Matters: An announcement was issued on December 28, 2019. The company plans to acquire 100% of the shares of Beijing Jinghanyu Electronic Engineering Technology Co., Ltd. (hereinafter referred to as “Jinghanyu”) in two steps with an estimated value of 823/1,270 million yuan. Jing Hanyu promised to achieve net profit of 0.8/0.92/1.06/1.22/142 million yuan in 2019-2023, with a growth rate of no less than 15%. Guoxin Machinery's view: 1) The significance of this acquisition is that the company will successfully enter the field of reliability testing of military electronic components, further strengthen the deep integration of the company's military electronics technology advantages and resources in the testing field, give full play to synergies, optimize the company's industrial layout, promote the effective extension of the company's military sector industry chain, and explore new profit growth points. The company's industrial integration capabilities and comprehensive profitability are expected to improve significantly. 2) Risk warning: The company's traditional adhesive business fell short of expectations; the company's integration after the acquisition fell short of expectations; and the military business fell short of expectations. 3) Investment suggestions: The company is a leading domestic structural adhesive. The adhesive business is growing steadily. The military electronics business laid out in recent years has grown rapidly. Currently, the military electronics testing service industry has been further strengthened, and the market ceiling has further opened up, and profitability is expected to increase dramatically. Previously, the company announced the 2019 performance forecast for the full year of net profit of 120-145 million yuan. We expect the company's net profit of 1.35/1.66/206 million yuan in 2019-2021, corresponding to a PE value of 32/26/21 times (considering the acquisition of Jinghanyu, the net profit for the 2020/2021 exam is expected to be about 25/312 million yuan, and the corresponding PE value is 17/14 times), covering the “buy” rating for the first time. Comment: Jinghanyu: China's leading independent third-party inspection agency for military component inspection services Jing Hanyu is the leading independent third-party inspection agency for military electronic component reliability testing services in China. Beijing Jinghanyu Electronic Engineering Technology Co., Ltd. was founded in 2008. Chairman Yan Yueliang holds 95% of the shares. Its main business includes component screening, destructive physical analysis (DPA) and other reliability testing, component packaging testing, and test program development services. Jing Hanyu mainly tests electronic components such as integrated circuits, crystal oscillators, power modules, relays, resistors, capacitors and inductors, etc., and serves mainly military units such as aviation, aerospace, weapons, ships, and scientific research institutions. Jinghanyu Electronics Co., Ltd. is headquartered in Beijing and has branches in Xi'an, Wuxi and Chengdu respectively. The Beijing headquarters has a laboratory area of 6,000 square meters, and the Xi'an branch has a laboratory area of 5,000 square meters and a site area of 11,000 square meters. Jing Hanyu has more than 300 employees, including more than 200 professionals, more than 1,500 sets of leading domestic inspection and testing equipment, fixed assets of 250 million yuan, and annual consumables R&D investment of more than 10 million yuan. It has passed the National Laboratory Accreditation (CNAS), China National Defense Technology and Industry Laboratory Accreditation (DILAC), obtained the National Defense Laboratory Accreditation Certificate, the Weapons and Equipment Quality Management System Certification (GJB9001C-2017), and the Beijing University of Aeronautics and Astronautics Component Reliability Institute authorized the designated component laboratory, and components approved by the Third Aerospace Academy Laboratory and other industry system certification. Through years of accumulation in the military industry, Jing Hanyu has accumulated many sets of inspection processes involving the complexity of the military industry's environment to meet the special requirements of electronic component inspection in the military industry. Currently, its inspection capabilities, categories, and throughput are in the leading position in the industry. Strategic acquisition: It is proposed to acquire Jinghanyu, and the company that lays out the reliability testing business for military electronic components plans to acquire 100% of Jinghanyu's shares in two installments with an estimated value of 823/1,270 million yuan. The company announced on December 28, 2019, that it intends to acquire 100% of the shares of Beijing Jinghanyu Electronic Engineering Technology Co., Ltd. (hereinafter referred to as “Jinghanyu”) in two installments, and set three prerequisites for the acquisition. 1) If conditions 1: after due diligence, there are no major defects and relevant securities regulatory rules are in place, there are no major defects or risks at the legal/finance/business/tax levels, and condition 2: If the net profit from non-return is not less than 80 million yuan in 2019, then the company will acquire 51% of Jinghanyu's shares in cash at the latest in July 2020 at the latest at a price of 823 million yuan. Jing Han Yu must promise that the withholding of non-net profit in 2020-2022 is not less than 0.92/1.06/122 million yuan; 2) If the non-net profit is not less than 0.92/1.06/122 million yuan in 2020-2022; 2) If Beijing Hanyu satisfies condition 3: If the net profit deducted in 2020 increased by no less than 15% year on year, then the company will acquire the remaining 49% of Jinghanyu's shares by issuing shares to purchase assets and raise supporting capital at the latest in April 2021 at the latest, to achieve complete control. Jinghanyu must commit to withholding non-net profit of no less than 1.06/122/142 million yuan in 2021-2023. On December 27, 2019, the company signed the “Cooperation Framework Agreement between Shanghai Kangda Chemical New Materials Group Co., Ltd., Yan Yue, and Zhang Yu (5%)” with Jinghanyu shareholders Yan Yueliang (95% of shares) and Zhang Yu (5% of shares). Demand in China's electronic component testing industry is growing rapidly, and Jing Hanyu has benefited