Events:

1) on August 18, the company announced the termination of planning for major asset restructuring, which intends to purchase CALIENT Technology71% shares of American Optical switch Company by cash acquisition.

2) on August 18th, the company issued the announcement on the acquisition of part of the shares of CALIENT Technology, intending to acquire the shares of the target company CALIENT51% by way of company merger.

Investment promotion comments:

1. The acquisition of American Optical switching switch Company to enter the optical communications industry, the company opened the road to the transformation of science and technology enterprises.

The target company for this acquisition, CALIENT, is a leading manufacturer of 3D-MEMS optical switching switches (OCS) that provide ultra-low latency and the industry's highest switching capacity and density for data center and cloud computing centers, SDN optical transport and laboratory automation, as well as other market segments including media and entertainment, C-RAN wireless infrastructure and submarine cable login. At present, with the change of network architecture and the outbreak of traffic, the data center is gradually becoming the convergence place of traffic. Lower latency and larger switching capacity are urgently needed for the data center to cope with the traffic growth. The optical switching switch based on 3D-MEMS technology is a kind of full-off switch. Compared with the switch based on photoelectric conversion, it can greatly reduce the time delay and increase the switching capacity.

In terms of products and technology, CALIENT has the industry-leading 3D-MEMS optical switch production technology, the company uses the patented technology of deep silicon plasma etching process to manufacture 3D-MEMS mirror array, this patent and powerful and reliable software, so that its product optical switching switch can achieve dynamic and flexible management of the optical layer. In terms of downstream customers, CALIENT is mainly aimed at large data center customers, including Google, Facebook Inc, Amazon and so on. We believe that the successful completion of this acquisition will help the company to expand its business in the field of optical communications and start the transformation of the company from a precision manufacturing company to a technology company.

2. The mobile communication RF device industry is gradually bottoming out, and the company is strengthening cost control and product research and development to continuously enhance its competitiveness.

From a global point of view, the mobile communication radio frequency device industry is gradually transferred to China, and the total global market share of domestic related companies is close to 70%. The company is the leading manufacturer in the country, and the downstream customers of related business are mainly Huawei, Ericsson, Nokia and other communication equipment manufacturers. There is a high correlation between the radio frequency device business of mobile communication and the wireless network construction of operators. After 2015, the overall Capex investment of the three major operators showed a downward trend, industry demand and product prices are in the stage of continuous bottoming. In this context, on the one hand, the company carries out fine management internally to improve efficiency, and strictly control expenses and reduce operating costs; on the other hand, it continues to carry out R & D investment to open up new markets and customers through the push of new products. In the first half of 2017, the company's R & D investment reached 35.96 million, an increase of 27.38% over the same period last year. We believe that the effective control of costs and expenses will help the company to tide over the difficult period of the industry, while the continuous investment in R & D will enhance the competitiveness of the company.

3. Acquire Kaimao and enter the glass industry With the acquisition of Ze Hong Technology, the Consumer Electronics layout continues to promote the company's entry into the glass industry through the acquisition of 51% stake in Kaimao, a small number of enterprises in the industry that master the manufacturing capabilities of a full range of 2D, 2.5D and 3D glass displays and glass cover bodies. it has mature advanced technology and equipment system for a full set of production processes, such as cutting, molding, polishing, strengthening and coating, which meets the needs of the future development of the market. It plays a high role in upgrading the company's industrial chain and performance.

Zehong Technology focuses on the surface treatment process of consumer electronics appearance products, has a mature surface treatment process system of aluminum alloy and stainless steel, and has entered the research and development of surface treatment technology of glass appearance parts. At present, it has domestic high-quality customers such as Huawei, OPPO, VIVO, XIAOMI, Lenovo, Meizu and so on. Through this acquisition, the company will achieve the extension of consumer electronics business from front-end processing and manufacturing to back-end surface treatment, and is expected to achieve the synergy of the whole industry chain layout and the rapid development of consumer electronics business through integration. Through the acquisition of the above-mentioned companies, the company further consolidates and develops the consumer electronics business market and realizes the integration and upgrading of the consumer electronics industry chain.

4. Investment suggestions:

Cover for the first time, giving a "prudent recommendation-A" rating. The company acquires CALIENT, an American optical switching switch company, and marches into optical communications, opening the way to transform into a technology-based enterprise. In the future, with the arrival of 5G and the improvement of industry demand, the company's future performance may usher in an inflection point. It is estimated that the return net profit of the company from 2017 to 2019 is 1.02, 310 million and 373 million, and the corresponding EPS is 0.09,0.27 and 0.33 yuan respectively. The current stock price is 10.9 yuan, corresponding to PE of 120,39x and 33x. Give a rating of "prudent recommendation".

Risk Tips:

1) the risk of failure of overseas mergers and acquisitions, including uncertainties such as examination and approval, foreign exchange, etc.

2) the demand of the communication industry remains low and the competition intensifies.

3) the research and development of consumer electronic products and customer breakthroughs fall short of expectations.