1. Incident Overview Recently, Derun Electronics issued an announcement: Liuzhou Shuangfei has completed the equity transfer and related business change registration procedures. After this change, the company has legally held 60% of Liuzhou Shuangfei's shares. 2. Analysis and judgment that Liuzhou Shuangfei has completed the equity transfer. The company is actively promoting fixed increase matters 1. The company plans to acquire 60% of Liuzhou Shuangfei's shares at a transaction price of 600 million yuan (480 million yuan in shares, 120 million yuan in cash payments), with an issue price of 28.86 yuan/share (after excluding interest); at the same time, it plans to raise no more than 38,033 million yuan in supporting capital at a reserve price of 28.86 yuan/share (after excluding interest). The supporting capital raised is intended to be used for cash consideration, Liuzhou Shuangfei project construction and related transaction fees. 2. The valuation of Liuzhou Shuangfei is reasonable. In 2015, Liuzhou Shuangfei had revenue of 1,336 billion yuan and net profit of 99 million yuan. According to performance commitments, Liuzhou Shuangfei will achieve net profit of 120 million yuan/140 million yuan/160 million yuan respectively from 2017 to 2019. The corresponding PE acquisition will be 8.3 times, 7.1 times, and 6.3 times, respectively. The average annual compound growth rate of net profit for the next 3 years will be 16.9%. The company is actively promoting fixed increases. 3. We believe that this fixed increase will enhance the company's competitive advantage in the field of automotive wiring harnesses. The company's stock price is still lower than the fixed increase issuance price, and the investment value and safety margin are remarkable. We are optimistic about the company's future development potential. Reiterate views: Increase automobile wiring harness production capacity and quickly enter the vehicle supply chain system1. Liuzhou Shuangfei is mainly engaged in vehicle wiring design, development, testing and production, including airbag harnesses. Major customers include SAIC-GM-Wuling, Dongfeng Liuqi, Beiqi Foton, Liugong Machinery, etc. Currently, the top five customers account for more than 95% of sales, and the largest customer is SAIC-GM-Wuling. 2. We believe that the acquisition of Liuzhou Shuangfei will rapidly increase the company's automotive wiring harness production capacity, enhance the company's automotive wiring product design and development capabilities, and help the company quickly enter the downstream vehicle supply chain system. Reiterate the point of view: The increase in domestic automobile sales is driving strong demand for automobile wiring harnesses, and the prospects for automobile wiring harnesses are broad 1. According to data from the China Automobile Association, in 2016, China's automobile production and sales volume exceeded 28 million units, ranking first in the world for 8 consecutive years. Among them, sales of new energy vehicles grew by more than 50% to 507 million units, and passenger car sales were 24.377 million units, an increase of 14.93% over the previous year. Among passenger cars, Chinese brands, German, Japanese, American, Korean, and French passenger cars sold 10.5286 million units, 4,511,300 units, 3.7915 million units, 2,964 million units, 1,794 million units, and 640,000 units respectively. Domestic brand passenger car sales exceeded 10 million units for the first time, an increase of 20.5% over the previous year. 2. The value of bicycle wiring harnesses for traditional cars is about 2,000 to 4,000 yuan, and some high-end models are 5,000 to 6,000 yuan. According to China's automobile production in 2016, 28 million vehicles were produced, and the price of automobile wiring harnesses worth 2,000 yuan is conservatively estimated, the annual demand of the Chinese automobile wiring harness market will exceed 56 billion yuan. New energy vehicles have more stringent requirements for automobile wiring harnesses than traditional cars, especially in terms of transmission capacity, mechanical strength, insulation protection, and electromagnetic compatibility. Therefore, the value of new energy vehicle wiring harnesses will increase by 20% to 40% compared to traditional cars. 3. We believe that with the increase in the market share of domestic own-brand car manufacturers and the increase in the degree of automotive electronics, this fixed increase will help the company benefit from the rapidly developing domestic automotive wiring harness market. 3. Profit forecasting and investment advice The company has formed a pattern of parallel development of the three major businesses of consumer electronics, automotive electronics, and the Internet of Vehicles. As an industry leader in the field of home appliances and consumer electronics connectors, Type-C products have now entered the performance release period; in the automotive electronics field, the company has a rich product line and strong technical strength, and demand for connectors and wiring products is strong, which will be a continuous growth point for the company in the future; in the field of Internet of Vehicles, the company's extended cooperation enhances technical strength, leading the industry's early layout, and products will gradually penetrate the automotive aftermarket. Considering the impact of the acquisition of Liuzhou Shuangfei and additional dilution, it is estimated that EPS from 2017 to 2019 will be 0.56 yuan, 0.92 yuan, and 1.29 yuan, maintaining the company's “highly recommended” rating. The automotive electronics business has entered the supply chain system of many automakers, and its performance is flexible, giving the company 50 to 55 times PE in 2017. A reasonable valuation for the next 12 months is 28.00 to 30.80 yuan. 4. Risk warning: 1. The progress of the automotive electronics business fell short of expectations; 2. The progress of the Internet of Vehicles project fell short of expectations; 3. The release of production capacity fell short of expectations.