Matters: Taihai Nuclear Power issued an announcement on January 5, 2018. The company plans to sign a major contract with the controlling shareholder, Taihai Group. Taihai Group will purchase container forgings and other products from the company for a total amount of no more than 3.65 billion yuan. It is estimated that the transaction will be executed until the end of 2020. The company expects the order to generate a net profit of 200 million to 600 million yuan per year. Our review of this is as follows: Comment: What's in this order? The details of the order were not disclosed at this time, but we can still make some judgments through the announcement. (1) This order is not nuclear power unit equipment. The approval of new domestic nuclear power units is still at a low level. In 2017, only the Fujian Xiapu Express Reactor started construction at the end of December, and the two major new units of mainstream third-generation nuclear power technology, the AP1000 and Hualong 1, have not progressed. Based on this, it is speculated that the nuclear power industry will not currently generate such huge equipment orders. As we mentioned in the industry report “Business Reversal, Bidding Accelerated, and Time to Deploy Nuclear Power Equipment” (June 26, 2017), modular small reactors, offshore floating reactors, and nuclear-powered ships are the three main extension directions of nuclear power equipment. (2) This order is not a single device order. The value of forging materials for the seven major nuclear power equipment (evaporator, pressure vessel, main pump, voltage regulator, main pipeline, reactor components, and driving mechanism) is less than 300 million yuan. According to the total contract amount, it is estimated that in addition to the company's core product line, the order should include a large number of other products. This shows that the company's products other than the main channel have been approved by customers and have begun to receive batch orders. What's the point of this order? (1) It has laid a good foundation for the company's performance in 2018. Assuming that the order is evenly distributed in 2018-2020, it can bring the company about 1.2 billion yuan in revenue each year, which is equivalent to about 50% of 2017 revenue (we forecast that the company's revenue in 2017 will be within 2.5 billion dollars). (2) The company's growth potential has once again been realized. We have emphasized many times that the company's growth model is “based on the advantages of alloy materials, continuing to develop in the three dimensions of product expansion, business outreach, and market development, and ultimately growing into a high-end equipment manufacturer with a diverse layout.” This order once again fulfills our judgment on the company's growth path and growth potential. As a simple comparison, the company has received a total of about 3 to 4 billion yuan in main pipeline orders since its establishment. The number of orders received through product expansion+business extension this time has reached 3.65 billion. Judging from the current situation, the company is far from reaching its growth bottleneck. How do you view the company's future performance? (1) The 2018 results have the potential to explode. The main reason why the company's stock price has been underestimated for a long time is that both the nuclear power equipment industry and the special equipment industry have great uncertainty. However, from another perspective, the company is still expected to achieve a net profit increase of about 160% in 2017 under the downturn in the two major downstream industries (the company expects net profit of 1,00-1.05 billion yuan in 2017), and also reap a good start in large orders in early 2018. If the prosperity of the nuclear power equipment and special equipment industry reverses in 2018, the company's performance has strong potential to explode. (2) The company moved frequently during the slump period in the industry to fully prepare for the recovery of the industry. Since the fourth quarter, the company first plans to raise no more than 3.95 billion yuan in capital in November, and also plans to acquire a subsidiary owned by the controlling shareholder, Taihai Group, in December. At a time when competitors' operations were generally disrupted and strategies contracted, the company not only achieved high growth in terms of performance, but was also prepared for the recovery of the industry in terms of capital and production capacity. We expect the Taihai Nuclear Power to grow into a new generation of heavy equipment for major countries in the next major industry cycle. Risk factors: The order execution progress fell short of expectations; the bidding progress for nuclear power equipment fell short of expectations; and product line expansion was blocked. Investment advice: We reaffirm that the company's growth model is “based on the advantages of alloy materials, continuous development in the three dimensions of product extension, business extension, and market development, and ultimately growth into a high-end equipment manufacturer with a diverse layout.” This big order continues to fulfill our judgment on the company's growth model. In the next stage, we expect the company to advance the layout in the following dimensions: (1) full coverage of the main equipment of the nuclear island (product extension); (2) expand the application of the company's products in other fields (business extension); and (3) promote the export of nuclear power products to overseas markets (market development). Maintaining the 2017/18/19 net profit forecast of 10.1/14.2/1.94 billion yuan, corresponding to EPS of 0.97/1.36/1.86 yuan (assuming that the number of additional shares issued is 20% of the original share capital), the PE corresponding to the current closing price of 26.45 is 27/19/14 times. It is recommended to give the company a PE valuation of 35 times its 2018 performance, corresponding to the target price of 47.7 yuan, and maintain the “buy” rating.