I. Overview of events

Recently, Huaying Technology released the 2016 annual report, profit distribution and capital accumulation fund to increase equity plan, and other announcements: 1) revenue in 2016 was 4.436 billion yuan, a decrease of 18.36% over the same period last year. The net profit belonging to shareholders of listed companies was 395.6697 million yuan, an increase of 160.37% over the same period last year, deducting non-net profit of-55.1702 million yuan, a decrease of 147.45%, and basic earnings per share of 0.39 yuan. Deducting non-earnings per share is-0.03 yuan 2) it is proposed to pay a cash dividend of 1.00 yuan (including tax) for every 10 shares, and the capital reserve fund will be used to increase 6 shares for every 10 shares; 3) the wholly-owned subsidiary Fujian Huaying display Technology Co., Ltd. will be absorbed and merged; 4) the holding subsidiary Huaying Optoelectronics plans to continue to sign a purchase LCD panel agreement with China Picture Tube (Bermuda). 5) it is proposed to integrate and concentrate the existing cutting-edge technology R & D resources to the Industrial Technology Innovation Research Institute. according to the company's strategic development plan, the company plans to invest no more than 446.3 million yuan in industrial technology innovation research in three years.

II. Analysis and judgment

The performance maintained growth in 2016, the improvement of product structure led to an increase in gross profit margin, and the performance is expected to usher in an inflection point. 1. The annual report performance is basically in line with expectations. (1) the company pointed out in its 2016 performance forecast that the net profit attributed to shareholders of listed companies is expected to change from 400 million yuan to 450 million yuan in 2016, an increase of 163.23% and 196.13% over the same period last year. (2) the company's comprehensive gross profit margin was 15.14%, an increase of 1.51 percentage points over the same period last year. (3) the main business, display module / cover glass, has a year-on-year growth rate of-18.93%, 154.31%, 98.39%, 1.15%, and 18.89%, 314.11%, respectively. Gross profit margin increased by 2.81% 360.57 percentage points. (4) the expense rate during the period was 11.01%, an increase of 2.88 percentage points over the same period last year. The sales expense rate, management expense rate and financial expense rate were 0.48%, 8.13%, 2.40%, 0.02%, 3.37%, and 0.51%, respectively.

2. The main reason for the performance growth in the current period is the investment income of 567 million yuan generated by the subsidiary's disposal of Xiahua Electronics' equity. The decline in the company's non-parent net profit is mainly due to the fact that the fund-raising project is still in the construction period, the second phase of the cover glass project of subsidiary Keli is still in the stage of equipment commissioning, and the subsidiary Huajiacai's small and medium-sized display device project is still in the stage of equipment commissioning. The above two subsidiaries are still in a state of loss and increased by about 79.18 million yuan over the same period last year. Out of the principle of prudence, the company set aside a total of 120.35 million yuan for asset impairment, an increase of about 85.13 million yuan over the same period last year, mainly because the company set aside 29.3522 million yuan for bad debts of accounts receivable.

3. We believe that as the second phase of the cover glass project of Colorado is about to enter the formal extraction stage from equipment debugging, the small and medium-sized display device project of Huajiacai will be mass produced in the second half of 2017, and the subsidiary company is expected to turn losses into profits. the company's performance will usher in an upward inflection point.

LCD module business has strategically reduced production capacity, increased shipments of vehicle products and increased revenue share

1. During the reporting period, the company focused on planning module production lines, optimizing production capacity allocation, and strategically shrinking small and medium-sized module factories. The processing and sales of modules for the whole year were about 6452, down 30.72% from the same period last year. The gross profit margin increased by 2.81% compared with the same period last year. Wujiang, a subsidiary of Huaying, achieved 894 million yuan in revenue, down 54.22% from the same period last year. Due to the impairment of fixed assets and the increase in personnel placement expenses, its net profit was 134 million yuan. The shipping volume of Huaying Optoelectronics decreased by 15.23%, and its revenue was 3.013 billion yuan, down 3.72% from the same period last year. The shipments of vehicle products with high gross profit margin and the proportion of revenue increased, benefiting from the influence of the sale of Xiahua Electronics equity, the net profit of Huaying Optoelectronics was 884 million yuan, an increase of 222.95% over the same period last year. Affected by the slowdown in the growth of the mobile phone and tablet market, Fujian Huaxian's shipments decreased by 60% compared with the same period last year. As the business model changed from processing supplied materials to processing imported materials in the second half of the year, the revenue was 590 million yuan, an increase of 88.03% over the same period last year, and the net profit was 32 million yuan, down 72.67% from the same period last year. Huaguan optoelectronic focus televisions, computers and other large-scale products, the volume of contract production increased steadily, revenue was 82 million yuan, up 5.08% over the same period last year, and the net profit was 3.6053 million yuan, turning losses into profits.