deeply as a leading enterprise in the industry. With China's economic construction and rapid development of technology, the electronics industry has also developed rapidly. Electronic components play a critical role in this, so using high-quality components in electronic products and devices is an important task. Through effective quality control and scientific selection, its performance parameters are effectively controlled, its functions are fully exploited, the quality of electronic equipment products is basically guaranteed, and the reliability of the whole machine is ultimately improved. China's electronic component inspection work continues to be carried out and continues to penetrate into various fields such as aviation, aerospace, electronics, and national defense in China. It has formed a relatively mature and comprehensive electronic component inspection work system, providing effective technical support for China's high-end technology fields. According to statistics from the China Certification and Supervision Commission, China's electronic and electrical inspection market in 2018 was about 13.7 billion yuan, and the industry's growth rate in the past three years has exceeded 20%. The electronic component testing industry has high technical barriers, customer barriers, and resource barriers. Thanks to the industry's high moat, Jing Hanyu has strong profitability. The acquisition is in line with the company's “new materials+military” diversified group development strategy and will significantly enhance the company's profitability. The company began expanding its military business in 2015, and acquired Chengdu Bicon Technology in 2017 to provide electromagnetic compatible products such as filters and power modules, as well as electromagnetic interference suppression and protection solutions for the aerospace sector. In 2017-19, the company promised profits exceeding 2600/3400/46 million yuan. In addition, the polyimide (PI) foam developed independently by the company is used in protective stealth materials for naval ships, contributing more than 10 million yuan in revenue in 2019. The company's acquisition of Jinghanyu will successfully enter the field of military electronic component testing, further strengthen the deep integration of the company's military electronics technology advantages and testing resources, give full play to the synergy, optimize the company's industrial layout, promote the effective extension of the company's military sector industry chain, and explore new profit growth points, which is conducive to improving the company's industrial integration capabilities and comprehensive profitability, and further promoting the company's long-term development. The company is an adhesive leader. Technological innovation drives endogenous growth, and epitaxial mergers and acquisitions actively deploy military companies are leading domestic structural adhesives, gradually laying out the military industry business in 2015. The company's main business is medium and high-end adhesives and new material products, including epoxy glue, polyurethane adhesive, acrylic adhesive, SBS adhesive, etc., and products with eight series and hundreds of specifications. It is an endogenous enterprise driven by technological innovation. In 2018, on the basis of an in-depth layout in the field of adhesives and new materials, the company completed the acquisition of Chengdu Bicong Technology Co., Ltd., and added related businesses such as military electromagnetic compatibility and power modules. Epoxy structural adhesives, polyurethane adhesives, acrylic adhesives, and SBS adhesives contributed 31.67%/22.64%/7.3%/4.32% of the company's 2018 revenue, respectively. The company's performance forecast for 2019 is 12—145 million yuan. In 2018, the company achieved operating income of 928 million yuan, a year-on-year increase of 68.85%, net profit of 0.8 billion yuan, a year-on-year increase of 83.75%, a year-on-year increase of 161.57%, a net profit margin of 8.59%, an increase of 0.69 percentage points over the previous year, and a net profit margin of 8.22%, an increase of 2.91 percentage points over the previous year. Among them, the period cost rate was 17.43%, a year-on-year decrease of 3.02 percentage points; the company always maintained a high R&D investment to drive endogenous growth. The R&D expenditure rate in 2018 was 5.96%, a year-on-year decrease of 0.37 percentage points, and the 2019Q3 R&D expense rate was 6.27%, an increase of 1.73 percentage points over the previous year. The company actively lays out the military industry chain. The products are widely used in downstream fields including aviation (C919 aircraft), wind power blade manufacturing, rail transit, photovoltaics, naval ship engineering, etc., with low cycle sensitivity. Since 2015, the company has actively expanded its military business. The acquisition of Chengdu Bicon Technology in '17 entered the field of aerospace electromagnetic compatibility. This acquisition of Jing Hanyu will effectively extend the military industry chain to military component inspection. In addition, the company's market share in the wind power sector exceeds 50%. The performance of its products, such as epoxy glue, acrylic glue, and polyurethane rubber for wind power blades, reached the level of similar international products. The high prosperity of domestic wind power in 2020 combined with the company entering the overseas wind power giants Vestas and Siemens is expected to maintain a compound growth of more than 20% over the next 3-5 years. Investment advice: The company that was given a “buy” rating for the first time is the leading domestic structural adhesive. The adhesive business has been growing steadily. The military electronics business, which has been laid out in recent years, has grown rapidly. Currently, the military electronics testing service industry has been further strengthened. The market ceiling has been further opened, and profitability is expected to increase dramatically. We expect the company's net profit in 2019-2021 to be 135/1.66/206 million yuan, corresponding to the PE value 32/26/21 times (considering the complete merger of Jinghanyu, the net profit for the 2020/2021 exam preparation is expected to be about 25/312 million yuan, and the corresponding PE value is 17/14 times), covering the “buy” rating for the first time.