Event: the company released its annual report in 2017. during the reporting period, the operating income was 3.998 billion yuan, down 18.87% from the same period last year, and the net profit belonging to shareholders of listed companies was 109 million yuan, an increase of 14.62% over the same period last year. At the same time, the company released its quarterly report for 2018, with operating income of 985 million yuan during the reporting period, down 9.96% from the same period last year, and net profit belonging to shareholders of listed companies was 26.8908 million yuan, an increase of 9.24% over the same period last year.

Operating income declined compared with the same period last year, while net profit increased year-on-year. Revenue: on the one hand, in 2017, the company stopped working with two third-party tire factories during 2016 to meet market needs and make up for the capacity decline caused by environmental relocation, resulting in a decline in tire production. Tire sales for the whole year of 2017 were 8.291 million, down 28.04% from the same period last year; on the other hand, in order to avoid the risk caused by material fluctuations, the company significantly reduced its material sales business in 2017 and the first quarter of 2018. The impact on these two major businesses led to a year-on-year decline in the company's main business revenue for the whole of 2017 and the first quarter of 2018. Net profit: due to the decline in the prices of tire raw materials such as carbon black, natural rubber and steel cord, the company's tire manufacturing costs decreased, and the gross profit margin rose 3.12 percentage points year-on-year to 19.9%. The company's net profit for the whole year of 2017 and the first quarter of 2018 increased year-on-year.

Increase R & D efforts and enhance core competitiveness: efficient R & D system is an important guarantee for the company to implement technology-leading strategy and sustainable scientific and technological innovation. At present, the company has a high-quality R & D team. In 2017, the company had 590 R & D personnel, an increase of 12.81% over the same period last year, and R & D investment reached 137 million, an increase of 20.90% over the same period last year.

Industrial 4.0 intelligent tire factory is gradually put into production, production and sales are expected to make a breakthrough: in 2017, the company implemented major project planning for the conversion of new and old kinetic energy, and the intelligent transformation strategy is being fully implemented. The full-process "Industrial 4.0" intelligent chemical plant for commercial tires has reached full production, and the full-process "Industrial 4.0" intelligent chemical plant for passenger tires will soon be put into full production in 2018. In the future, as the company's production lines gradually reach production, production and sales volume is expected to make new breakthroughs.

Double stars and Jinhu signed an acquisition agreement to help double stars quickly achieve global layout. Double Star Group and its subsidiary Xingwei Korea Co., Ltd. and Jinhu Tire and Jinhu Tire creditors signed the "share subscription Agreement" and "shareholder Agreement" on behalf of the Korean Development Bank. Starmicro Korea will invest 646.3 billion won to subscribe for 129267129 common shares of Jinhu Tire at the price of 5000 won per share, accounting for 45% of the total shares of Jinhu Tire after the issuance of Jinhu Tire shares, and become the controlling shareholder of Jinhu Tire. Jinhu Tire is the second largest tire manufacturer in Korea with a history of 58 years. It once ranked the 10th largest tire company in the world, and its main product is PCR. At present, Jinhu Tire has a global design capacity of about 60 million units, which are distributed in 8 tire production plants around the world, including 3 in South Korea, 3 in China, 1 in the United States and 1 in Vietnam, and has five R & D centers in the world. it is located in Korea (2), the United States, Germany and China, and is in a leading position in many technology fields. Provide original matching tires to major global automakers, including Hyundai, Kia, Mercedes-Benz, BMW, Volkswagen, General Motors, Chrysler, Gyibug, Dodge, Skoda, Renault and so on. This acquisition agreement will help double stars quickly achieve a global layout.

Thanks to the rapid rise of self-branded car companies and huge car ownership, tire demand is expected to meet high growth: although China's automobile industry is developing rapidly, joint venture brands have been dominant due to historical reasons. Joint venture brand car companies already have a complete supply chain system before entering China, and after entering China, they also bring these spare parts, including tires, to China. Therefore, for a long time, it is difficult for national tire brands to enter the vehicle matching market. However, with the development of national automobile industry, the rapid rise of independent brand cars, such as Geely, Great Wall and BYD, is a great opportunity for national tire brands to enter the whole vehicle supply chain; according to the growth law of foreign automobile market, automobile production and sales soar for several years, with the increase of tire wear and functional degradation, the demand for replacement tire will increase greatly, and the replacement tire market is expected to usher in high-speed growth.

Investment suggestion: facing the industry tide of intelligence and information, the tire industry is accelerating the elimination of backward production capacity and upgrading to green intelligent production. Qingdao double Star Intelligent Model Tire Factory is in the forefront. We estimate that the company's EPS will be 0.21,0.33 and 0.47 yuan respectively from 2018 to 2020, and the corresponding PE will be 28X, 18x and 13x respectively, maintaining a "highly recommended" rating.

Risk hint: tire industry decline risk, rubber price rise risk.