Incident: On April 29, 2016, Xining Special Steel released its 15-year annual report. The company achieved operating income of 6.053 billion yuan, a year-on-year decrease of 17.24%; net profit attributable to shareholders of listed companies - 1,619 billion yuan; and basic earnings per share - 2.18 yuan, lower than our expectations. Comment: The steel industry is struggling to develop, and the company's performance is losing money. In 2015, domestic large and medium-sized steel companies lost huge losses in their main business. Demand in the domestic steel market was weak, prices plummeted, steel prices hit record lows, and the overall development of the steel industry was extremely difficult. Crude steel production fell year-on-year for the first time in more than 30 years (-2.3%), and domestic special steel prices fell 23.65% year-on-year throughout the year. At the same time, industries such as upstream mining and coal coking were affected by the impact of imported mineral prices and overcapacity in steel production. Prices also fell all the way down, and performance turned into losses. The company mainly produces three major products: steel, iron powder, and coke. Under the downturn in the entire steel industry chain, the company lost its performance in 2015, and net profit - 1,619 billion yuan. Sluggish terminal demand in the steel industry caused the volume and price of the company's products to drop sharply. The annual prices of iron ore and coke fell 36% and 19%, respectively, and domestic special steel prices fell 23% year on year; the company's steel sector saw the biggest drop in gross margin, down 21.32 percentage points year on year, and the coal sector and ore mining sector also decreased by 2.94 percentage points and 13.08 percentage points year on year, respectively. Steel gradually picked up in '16, and the main structure of the special steel business was upgraded. Xining Special Steel is located in an important area of the “Belt and Road” and has unique geographical advantages. After completion of the company's technical improvement project, it will bring about an upgrade in the product structure. In addition, steel production declined sharply year-on-year in the first quarter of '16. Steel billet inventories fell by nearly 22% compared to last year, and average daily steel production hardly increased, which was beneficial to the oversupplied steel market. Meanwhile, prices of raw materials such as iron ore, scrap steel, and coke all maintained their upward trend. Spot prices of iron ore and rebar rose 25.67% and 53.29%, respectively, in the first quarter. Steel price costs are well supported, and confidence in the steel market has improved. The company is actively promoting the upgrading of the main special steel business structure. With the country's supply-side reforms and the continuous deepening of “capacity removal,” the company is waiting for the fundamentals of the industry to improve. The balance ratio of the reduction in the scale of the issuance increase increased. The failure of the company's fixed increase plan in '13 and '14 put a lot of pressure on the company's capital requirements. In January '16, the company lowered the scale of the increase, and the total amount of capital raised declined again. According to the plan issued by the company in May '15, the company originally planned to issue a total of 1.1 billion shares to Qinghai Development Investment, Shanghai Mu Zhao Investment, and Xining Special Steel's first shareholding employees, raising 6.36 billion yuan in capital, all of which were used to repay bank loans (with no more than 100 million shares and subscription capital of no more than 576 million yuan), but from the withdrawal of Guizhou Zhongke 2, which participated in the subscription, to the withdrawal of Guohua Life Insurance, the company's fixed increase was reduced from 1 billion shares to 904 million shares. The company's fixed increase loan repayment project has not yet been completed, and the company's balance ratio continues to rise. By the end of 2015, the asset balance ratio had increased to 92.84%, an increase of 8.26 percentage points over the previous year. At the same time, the upgrading of the company's industrial structure increased investment in engineering construction, coal mines, and increased liabilities. The company's performance loss net assets decreased, and the balance ratio increased. In addition, the company acquired West Steel Real Estate Company in October '14. Since it was still in the housing construction stage and there were insufficient available properties, the real estate development sector's revenue and profit declined sharply. The real estate sector's operating income fell 88.43% year on year, and gross margin decreased 6.11 percentage points year on year. Profit forecast and rating: We are optimistic about the benefits of 16 years of supply-side reforms and the continuous deepening of “capacity removal” for the steel industry. We expect the company's 16-18 EPS to be 0.05 yuan, 0.07 yuan, and 0.09 yuan. Given that the company is in a period of transformation and upgrading and has an integrated layout from “coal, iron ore, and steel,” the company's “gain” rating will be maintained. Risk factors: China's economic growth is slowing, downstream demand for special steel products is slowing; steel prices continue to be low; prices of raw materials such as iron ore and coke have risen sharply; anti-dumping investigations in overseas countries affect exports of special steel products; and financial pressure continues to increase due to bank loans.