Key investment points, performance turned a loss into a win, and business development is beginning to bear fruit. In 2016, the company achieved operating income of 218 million yuan (+180.03%), net profit attributable to the parent company of 70.7 million yuan (-27.78%), and EPS of -0.29 yuan. In the first quarter of 2017, the company achieved operating income of 115 million yuan (+248.34%) and net profit attributable to the parent company of 13.19 million yuan (+236.63%), turning a loss into a profit. The company's losses in 2016 were mainly affected by reasons such as adjustments in procurement methods brought about by the country's military system reform, unmet expectations in the expansion of the civilian goods market, and the failure of the company's military product bidding. There were few orders in the military business and civilian goods business. However, the company actively expanded various businesses such as air defense command systems, radar systems, general aviation products, and undersea exploration, etc., and the results gradually became apparent. In the first quarter of 2017, military orders increased, revenue increased dramatically, and the company turned a loss into a win. As the business continues to expand, the company's subsequent profitability is expected to further improve. The layout of five major business segments to promote the transformation of military technology into civilian use is expected to benefit from the deepening development of civil-military integration. The company currently has five major business areas, including regional air defense and air traffic control equipment. At the same time, it also focuses on the transformation of existing military technology for civilian use, and promotes the application of products in the fields of navigation, civil aviation, key land, oceans, and communications. In November 2016, the company won the bid for the “Special Laser Detector for Underwater Archaeological Robots” project of the “2016 Industrial Foundation Project”. Coastal defense equipment and air traffic control equipment are expected to become new profit growth points. At present, the company has formed a series of general aviation products such as mobile tower command vehicles, airport scene surveillance radars, general aviation air traffic control information service stations, low-altitude multi-source intelligent surveillance systems, and drone control systems, etc., and has also made substantial breakthroughs in market expansion. As the country's civil-military integration strategy progresses further, the company's business is expected to benefit fully. Integrate related industrial chains and drive growth through synergy. Following the company's acquisition of Huayang Communications in 2015 and entering the communication device market, in the second half of 2016, the company successively completed mergers, acquisitions and investments in Nanjing Biotech, and Dingsheng Electronics. The integration of the industrial chain is conducive to promoting the industrialization process of various advanced technologies in the company's layout and forming a synergistic effect to enhance the company's competitiveness. At the same time, the technical advantages obtained during the integration process helped enhance the company's R&D capabilities, and also laid the foundation for the company to improve the technical level of its core military business. It is expected that in 2017, the company will further integrate existing business resources, improve operating efficiency, and may continue to purchase new assets, leading to an increase in revenue and profit. To enhance the core competitiveness of military products, orders are expected to pick up after the military reform. The adjustment of procurement methods brought about by the military system reform in 2016, and the failure of military bidding had a negative impact on performance. The military reform was gradually completed in 2017. After the procurement mechanism stabilized, it would help the company expand its market. The company strives to improve the intelligent performance of existing regional air defense products and increase the development of new short-range air defense products. A number of products were unveiled at the 2nd Civil-Military Integration Hi-Tech Achievements Exhibition in 2016. Furthermore, the company participated in 5 approved projects for the domestic military's “13th Five-Year Plan” pre-research project. It is expected that in the future they will be converted into military type research projects, and the company is expected to seek military procurement plans for shaped equipment. Benefiting from the improved market environment and clear strategic layout of the company, military sales performance is expected to pick up in 2017. Risk factors: the progress of military reform has fallen short of expectations; the improvement of the level of intelligence in military products is not ideal; market expansion of the civilian goods business does not meet expectations, etc.; profit forecasts, valuations, and investment ratings. Taking into account the uncertainty of the company's business development and external environment, we lowered the company's 2017/18 EPS forecast to 0.16/0.19 yuan (the original forecast was 0.38/0.53 yuan), giving the 2019 EPS forecast of 0.24 yuan, and the current stock price of 25.88 yuan, corresponding to 2017/18/19 PE 164/135/108 times, respectively. Considering the future development prospects of the company's business and the continuous advancement of civil-military integration, maintain the company's “increase in holdings” rating, with a target price of 30 yuan.