A leading company in key components of circuit breakers, mastering core processes and enjoying high gross profit margins: The company has been deeply involved in the low voltage circuit breaker industry for many years, specializing in low voltage circuit breakers, molded insulating parts, micro motors, electric actuators and other products. Relying on advantages such as technology research and development, mold design, precision manufacturing, etc., it has gradually grown into a leading company for core components of low voltage circuit breakers. The company's products are positioned in the high-end market. The main customers include well-known domestic and foreign electrical companies such as Fuji Electric, Schneider, Siemens, Mitsubishi, Shanghai Renmin Electric Factory, etc., and the company's molded insulation products have unique material mass formulations, so they enjoyed a high level of gross margin. The company's gross margin in the first half of 2017 was 39.36%, higher than other companies in its peers. We believe that the company will accompany the steady growth of the circuit breaker industry, enjoy high gross profit margins with core process technology, and ensure a steady increase in profit levels.

It is proposed to acquire Tianyi Shangjia to build the first brand of high-speed rail brake pads: In August 2017, the company plans to acquire 100% of Tianyi Shangjia's shares (later adjusted to 99.675%). The latter was the first to break the monopoly of foreign brands. Currently, it is one of the largest and most technologically advanced high-speed rail and urban rail vehicle brake pad suppliers in China. There is huge room for replacement of domestic high-speed rail brake pads. Tianyi Shangjia has already provided powder metallurgy brakes for EMUs to 17 of the 18 railway bureaus under China Railway. The market share increased from 7% in 2014 to over 19% in 2016. Tianyi Shangjia will continue to be the leader in the import substitution trend in the next few years. Tianyi Shangjia achieved net profit of 197 million yuan in 2016, promising that net profit returned to the mother after deduction in 2017-2019 will not be less than 228 million, 263 million, and 303 million yuan respectively. High-speed rail brake pads are industrial consumables. The market size is expected to exceed 5 billion yuan in 2020. The products are not cyclical, the market space is broad, and the volatility is low.

The high-speed rail brake pad industry has a high threshold, and the company's first-mover advantage is obvious: high-speed rail brake pads require extremely high technology and stability. The industry threshold includes complex technical requirements for powder metallurgy, high financial barriers, etc. Among them, passing CRCC certification is the most important step. Currently, there are only 8 companies that have passed CRCC certification in China. Tianyi Shangjia holds a total of five CRCC certification certificates for powder metallurgy brakes, covering 15 models, and is the only supplier of “Fuxing” high-speed rail brake pads. It is expected to monopolize the supply of “Fuxing” brake pads by 2019. Technical strength+complete products+first-mover advantage support the company's high gross profit margin. In 2015, 2016, and January-April 2017, the company's gross margin reached 69.7%, 74.3%, and 72.3%. Profitability was very strong, and a steady trend was maintained.

Profit forecast and investment suggestions: As a leading core component company in the low voltage circuit breaker industry, Xinhongtai acquired Tianyi Shangjia and then rebuilt the first high-speed rail brake pad brand. Strong forces joined forces to build a new new Hongtai, regardless of the completion of the acquisition. We expect the company's net profit for 2017-2019 to be 6800, 80, and 90 million yuan respectively. EPS is 0.46, 0.54, 0.60 yuan respectively, and the corresponding price-earnings ratio is 80, 69, 61 times. Considering the completion of the acquisition, the company's stock capital for the exam was changed to 313 million shares. The company's net profit for the 2017-2019 exam is estimated to be 2.96, 343, and 393 million yuan, respectively. The corresponding price-earnings ratio is 39, 34, and 29 times. The company's two-wheel drive has built a two-wheel drive industry with a high threshold for the high-speed rail brake pad industry. Tianyi Shangjia took the lead in supplying “Fuxing” brake pads for the Chinese standard EMU. Future performance is guaranteed, coverage for the first time, and “recommended”.

Risk warning: The acquisition progress did not meet expectations; market competition intensified; the price of high-speed rail brake pads fell.