Incident: The company announced its 2017 annual report. It achieved annual revenue of 2,286 billion yuan, a year-on-year increase of 13.42%, and realized net profit of 130 million yuan, a year-on-year decrease of 33.42%, corresponding to earnings per share of 0.29 yuan. The company passed the profit distribution plan and distributed a cash dividend of 0.60 yuan for every 10 shares, using the capital reserve fund to transfer 3 shares for every 10 shares to all shareholders. Comment: The company's revenue is growing steadily, and exchange rate and cost factors are dragging down the company's profits. During the reporting period, the company's revenue grew steadily, up 13.42% year on year, mainly driven by the continuous introduction of new products such as optical modules, low-frequency wiring harnesses and connectors, and the continuous expansion of new business; the company's net profit fell by 33.42% compared to the same period, mainly due to 3 reasons: (1) The second half of 2017 was affected by large exchange losses; (2) the price of raw materials for some products rose, and there were cyclical restrictions on the bargaining power with downstream customers; (3) The company's R&D and market in new markets and fields In terms of management With continuous investment, the benefits need to be gradually reflected. The company reviewed and passed a bill to develop foreign exchange derivatives business in 2018, and the problem of exchange losses is expected to be greatly mitigated. The signal interconnection business is leading domestically, and is actively building a “global service network model”. The company has formed a complete product line for radio frequency, optical, and electrical transmission. It is currently one of the few signal interconnection solution providers in the industry with comprehensive advantages in product types, solutions, and customer fields. It is a technology-based enterprise that has achieved “military and civilian integration” in both technical platforms and business fields. The company is a leading enterprise in the RF cable segment. With its 6 subsidiaries, the company has obtained the “National High-tech Enterprise” certificate, provides customers in various fields with one-stop solutions for “Design-In” signal interconnection products, and actively lays out the global market to create a “global service network model”. At present, branches, subsidiaries and logistics outlets have been set up in various major countries, which can provide localized one-stop packaging supply and timely service guarantee for core customers in the industry. Raise capital for continuous investment to promote the steady development of main business projects. At the end of 2016, Jin Xinnuo completed its first targeted increase since completing its listing, raising a total of 1200 billion yuan in capital. As of December 31, 2017, it has invested a total of 236 million yuan for 6 projects, including the Jinxinuo Industrial Park, the production of new connectors, and the construction of an R&D center. It is expected that after the project is completed and delivered, the company can further enhance the market position and technical advantages of the products in the fields of communication electronics and aerospace, explore application fields for products such as big data informatization, rail transit, consumer electronics, vehicle networking, and new energy sources, and form new profit growth points. The acquisition of shares in Jiangsu Wanbang and Wuhan Junheng is expected to benefit from the 5G forward-looking layout. The company paid 143 million yuan in cash to acquire part of Jiangsu Wanbang's shares. After completion, the company held 51% of Jiangsu Wanbang's shares and extended the product to beam control chips and modules; the company obtained 34.04% of Wuhan Junheng's shares through equity acquisitions (31 million yuan) and capital increases (0.3 billion yuan), which accelerated the company's industrial layout in the field of optical communication products. Jiangsu Wanbang's beam control technology, phased array radar antenna front technology, and Wuhan Junheng's optical module will all have good application prospects in 5G communication. According to the company's announcement, active integrated antennas will be an inevitable choice for 5G large-scale antenna systems, and optical module products are also expected to be driven by 5G, maintaining a compound growth rate of more than 30% every year. In December 2017, China completed the 5G international standard for non-independent networking NSA. The three major operators are basically targeting trial commercial use in 2019, and the company is expected to continue to benefit from the forward-looking layout of the 5G industry. The implementation of the equity incentive plan shows confidence in the company's future performance. In February 2018, the company granted 800,000 restricted shares to Yu Xin, general manager of the company, at a price of 7.63 yuan/share, and the sales restrictions were lifted in three installments. Based on the company's net profit and operating income in '17, the three conditions for lifting sales restrictions are: the net profit or revenue growth rate of no less than 10% in '18; the growth rate of net profit or revenue in '19 compared to '17 is not less than 20%; and the growth rate of net profit or revenue in '20 compared to '17 is not less than 30%. Yu Xin has been with ZTE for 16 years. In addition to showing the company's confidence in future performance, this equity incentive is also expected to bring channel advantages to the company and expand overseas markets through incentives to enhance the performance of the company's communications and other businesses. Profit forecast and rating: Considering the company's leading position in the signal interconnection business and the forward-looking layout in the 5G industry, our 2018/19/20 EPS forecast was 0.46/0.57/0.70 yuan, respectively, corresponding to the 2018/19/20 PE of 34/28/23 times. Give the company a “Recommended” rating. Risk warning: The expansion of new fields and new markets falls short of expectations; capital raising projects fall short of expectations; fluctuating raw material prices and declining gross margin of some products.