Summary of the report:

First, getting involved in nuclear power and military industry brings new opportunities for development.

The company transformed nuclear power and military industry and planned to acquire Sanzhou nuclear energy. Its main business was expanded from toys to toys, nuclear power and military industry. ① acquisition plan: purchase assets, plan to purchase 100% equity of Sangzhou Nuclear Power from shares issued by Sanzhou Special Management, China Nuclear Power Institute and Huaxia Life Insurance Company, with the underlying asset trading price of 1.6 billion yuan and the issue price of 9.09 yuan per share; supporting financing, raising 814 million yuan from eight qualified investors at an issue price of 11.97 yuan per share. ② domestic nuclear power troika (CNNC, CNNC, CGN) indirectly participated in the acquisition.

Second, the core competitiveness of the acquisition target is outstanding.

Sanzhou Nuclear Power is the backbone enterprise of R & D, production and sales of special equipment for nuclear power and military industry, mainly engaged in main nuclear power pipelines, military products, civil pipeline equipment and pipe fittings. ① market position: second-generation and second-and-a-half generation nuclear power, undertaking nearly 60% of reactor main pipeline orders; third-generation nuclear power, "Hualong No. 1" sample supplier; military products, the only qualified manufacturer of a military product. ② technology advantages, master "smelting + forging" two key technologies and processes, creating the "four firsts" performance in the industry. ③ performance commitment, 2016-2018 return net profit of not less than 1.21 yuan, 193 million yuan, 282 million yuan, a total of not less than 596 million yuan.

III. A broad market for nuclear power and military industry

1. Nuclear power market. The total investment in ① main pipeline equipment accounts for 2.8% to 6% of the total investment in nuclear power plants. The average annual demand for ② nuclear power equipment will exceed 52 billion yuan, nuclear power project approval will restart in 2015, and China will usher in the peak period of nuclear power construction in the next few years; ③ nuclear power in the three continents corresponding to nuclear power market space of 12.6 billion yuan. 2. Military market. China's defense budget is expected to maintain a growth rate of 10% in the next five to 10 years; the proportion of equipment renewal and maintenance is expected to exceed 40%; and the demand for military special pipelines and pipe fittings is expected to grow at an average annual rate of 30% to 40%.

Fourth, the traditional toy business is still optimistic.

The toy business showed a rising inflection point in 2015, with a net profit of 18.2345 million yuan, an increase of 22.66% over the same period last year. The opening of the two-child policy and the devaluation of the RMB are the two main reasons for the improvement of the toy business.

V. profit forecasts and investment suggestions

We estimate that after the merger and acquisition of Sanzhou Nuclear Power, the reasonable valuation range of the company is 85.133 billion, with a median value of 11 billion. Corresponding to 833 million share capital after additional issuance, the reasonable range is 10.2-16 yuan, with a median value of 13 yuan.

VI. Catalyst

1. Mergers and acquisitions will be overdue. 2. The three continents have received large orders for nuclear power and military industry.

7. Risk hints:

1. Market systemic risk; 2. Product volume is not up to expectations.