Incident: Optoelectronics Co., Ltd. recently released its 2017 mid-year report. In the first half of 2017, the company achieved operating income of 492 million yuan, a year-on-year decrease of 1.19%; realized net profit attributable to the parent company of 7.45 million yuan, an increase of 0.51% year-on-year, and realized net profit attributable to the parent company after deduction of 5.45 million yuan, a year-on-year decrease of 5.55%; the corresponding EPS was 0.01 yuan/share. Comment: Performance declined due to factors such as military product structure and delivery cycle, and Xinhuaguang's revenue grew rapidly. In the first half of 2017, Optoelectronics Co., Ltd. achieved operating income of 492 million yuan, a year-on-year decrease of 1.19%; net profit attributable to the parent company was 7.45 million yuan, an increase of 0.51% over the previous year. By business, in terms of defense business, due to factors such as military product structure and delivery cycle, the main defense product business revenue reached 247 million yuan, a year-on-year decrease of nearly 50 billion yuan. In the second half of the year, defense companies will further implement production and operation plans, promote product fulfillment progress, and improve quality and efficiency. In terms of optoelectronic materials and devices, the optical materials industry has been affected by a decline in market demand. Shipments in the digital camera industry have dropped sharply, and the market for terminals such as video surveillance, automotive, and intelligent projection has continued to grow. During the reporting period, Xinhua Optoelectronics (a subsidiary of the optoelectronic materials business) cooperated with many famous domestic optical technology companies in accordance with established business policies. Major customer development results were remarkable, while demand for H-FK glass exploded. In the first half of the year, optical materials and device products achieved main business revenue of 263 million yuan, an increase of nearly 30% over the previous year. In the second half of the year, Xinhua Optical Company will increase exploration of terminal demand, focus on the terminal market, follow up on the emerging optical application market, and promote continuous improvement in efficiency levels. Various research and development activities in the defense business are progressing steadily. The company's defense business covers three major fields, the field of large-scale weapon system assembly integration: although orders declined in 2017, the number of new weapon models under development and preparation for production continued to increase. They have gradually moved from single production to the joint development stage, and several joint development projects are progressing smoothly, and some bidding projects have gained a leading edge. Precise guidance guide field: Order tasks are full. The company's guide head production is already the largest in China and the highest in the world, and has achieved technological innovation and model expansion of laser-end guided missiles, guided bombs and rockets for different ballistic radial missiles and different launch platforms. The field of optoelectronic information equipment: On the basis of maintaining the competitiveness of the company's products such as helmet displays, video cameras, and multi-function displays, through visits and technical exchanges with general units, higher authorities and the military, the development tasks and intentions of various aviation projects have been determined, further improving the company's competitiveness in this field. The company is expected to become an integrated platform for the Ordnance Industry Group's optoelectronic defense business. Looking at the weapons industry group as a whole, an increase in the group's asset securitization rate has been included in the plan, and the asset securitization rate of the weapons industry group is expected to rise sharply to 50% at the end of the 13th Five-Year Plan. Up to now, the Ordnance Industry Group has basically completed the asset injection work for Inner Mongolia First Aircraft (600967.sh) and China Soldier Red Arrow (000519.sz). According to the idea of promoting asset listing by industry sector, the company is the only listing platform for the Optoelectronics Defense Division of the Weapons Group. We are optimistic about the prospects of Optoelectronics Co., Ltd. as an integrated platform for the Optoelectronics Defense business of the Weapons Industry Group. Profit forecast and rating: We expect the operating income of Optoelectronics Co., Ltd. from 2017 to 2019 to be 1,499 billion yuan, 1,617 billion yuan and 1,800 million yuan, respectively. The net profit attributable to the parent company is 31.05 million yuan, 36.43 million yuan and 42.94 million yuan respectively, corresponding to EPS of 0.06 yuan/share, 0.07 yuan/share and 0.08 yuan/share, respectively. We maintain the rating of “increase in holdings” of Optoelectronics shares. Risk factors: The company's profitability declined due to increased competition due to the opening up of the military industry in the defense business; low demand for optical materials products; and the restructuring process of the Military Research Institute fell short of expectations.