Main points of investment

CLP Panda has significantly increased its investment in Panda Group with cash, which is sufficient to facilitate capital operation: on February 20, 2016, Panda Group received a substantial capital increase from controlling shareholder CLP Panda. The original registered capital of Panda Group was changed from 1.266 billion yuan to 720 million yuan when Huarong and Great Wall of China withdrew, a decrease of 546 million yuan. According to the resolution of the board of directors and the shareholders' meeting of Panda Group on equity restructuring, it is suggested that the reduced registered capital and corresponding equity of Panda Group in this equity restructuring should be made up by other investors such as CLP Panda to inject corresponding cash and assets in accordance with market principles. However, in the actual implementation, CLP Panda increased its capital to Panda Group by 913 million yuan in cash, and the registered capital not only reached but also exceeded the original level of 1.633 billion yuan. CLP Panda has the first unit engaged in the research and production of electronic countermeasure equipment with the door (the state-run 9247 factory Nanjing Krida) and the main scientific research and production base of China's military electronic equipment (the state-owned 720 factory Nanjing Changjiang Electronics). These two companies are on a par with the Panda Group, which is likely to buy these two companies from CLP Panda vendors.

Panda Group has adjusted its ownership structure, and a single shareholder has strengthened its asset control: on August 26, 2015, the company's direct controlling shareholder, Panda Group, adjusted its equity structure. After the adjustment, China Huarong and China Great Wall withdrew from the Panda Group and acquired the Nanjing Panda stake and cash, and the former major shareholder of the Panda Group, China Electric Power Panda, achieved 100% holding. Under the background that China Electronic Information Group is actively promoting the group's asset securitization and business integration, we believe that Nanjing Panda is likely to receive high-quality asset injection from the Group. the most likely is the direct shareholder injection of Handa Technology's military radio communications countermeasure equipment assets. Considering that CLP Panda is the single major shareholder of the Panda Group, it is also possible to sell the military electronic equipment assets of Cheung Kong Electronics and Coreda to Panda Group for injection into Nanjing Panda.

Investment advice: we believe that after the single-shareholder Panda Group has a large amount of capital, the conditions for the injection of relevant assets into listed companies in conjunction with Nanjing Panda vendors have become more mature. The income and net profit of potential injected assets in 2014 were 2.5 billion yuan and 450 million yuan respectively, 72% and 230% of Nanjing Panda, respectively. We maintain a "buy-A" investment rating with a six-month target price of 21.50 yuan.

Risk hints: the group's arrangements for the injection of military assets are not up to expectations; the income from the main business is not up to expectations; and so on.