Incident: 1) On October 29, the company issued an announcement. The company added Shenzhen Chengjie Intelligence as the target of the merger and acquisition on the basis of issuing shares and purchasing 100% of Shenzhen Yuchen's shares with cash payments. Shenzhen Yuchen: The valuation is 450 million yuan. The company plans to use 35% cash payment +65% equity payment to acquire 100% of the shares. The net profit promises for 2018-2020 are 30, 40, and 50 million yuan, respectively. Chengjie Intelligence: With a valuation of 650 million yuan, the company plans to buy 100% of its shares with 30% cash payment +70% equity payment. The net profit promises for 2018-2020 are 350, 65, and 75 million yuan respectively. 2) The company's Q1 to Q3 achieved net profit of 1,646 million yuan yoy of 24.7%, net profit of 51 million yuan yoy -62.4%, after deducting net profit of 44 million yuan yoy -47%; Q3 achieved revenue of 461 million yuan yoy -19.6%, net profit to mother of 0.14 billion yuan, yoy -81%, net profit of non-return to mother of 0.14 billion yuan, yoy -45.5%. Key investment points: Haoneng Technology received a major order from the Ningde Era, and its leading position in front-end equipment is stable. In 2016, the company completed a major asset restructuring with the merger and acquisition of Haoneng Technology, and achieved 100% ownership of Haoneng Technology. Recently, Haoneng Technology won 364 million yuan in the Ningde Era equipment tender, equivalent to 50% of Haoneng's revenue in 2017. The winning projects mainly included coating machines, rolling, slitting equipment, etc. Among them, coating machines accounted for more than half, and there were breakthroughs in quantity and proportion. Winning the bid this time will have a positive impact on the 2019 results. We have now entered the 2.0 era of global lithium battery equipment production expansion. This round of capacity expansion is more concentrated on leading companies. The Matthew effect is obvious, and overseas leaders are expected to continue expanding domestic production in the future. Haoneng Technology has an outstanding advantage in front-end equipment. Equipment orders from leading companies such as Samsung, LG, Panasonic, and BYD are all in the middle. Breakthroughs from major customers will bring flexibility to the company's performance. It is proposed to acquire Shenzhen Yuchen and Chengjie Intelligence, and lay out the middle and back stages to become a leader in the entire line of lithium battery equipment. Shenzhen Yuchen provides customers with specialized assembly and testing automation equipment for lithium batteries, and has established good cooperative relationships with companies such as CATL, AVIC, Yiwei, Tianyi, BAK (China), PHILIPS (Netherlands), Weijia (Germany), Shabigao (Italy), Sosco (USA), and Valeo (France). Yu Chen's valuation is 450 million yuan, and the net profit promises for 2018-2020 are 30, 40, and 50 million yuan, respectively. Chengjie Intelligence mainly manufactures fully automatic film production and winding equipment for the lithium battery and superelectric industry. It has 65 types of winding equipment, more than 90 professional winding engineers, and can produce more than 150 fully automatic winding equipment of various types and more than 80 fully automatic production equipment every month. Chengjie is valued at 650 million yuan, with net profit commitments of 350, 65, and 75 million yuan respectively for 2018-2020. Yuchen and Chengjie products are mainly mid-stage equipment for cell production, and will form a good synergy with Haoneng Technology after the acquisition. The company will form a situation where it has strong strength in the first, middle, and back stages, and build a leading equipment line, which can greatly strengthen the position and scale of the company's lithium battery equipment industry. Gree Smart Order Risk Eliminates Uncertainty in Contract Execution and Equipment Repayment Haoneng Technology recently signed two “Memorandums of Understanding” with Gree Smart. The two parties agreed to change the original order of 715 million yuan to 620 million yuan, excluding the 99 million yuan purchased by Haoneng from Wanjia. Of the orders, Haoneng's order was changed to 85% of the original order amount. Currently, the remaining equipment amount is 270 million yuan. The two parties agreed that Duli Intelligence would provide all procurement contract acceptance reports to Haoneng before November 20, 2018, and that payments will be completed in the form of commercial acceptance notes within 10 wage days from the date the acceptance report was issued. Haoneng Technology's net profit for the first half of the year was 27.43 million yuan, down 41% from the previous year. The memorandum eliminated uncertainty about whether Gree Smart's early procurement contract would continue to be executed and the equipment would be paid back, and the company's cash flow will improve. Performance declined in the first three quarters, and there are currently marginal improvements in the positive and equipment businesses. The company's performance in the first three quarters declined significantly year-on-year. The main reason for the fluctuation in performance was 1) Cathode materials were affected by large fluctuations in the price of raw materials cobalt. The gross profit margin for the first half of the year was 7.71%, down 6.09 percentage points year on year; 2) The sale of Hunan Yacheng shares in Q3 last year brought investment income of 52 million yuan. Compared with the same period last year, investment income decreased sharply. At present, the company's Yingde Phase II plan is close to completion of construction of 5,000 tons/year of power ternary and about 3,000 tons/year of high-voltage lithium cobalate. The company's ternary materials are gradually being upgraded to the high-end, and most of the main power battery manufacturers in the ternary power sector have already carried out trial and certification work. Currently, the company's positive position business is in a marginal state. The subsequent release of production capacity will bring flexibility to performance. The risk of revenue confirmation and repayment of orders from Haoneng Technology and Gree Smart on the equipment side has been lifted, and the operating trend of many of the company's businesses is stable, moderate and positive. Profit forecast and investment rating: We have now entered the 2.0 era of global lithium battery equipment production expansion. This round of capacity expansion is more concentrated on leading companies. The Matthew effect is obvious, and the subsequent expansion of domestic production by overseas leaders is expected to be relayed. We believe that 1) The company has an in-depth layout in lithium battery equipment and cathode materials. The subsidiary Haoneng Technology won large orders in the Ningde era, and is expected to be introduced to other leading domestic and foreign manufacturers in the future, bringing flexibility in performance; 2) The company plans to acquire Shenzhen Yuchen, and Chengjie Intelligence forms a strong situation in the front, middle, and back segments to create a leading supplier of lithium battery equipment; 3) Gree Smart orders. The risk of pledge by controlling shareholders has basically been lifted, and the marginal improvement effect is obvious. Considering the acquisition of Yuchen and Chengjie, the company's net profit for the 2018-2020 exam preparation was 159 million yuan, 2.58, and 347 million yuan respectively, corresponding to the 2018-2020 PE, which was 28, 17, and 13 times, respectively (assuming that the market value reached 4.4 billion yuan after the acquisition). Based on the principle of prudence, without considering factors such as the impact of acquisitions and the dilution of issued shares, the company's 2018-2020 EPS is expected to be 0.45, 0.72, and 1.05 yuan respectively, corresponding to the 2018-2020 PE of 35, 22, and 15 times, respectively. Considering that the acquisitions of Yuchen and Chengjie will enhance the company's overall supply capacity and profit level, while valuations in 2019 and 2020 are low, maintaining a “buy” rating. Risk warning: Power battery customer production expansion falls short of expectations; risk of large price fluctuations in cathode materials and raw materials; risk of customer repayments falling short of expectations; risk of deferred mergers and acquisitions falling short of expectations; risk of issuing shares falling short of expectations; risk that future performance of the target of the proposed acquisition falls short of expectations.