2. We believe that the on-board mechanical instrument display is gradually switching to liquid crystal instrument display, and the continuous optimization of high gross margin product structure and capacity structure will push the module business to bottom and rebound.

The first phase of the cover glass has been put into production, the second phase is stepping up construction, the product performance is excellent and the development prospect is broad. 1. During the reporting period, Kelisi was the first domestic manufacturer to use the overflow method to produce high aluminum cover glass, with annual revenue of 51 million yuan, an increase of 151.92% over the same period last year, and revenue growth of the first phase of the project compared with the same period last year, which is affected by the adoption of public supporting facilities such as land and factories that can be shared between the first phase and the second phase of the project. The fixed cost is high, and the performance loss is 221 million yuan. The kiln of the first 5.5 generation line in the second phase of the project was ignited in September 2016 and began to lead the plate in March 2017. it is currently in the stage of debugging the equipment, and the company will formally pick up the plate as soon as possible.

2. We believe that the glass cover plate has the advantages of high light transmittance, strong scratch resistance, Meguiar fashion and the ability to transmit electromagnetic signals, so it is widely used as a necessary protection component in mobile phones, tablet computers and other products. With the rapid development of wireless charging and 5G, the cover glass is expected to gradually replace the metal housing. Due to the high technical barriers and large investment in the production line, with the commissioning of the second phase of the project and the improvement of the yield, the cover glass business will become a new performance growth point of the company.

The sixth generation TFT-LCD panel production line is progressing smoothly and will be put into production in the second half of the year, forming the layout of the whole industry chain.

During the reporting period, Huajia Cai is still in the project construction period, with a net profit loss of 44.8 million yuan, of which the small size display device project is expected to achieve product lighting by the end of the first quarter or the beginning of the second quarter of 2017, mass production in the second half of 2017, with a design capacity of 30,000 pieces per month. We believe that the company has formed the whole industry chain layout of upstream touch module materials, mid-stream IGZO TFT-LCD panels and downstream LCD modules. With the commissioning of the panel project, Huajiacai will turn losses into profits, and will continue to contribute positive benefits with the climbing of production capacity.

Plan to absorb and merge wholly-owned subsidiaries to improve management efficiency

We believe that the absorption and merger of wholly-owned subsidiaries will help the company in assets, business, manpower, financial and other aspects of integration and coordination, reduce management costs, improve operational efficiency, in line with the company's strategy.

Sign LCD panel purchase agreement to ensure the supply of raw materials and reduce the risk of supply chain.

We believe that LCD panel is the most important raw material of LCD module, because the LCD panel industry is highly concentrated and each panel factory has its own supporting LCD module factory, the signing of this procurement agreement will ensure Huaying Optoelectronics to obtain a stable supply of raw materials and reduce supply chain risk.

Research on new technologies such as coded AMOLED and flexible display to reserve new display technologies for sustainable development

1. According to the strategic plan, the company plans to invest no more than 446.3 million yuan in three years to carry out industrial technological innovation research:

It is planned to invest 255 million yuan in 2017, 82 million yuan in 2018 and 109.3 million yuan in 2019. The research direction of the research institute is advanced display technology, intelligent systems and so on.

2. We believe that the investment in the Industrial Technology Research Institute will reserve high and new technologies such as AMOLED and flexible display for the company, enhance the company's independent innovation capability in the field of display technology and intelligent systems, shorten the research and development cycle of new products, and promote the transformation and upgrading of the company's business.

Third, profit forecast and investment suggestions

It is estimated that the company's EPS for 2017-2019 will be 0.08,0.10,0.17 yuan respectively, and the current share price will be 156.9 times, 122.2 times and 71.1 times respectively for 2017-2019 PE. Based on the elasticity of the company's performance growth, the company can be given 175x-180x PE in 2017, with a reasonable valuation of 14.0mm-14.4yuan in the next 6 months.

Fourth, risk tips:

1, the production capacity is not as expected; 2, the construction progress of the project is not as expected; 3, it shows that the market competition is intensified.