Key points of investment:

In 2018, railway investment returned to 80 billion dollars, and the 850 billion urban rail project was approved. In terms of railways, on January 2, 2019, China Railway General Assembly held a 2019 working conference and announced that in 2018, the country's railway fixed asset investment reached 802.8 billion yuan, an increase of 0.22% over the previous year. Compared with the 2018 investment plan of 732 billion yuan, it exceeded 9.67%. In particular, according to statistics from Infrastructure Connect Big Data, there are 36 large-scale high-speed rail projects to be started by 2019, with a total investment of over 1.4 trillion yuan. In terms of urban rail, in the first half of 2018, there were 233 urban rail transit lines under construction in mainland China, with a total mileage of over 6,000 kilometers, a total investment of more than 3.6 trillion yuan, and an average annual investment of over 500 billion yuan. In particular, in August 2018, the NDRC restarted the approval of urban rail transit projects that had been suspended for almost a year, and the boom in urban rail transit construction was revived. As of January 4, 2019, the NDRC approved nearly 850 billion yuan of urban rail investment projects in eight cities including Suzhou, Chongqing, Jinan, Hangzhou, Shanghai, Shenyang, Changchun, and Wuhan.

Demand for rail fasteners exceeded 70 million sets in 2018, and future additions and modifications will be in high demand. Normally, a railway line consists of two railroad tracks in both directions. According to current construction standards where the distance between the pillows is 0.6 meters and each rail pillow is equipped with two sets of fasteners, for every 1 kilometer of a new line put into production, an additional set of fasteners is required. (1) New demand for railways: In 2018, the country's railways invested 4,683 kilometers of new lines, corresponding to 31.22 million sets of rail fasteners; (2) Railway rehabilitation requirements: According to company announcements, the service life of rail fasteners is about 8 years. In 2018, rail fasteners newly put into production in 2010 need to be modified, corresponding to 32.72 million sets of modified fasteners; (3) New demand for urban rail transit: In 2018, the operating mileage of urban rail transit was increased by 725.32 kilometers, corresponding to demand 4.84 million sets of rail fasteners; (4) Urban rail renovation requirements: 2018 requirements In 2010, 456 kilometers of urban rail were renovated and put into production, corresponding to the demand for 3.04 million sets of rail fasteners; in total, demand for rail transit fasteners in 2018 was 71.82 million sets. We believe that as domestic rail transit construction continues to grow, demand for new and modified rail fasteners will be strong in the future.

Obtain supporting qualifications from multiple suppliers and compare competitor companies' strong profitability. The main participants in domestic rail fasteners are 7 large-scale rail fastener consortia. The listed non-metallic rail fastener companies are Shidai New Materials, Haida Co., Ltd., and Shidai New Materials supports China Railway Longchang, and Haida Co., Ltd. supports Chaohu, Anhui. The company's supporting company is Zhongyuan Lida. In 2018, it also obtained supporting qualifications from many rail fastener system integrators such as Hebei Yichen, Anhui Chaohu, Jinyi Industrial, China Railway Longchang, and Tieke Shougang, broadened sales channels. It is expected that future rail fastener revenue will increase rapidly. Therefore, from the perspective of supporting suppliers, the company has a large number of customers. Although the company's revenue is small, its profitability is strong. The company's 2018 Q3 gross margin was 40.37%, far higher than Shidai New Materials 16.16% and Haida shares 24.30%; the company's 2018 Q3 net profit margin was 22.96%, far higher than Times New Materials 0.98% and Haida shares 8.25%.

The company specializes in rail fastener non-metallic parts and electronic component accessories. ① Non-metallic parts of rail fasteners: Rail fasteners are parts that connect the steel rail on the track to the rail pillow (or other type of foundation under the rail). The non-metallic components are the core components that ensure the accuracy and smoothness of the track, and play a decisive role in the insulation performance and service life of the overall fastener. In the first half of 2018, the company achieved revenue of 114 million yuan for rail fasteners and non-metallic components, an increase of 3.52% over the previous year, accounting for 85.53% of revenue and a gross margin of 42.24%. ② Electronic component parts: mainly rubber plugs and bases, mainly used for aluminum electrolytic capacitors and air conditioning compressor protectors; in the first half of 2018, the company's electronic component parts achieved revenue of 19 million yuan, an increase of 2.93% over the previous year, accounting for 14.47% of revenue, and gross margin of 28.09%. In the first three quarters of 2018, the company achieved revenue of 203 million yuan, a year-on-year decrease of 0.26%; it achieved net profit of 47 million yuan, a year-on-year decrease of 17.85%; mainly due to rising production costs due to rising raw materials and auxiliary materials. With the commencement of the 1.4 trillion high-speed rail project, the company will fully benefit, and subsequent growth can be expected.

The company has strong R&D capabilities and good channels of cooperation. In the first three quarters of 2018, the company invested 8.4784 million yuan in R&D, accounting for 4.18% of revenue; the company's R&D model included in-house independent R&D and joint R&D with other research institutes. In terms of internal independent research and development, the company's research institute organizes R&D work according to downstream customer needs and combined its own technical advantages; in terms of joint research and development, in 2005, the company joined the “China Passenger Transport Special Line Fastener System Joint R&D Team”, which was commissioned by the former Ministry of Railways to take the lead by the Railway Research Institute, and undertook research and development on many topics to achieve a seamless connection between industry and research. By the end of June 2018, the company had 52 R&D personnel and undertook 3 national scientific research projects and 9 provincial and municipal scientific research projects; 25 patents were authorized, including 10 invention patents and 15 utility model patents.

It was covered for the first time, giving it an “increase in holdings” rating. The company's net profit for 2018-2020 is expected to be 65 million yuan, 88 million yuan, and 111 million yuan respectively. The corresponding EPS is 0.37 yuan/share, 0.50 yuan/share, and 0.63 yuan/share, respectively. Based on the closing price of 11.42 yuan on January 28, the corresponding PE is 31, 23, and 18 times respectively. As a rail fastener non-metallic parts company, the company will fully benefit from the high level of domestic rail transit investment, so for the first time, the company was given an “increase in holdings” rating.

Risk warning: The development of domestic rail transit investment fell short of expectations; the company's performance development fell short of expectations; the company's supporting sales fell short of expectations; the company's R&D fell short of expectations.