 2015, the company signed an equity transfer agreement to acquire 100% of Germany's RPS shares, 49% of Tianjin Baofu's shares, and 100% of BB Signal's shares held by BICC in cash. After the transaction is completed, the company will hold 100% of the shares of the above three target companies. RPS2015 achieved revenue of 140 million euros and losses of 1.55 million euros in the year. The basic transaction consideration paid in this transaction was 13.25 million euros. (about 0.1 times PS, 0.5 times PB). We anticipate that this transaction will bring in a certain amount of non-operating income, which will have a positive impact on profits in 2016. 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. 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. As the investment of the largest customer, German Federal Railways, increased rapidly in 2017-2020, RPS's overseas revenue will increase rapidly. After the transaction is completed, the company will use its competitive advantage in the domestic rail transit sector to help RPS increase its efforts to develop the domestic market in China and obtain orders from China. The gross margin of RPS is expected to increase from 6% to 8% to around 12%. The market space for high-speed rail core components is about several billion dollars, with high technical requirements and high gross margin. The market is mainly monopolized by China Railway and China Railway Construction. After completing the acquisition of RPS, the company is expected to use the performance and technology of Germany's Baofu to enter the high-speed rail contact network core components market and obtain high monopoly profits. 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 net profit of 4,527,054.77 yuan. Profit forecasts and investment rating companies' profits declined in the first half of the year, mainly due to increased expenses and increased reserves for bad debts; railway investment remained high, rail transit investment accelerated, and on-hand orders remained high; low-cost acquisition of RPS and entry into the high-speed rail traction power supply network business are expected to obtain domestic orders; and the company's revenue is expected to grow several times and profits are expected to grow rapidly after the acquisition of RPS. Excluding uncompleted mergers and acquisitions, the company's EPS for 2016 to 2018 is estimated to be 0.3 yuan, 0.41 yuan, and 0.56 yuan, respectively. The corresponding valuations are 59 times, 43 times, and 32 times, respectively, maintaining the “buy” rating. Risk warning: Railway and rail transit orders are lower than expected, contact network order expansion is lower than expected, and merger and acquisition progress is lower than expected.