Matters: Taihai Nuclear Power announced on January 5, 2018 that the company plans to sign a major contract with the controlling shareholder Yantai Taihai Group. Taihai Group plans to purchase container forgings and other products from Yantai Taihai Nuclear Power, a first-tier wholly-owned subsidiary of the company. The transaction consists of several sub-contracts. The transaction is expected to be executed until the end of 2020, and the amount will not exceed 3.65 billion yuan, which is expected to generate net profit for the company every year. Comment: A large order of 3.65 billion yuan will significantly increase performance. The non-nuclear forging business will greatly expand and reduce dependence on the nuclear power business. The company is positioned to grow as a comprehensive high-end equipment supplier based on high-end material R&D and production capabilities and high-end equipment manufacturing capabilities, which can cover the fields of nuclear power/petrochemical/thermal power/hydropower/offshore engineering/aerospace/high-speed rail, etc., and closely revolve around these two core competencies. On the one hand, we continue to develop and upgrade our main products with R&D and innovation capabilities, continuously expand product and technical advantages in specialized fields, improve the R&D and manufacturing capabilities of nuclear power equipment, and rely on superior technology to gradually broaden the company's coverage of nuclear power equipment and materials and extend the industrial chain; on the other hand, we seek a “relevant diversification” strategic layout, launch R&D work such as small nuclear power reactor equipment in advance, and extend high-end forging manufacturing capabilities to other equipment manufacturing industries, continuing to enrich the company's product line. This time, the company received a large order of 3.65 billion yuan for container forgings and other products. The significance is mainly in the following two aspects: 1) A major breakthrough in non-nuclear forging business development, which will significantly increase performance and open up room for the company's performance growth: According to data disclosed in the company's annual reports over the years, the nuclear power business is mainly composed of nuclear power pipelines, other nuclear power equipment, nuclear grade materials and technical services. Other non-nuclear special equipment businesses mainly consist of forged products, petrochemical equipment, complete converter equipment and cobalt concentrate, etc., which has now been stagnant for nearly two years. As a matter of fact, the order business is likely to be The non-nuclear forging business is expected to generate net profit of about 200-600 million yuan for the company every year from 2018 to 2020; 2) The revenue recognition of this order will significantly change the company's revenue structure for the next three years, reduce the company's dependence on a single nuclear power business, reduce the impact of changes in nuclear power policies on the company's performance, and facilitate the company's long-term healthy development. Third-generation nuclear power only owes policy momentum. The company will fully benefit from restarting nuclear power projects, and third-generation nuclear power technology is mature, and there are no technical barriers on the critical path. According to the requirements of the “Medium- and Long-Term Nuclear Power Development Plan (2011-2020)”, China's newly built nuclear power units must meet three-generation safety standards. Currently, domestic third-generation nuclear power technologies include AP1000, EPR, and Hualong 1. Subsequent technology routes will focus on Hualong 1 and AP1000. Hualong 1 is a third-generation nuclear power technology formed by making full use of existing design technology and equipment manufacturing systems and gradual improvements; 95% of the equipment uses mature design and manufacturing processes, and key equipment such as main pumps, steam generators, and digital instrument control systems (DCS) all use mature products, and has rich engineering application and operation experience. The remaining 5% of the new equipment has also completed testing and verification. The AP1000 uses Westinghouse technology in the United States. The biggest technical main pump problem has been solved. At present, the first batch has completed thermal testing, and there are no technical barriers to equipment on the critical path in the future. The attitude of the national nuclear power policy has always been positive and clear. Currently, the pace of approval is being slowed down based on conservative decisions. Promote the construction of coastal nuclear power plants and actively carry out preliminary verification work for inland nuclear power projects. According to the opinions of the “13th Five-Year Plan for Electric Power Development (2016-2020)” and the “13th Five-Year Plan for Energy Development”, we aim to reach 58 million kilowatts of installed nuclear power in 2020, and the installed capacity of nuclear power under construction to reach more than 30 million kilowatts. As of January 2018, the total number of nuclear power units currently under construction was 58.02 million kilowatts, and more than 30 million kilowatts of nuclear power units still needed to be built. According to an estimate of 1.2 million kilowatts of power per unit, at least 25 new units would need to be started before 2020, with an average of about 7 to 9 units per year. One of the important reasons for the current stagnation of nuclear power approval is that the world's first AP1000 nuclear power project, the Zhejiang Sanmen Nuclear Power Plant, has not yet been put into operation. The necessary condition for subsequent approval and release of nuclear power is that the AP1000 project is connected to the grid to generate electricity and complete trial operation for 168 hours. Sanmen Nuclear Power Unit 1 is still at the point where thermal testing has been completed and the loading is in progress. According to Polaris Power Grid, based on conservative decision-making considerations, in the second half of 2017, the Nuclear Safety Administration and the Energy Administration organized three groups of experts to inspect the Sanmen nuclear power plant. The results of the inspection showed that Unit 1 had the loading conditions. However, senior state officials have yet to release the loading license for this unit, but expectations for a nuclear power restart have been further strengthened. Once nuclear power approval is restarted, the nuclear power business is expected to bring in net profit of at least 400-500 million yuan per year, according to the company's 50% market share. Investment advice: The net profit for 2017-19 is estimated to be 993 million yuan, 1,261 billion yuan, and 1,461 million yuan respectively, corresponding EPS is 1.15, 1.45, and 1.68 yuan, and corresponding PE is 23.1X, 18.2X, and 15.7X, respectively. Considering that the company is a leading enterprise in the nuclear power equipment segment, continuously upgrades technology to maintain its leading position in the industry, actively expand the nuclear power and non-nuclear equipment industry chain, and expand market space, it is recommended to give it an “increase in weight” rating. Risk factors: Nuclear power bidding progress falls short of expectations; new business development falls short of expectations; order execution progress falls short of expectations.