Technology upgrading and smart grid construction have promoted the sustained growth of the carrier communication industry: in March 2010, State Grid Corporation released the General report on State Grid Intelligent Planning (revised version), with a total investment of 384.1 billion yuan in intelligent grid construction. and divided into three development stages, of which 2009-2011 is the pilot stage, 2011-2015 is the comprehensive construction stage, and a unified strong smart grid will be built from 2016 to 2020. After the comprehensive construction stage from 2011 to 2015, China will still have a follow-up investment of about 50 billion yuan in electricity consumption from 2016 to 2020. At the same time, as the average replacement cycle of watt-hour meters is 6 years, since the State Grid built a strong smart grid in 2011, the first batch of smart meters have entered a period of upgrading, which will contribute part of the demand to the carrier communication market. Therefore, the carrier communication market will maintain steady growth before 2020.

Carrier communication service market share advantage is prominent, broadband carrier and medium voltage carrier steadily advance, realize the independent supply of bare chip: the company has independent intellectual property rights of power carrier communication technology, and is the mainstream manufacturer of carrier communication industry in our country. Since 2013, the company has maintained a solid cooperative relationship with more than 70 watt-hour meter manufacturers that directly participated in the bidding of the State Grid Corporation. The company's carrier products have been invited by the State Grid Corporation for watt-hour meters and electricity information collection equipment, with a share of more than 40%, ranking first in the country.

In addition to traditional products, the company's broadband carrier products made a breakthrough, with mass trial production in May 2016 and mass delivery in July 2016; at the same time, medium voltage carrier has also completed the research and development of channel technology based on substations, and is comprehensively promoting its application in the fields of collection, distribution network and dispatching, and is about to achieve mass sales. In September 2016, the company began to make full use of the naked chips produced by its subsidiary Yinqi integration, realizing the independent research and development, design and supply of bare chips. While the memory of the chips was expanded, the communication response and processing speed were also greatly improved. And further improve the company's overall gross profit margin of carrier communications products.

Develop fire safety business with bus communication technology, and consolidate the dominant position of the industry with differentiated strategic layout: the company has power supply two-wire real-time bus communication technology, which adopts two-wire installation (that is, transmission wire not only communicates and supplies power). It can meet the dual requirements of long-distance communication and power supply. At the same time, the company continues to improve the relevant technology reserve, not only independently developed the TC-BUS bus communication protocol, but also designed a series of low-power TC chips. On the basis of the accumulation of bus communication technology, the company has steadily promoted the market application of fire safety products with independent subsidiary Dingxin fire protection layout fire safety business. In 2016, the company realized 8.39 million yuan in marketing of its fire-fighting products and signed an intention order of more than 60 million yuan. At present, the company has more than 30 products have been certified by Shenyang Fire Institute, with market sales qualifications. It is expected that the company's fire fighting business revenue will achieve rapid growth, becoming another major performance growth point in addition to the carrier communication business.

Investment suggestion: the periodic replacement of smart meters and the promotion and application of broadband carrier acquisition terminals will drive a new round of growth in the carrier communication industry. In a good external environment, the company deeply ploughs the carrier communication service and launches broadband carrier communication and medium voltage carrier communication products; at the same time, it vigorously develops bus communication technology to accelerate the promotion and application of this technology in the field of fire safety, to achieve diversified business layout. We estimate that the company's revenue from 2017 to 2019 will be 1.695 billion yuan (+ 22.27%), 2.123 billion yuan (+ 25.27%) and 2.653 billion yuan (+ 24.93%) respectively, and the net profit will be 380 million yuan (+ 22.00%), 485 million yuan (+ 27.75%) and 611 million yuan (+ 26.16%), respectively, and the corresponding EPS will be 0.88,1.12,1.41 yuan respectively, and the corresponding PE will be 31 times, 25 times and 19 times respectively. With reference to the level that the industry can compare the company's average dynamic PE33 in 2017, and considering the company's leading position in the carrier communication industry, the company is given a reasonable valuation of 2017 dynamic average PE35 times, with a 6-month target price of 30.80 yuan. Cover for the first time, give "overweight-A" investment rating.

Risk tips: strong policy dependence, affected by the bidding procurement and installation progress of the State Network Company, and intensified market competition.