Investment advice: the company issued a 17-and-a-half-year performance report, with total operating income of 181 million yuan in the first half of the year, an increase of 131.71% over the same period last year, and a net profit of 20.3669 million yuan belonging to shareholders of listed companies, turning losses into profits compared with the same period last year. We believe that with the fading of the adverse effects of military reform, Tianhe Defense's military products are more flexible, and the company's performance is expected to achieve steady growth in the future. We expect EPS to be 0.15,0.17 and 0.23 yuan in 17-19, corresponding to 199X, 173x and 134X in share price PE on August 17, 2017, maintaining the "recommended" rating.

With the outbreak of military performance, the company ushered in a performance inflection point: the company achieved a total operating income of 181 million yuan (+ 131.71%) in the first half of the year and a net profit of 20.3669 million yuan belonging to shareholders of listed companies. The basic earnings per share is 0.08 yuan. In the first half of the year, the company's military business achieved great growth, the revenue of man-portable air defense missile command system increased by 69.1149 million yuan (+ 5267.95%) compared with the same period last year, and the income of civilian products increased by 43.721 million yuan compared with the same period last year. At the same time, the company transferred most of the shares of Smart Micro Power, and the total investment income increased by 17.6569 million yuan (+ 299.17%) over the same period last year, making a substantial increase in the first half of the year. A series of capital operations of the company have always been clearly focused on the main business, and the realization and post-balance sheet cost rate of subsidiaries has dropped significantly, and the performance of military products was poor last year under the influence of policies such as military reform. In the first half of this year, the company successively won large orders for military products. We believe that the adverse effects of military reform have diminished, the outbreak of military performance is more flexible, and as the project is put into production, the company's performance of military and civilian products will grow steadily.

The adverse effects of military reform have weakened, and military orders have gradually improved: at the present stage, the company's military products mainly include regional low-altitude short-range air defense group combat command system (field communication command system, man-portable air defense missile combat command system) and military information software. The production and sales of military products are strictly based on the current military weapons and equipment procurement system, due to the national military system reform, the adjustment of military procurement methods and the failure of military bidding and other factors, the company's traditional military orders decreased significantly in 2016. However, with the gradual acceleration of the pace of military reform, the tightening of the surrounding situation and the increase in the demand for terminal air defense security, national defense information construction, as a key investment field of national funds, will further promote the development of the company's technical products in the field of national defense construction. In addition, the company participates in the military's 13th five-year National key R & D Plan and the pre-research project of the equipment Development Department of the Central military Commission, which may be expected to become a type research project of the domestic military, so as to strive for the domestic military's stereotyped equipment procurement plan. In 2017, we won large orders one after another, and achieved a turnaround in the first half of the year. We believe that at present, the company's relevant industry policies have gradually become clear, coupled with the strengthening of the company's own transformation and upgrading profitability, the company will continue to increase market development efforts in the future. or will strive for more military orders.

Extensional integration focuses on the main industry, and capital operation is expected to make further progress: the company entered the civil communications field by acquiring a 60% stake in Shenzhen Huayang Communications in 2015. Last year, it acquired Great Wall Digital (51%), Nanjing Biao (51%), Flux Technology (51.02%) and Dingsheng Electronics (51%), so as to realize the integrated investment along the industrial chain at a faster speed and support the company's development and upgrading from vertical to platform.

At present, Huayang Telecom, a holding subsidiary, has completed its factory expansion and has the qualifications of domestic and foreign well-known major customer communications suppliers such as Samsung and ZTE. Great Wall Digital and Nanjing Biao are in good condition and are expected to fulfill their performance commitments. In March this year, the company plans to transfer 3.6 million shares of Mobile Micro Power, with 3.479 million shares as of June 30, and is expected to earn an investment income of 20 million yuan, which will further concentrate funds to promote the development of the main business. We believe that with the improvement of the internal and external environment of the company, the company may continue to integrate existing resources and purchase new assets in the future, so as to improve the company's profitability and efficiency.

The fund-raising project was put into production at the end of the year, and the performance increment was guaranteed: the funds raised by the company's IPO were mainly used for the "continuous wave radar system series product construction project" and the "military-civilian dual-use defense technology R & D center construction project". At present, the two projects have been completed, and due to the market environment, the company's strategic layout and industry policies and other reasons, the original production schedule was adjusted from December 31, 2016 to December 31, 2017. When the continuous wave radar project reaches production, it will have the ability to add 80 sets of man-portable air defense missile command system (including TH-S216, TH-S311 and TH-S711), 20 sets of regional counter-offensive group communication command system (including TH-G701 and TH-G701A), and 25 sets of radar and other core components. It is estimated that the annual income will increase by 726 million yuan, and the net profit will reach 211.09 million yuan. The company is the first private military industrial enterprise, the performance has been dependent on military sales, and private enterprises compared with state-owned enterprises, military orders are more volatile. Dual-use projects include military-civilian technology research and development laboratories, testing facilities, office facilities, and so on. on the one hand, reaching production can improve the utilization efficiency of various resources of military products, and on the other hand, through technological advantages, improve the ability of civilian products and market development, increase the income share of the company's civilian products, and enhance the profitability of enterprises. We expect that after the project is officially put into use, the stable and sustained growth of the company's performance will be strongly guaranteed.

Risk hint: the progress of military reform is not as expected; the market development of civilian products is not as expected; the output of the project is not as expected.