Events:

The company announced that it intends to purchase 69% of Ningbo Shuanglin Investment held by the controlling shareholder Shuanglin Group and 2% of Shuanglin Investment held by Ninghai Jisheng Transmission by issuing shares and paying cash, and raise matching funds. A framework agreement has been signed with the shareholders of the target company, which will make a commitment to the performance of the target company in the next three years. The company's shares will be postponed for resumption of trading.

Comments:

The injection of DSI assets has become a scarce target for automatic transmissions, and new customer development is still the key. The company intends to acquire the target Shuanglin Investment holds a 90 per cent stake in DSI, a total of 71 per cent. As an automatic transmission company, DSI integrates R & D, manufacturing and sales, with a history of more than 80 years. Its products cover 4-speed and 6-speed front and rear drive and full-drive high-torque automatic transmissions, with two factories in Xiangtan, Hunan and Jining, Shandong. At present, it mainly supports Geely Boyue and Borey. Among them, Boyue, as Geely's most representative star model, has been a hit since its launch at the end of March last year. Under the circumstances of limited production capacity, Boyue has achieved 110000 of its annual sales, of which more than 80% of the orders are automatic.

We expect Bowie to sell 300000 vehicles in 2017 and bring significant benefits to DSI. At the same time, DSI is still opening up new customers and has won orders from BAIC Yinxiang, Southeast, Siwei and other brands. Automatic transmission has always been the core component for domestic parts system to conquer and achieve import substitution. After Shuanglin acquires DSI, it will become a scarce target for automatic transmission in the A stock market, but at present, the volume of new customers is relatively small, and the key in the future still depends on the development of new customers of DSI.

The new torch and Chengye will continue to provide growth impetus for the performance. The new torch is expected to continue to drive high performance growth: 1) the new torch is the only supplier of Baojun 7300560 and a supplier of high-quality independent car companies such as Changan and Geely. In the future, it is expected to enter the high-quality joint venture supply system such as Guangzhou Automobile and Volkswagen; 2) the revenue share of the third generation high value-added wheel products will increase rapidly, which will effectively increase the revenue gross profit margin. 3) production capacity has been released in 2016, reaching 1600-1800 million units per year, providing a guarantee for performance growth.

In May this year, the company's acquisition of 100% stake in Shanghai Chengye has completed delivery. On the one hand, Chengye will introduce its SAIC Volkswagen and other vehicle customers for the company to improve the customer structure. On the other hand, the net profit for the first 10 months of 2014 / 2015 / 2016 is 0.54 / 0.60 / 0.47, and the net profit margin is 14% / 16 / 14, respectively, which is higher than Shuanglin's net profit margin of 9 / 10 / 10 / 2016, which is 12% for Shuanglin 2014 / 2016.

The acquisition of Chengye will improve the company's profit margin and thicken its performance. In addition, Deyang Electronics expects to fulfill its performance commitment (net profit of 120 million yuan) in 2017.

The intelligent driving layout is gradually landing. Shuanglin Group owns 60% of the shares to set up a joint venture Ningbo Eagle Eye layout vehicle Internet; the company's stake in Fretak will build an intelligent driving technology platform and introduce foreign advanced intelligent driving technology.

Investment advice:

The main business of the company is stable, the structure of products and customers will be improved, and the asset injection of DSI automatic transmission will bring new space. Without considering the acquisition, merger and additional issuance of DSI, it is estimated that the EPS from 2017 to 2018 will be 1.17,1.51 yuan respectively, corresponding to PE 22x and 17X. Assuming that DSI 2017 issued 57.74 million additional shares for the whole year (assuming an additional issue of 1.5 billion yuan, the number of shares is calculated according to the current market value), it is estimated that the EPS for 2017-2018 will be 1.34 yuan and 1.62 yuan respectively, corresponding to PE 19x and 16x, maintaining the "buy" rating.

Risk hint: the growth rate of sales in the automotive industry is lower than expected, the performance of the company's acquisition projects is not as expected, the process of mergers and acquisitions is slow, the expansion of new DSI customers is not as expected, and the promotion of intelligent driving platform is not as expected.