The semi-annual report fell short of expectations, and costs increased dramatically. Tianlong Optoelectronics released its 2011 semi-annual report, with revenue of 418 million yuan for the first half of the year (up 125% year on year), gross profit margin of 41.4% (up 7 percentage points year on year), net profit of 61.32 million yuan (up 71% year on year), and fully diluted earnings of 0.31 yuan per share. The company's revenue is basically in line with our expectations of 430 million yuan, and earnings per share are lower than our expectations of 0.40 yuan. The main reason is: (1) Significant increase in management costs. The company's management expenses in the first half of the year were 44.38 million yuan, an increase of 216% over the previous year (the management expense ratio reached 10.6%, far higher than 7.6% in the same period last year). Mainly due to the expansion of the company's market size and a sharp increase in the number of personnel introduced; (2) the calculation of asset impairment losses. Due to the downturn in the photovoltaic industry in the first half of the year, the company made a lot of bad debt preparations and preparations for falling inventory prices. Asset impairment losses of 22.43 million yuan in the first half of the year (5.26 million yuan in the same period last year) dragged down net profit. Polycrystalline furnaces achieved sales breakthroughs. The company's semi-annual report revealed that in the first half of 2011, polycrystal furnace sales revenue was 20 million yuan (we expect to ship about 10 units), single crystal furnace revenue was 240 million yuan (estimated shipment volume is around 400 units), and the new product polycrystalline furnace finally achieved a sales breakthrough. In the second half of the year, as the impact of PV subsidy cuts in European and American countries weakens, and the implementation of domestic PV feed-in tariff policies, we expect demand in the PV market to pick up, and the company's sales volume of photovoltaic equipment products will surpass the level of the first half of the year. Graphite thermal field performance increased significantly. The company has completed the acquisition of Shanghai James, an upstream graphite thermal field manufacturer. Graphite's revenue for the first half of the year was 92.17 million yuan (expected to exceed our forecast of 180 million yuan for the whole year), and the gross margin was 6l.g%, which also exceeded our profit assumption of 35%. We expect the graphite heat market to contribute 0.2 yuan to the company's performance in 2011 (more than the previous forecast of 0.12 yuan). Breakthroughs are needed in the development of new products. There is still no substantial breakthrough in customer development for the company's new product, the sapphire furnace, and further attention is needed. The company's planned new products, the PV800 multi-wire cutting machine and MOCVD equipment, are expected to be less likely to contribute to revenue in the short term due to high technical barriers. Risk factors: Demand in the downstream photovoltaic industry continues to decline, new business customer expansion is slower than expected, etc. Maintain an “Overweight” rating. The company's 2010 EPS was 0.43 yuan. Considering the impact of the company's 2011 management expenses exceeding expectations, accruing asset impairment losses, and the slower expansion of new products, we lowered the company's 2011-2013 EPS estimate to 0.85/1.35/1.69 yuan (corresponding to the previous reduction of 1.08/1.62/1.93 yuan). The target price was lowered to 30.00 yuan (corresponding to 35 times PE in 2011) to maintain the “gain” rating.