Events: 1) The company released the 2017 annual report and the report for the first quarter of 2018: in 2017, it achieved total operating income of 4.23 billion yuan, a year-on-year increase of 2.1%; realized operating profit of 697 million yuan, an increase of 6.2% over the previous year; realized total profit of 693 million yuan, an increase of 4.8% over the previous year; and realized net profit attributable to shareholders of listed companies of 595 million yuan, an increase of 10.4% year-on-year. The performance was in line with expectations. Revenue for the first quarter of 2018 was 1.09 billion yuan, up 22.5% from the same period last year, and net profit attributable to the parent company was 153 million yuan, up 75.2% from the same period last year, and performance slightly exceeded expectations. 2) Recently, the company announced that it intends to transfer 51% of the shares held by Zhejiang WeiNeng Technology Co., Ltd. to Huzhou Qinfeng Investment Partnership (Limited Partnership) at a consideration price of RMB 19.87 million. Comment: 1. The performance was in line with expectations. The 2017 operating income and net profit of the Optical Communications and Information Security Dual Wheel Drive Company were 4.23 billion yuan and 595 million yuan respectively, up 2.1% and 10.4% year-on-year respectively, and the performance was in line with market expectations. By business sector, the company laid out the three major sectors of optical communications, network security, and mobile Internet. The increase in revenue in 2017 mainly came from Baizhuo's cybersecurity business, and the growth of optical fiber cable and mobile Internet business. Among them, fiber optic cable revenue was 1.96 billion, up 11.0% year on year, accounting for 46.3% of revenue, up 3.7 percentage points; traffic and data marketing revenue was 430 million, up 41.8% year on year, accounting for 10.2% of revenue, up 2.8 percentage points; Internet security business was due to Baizhuo's cybersecurity business in March 2017 The Internet was merged for the first time, with annual revenue of 290 million yuan, accounting for 6.8% of revenue. Furthermore, the communication equipment and communication cable business both experienced a sharp decline. Among them, communication equipment fell by 45.9% and communication cables fell by 29.5%, which partially hampered performance. Revenue and net profit for the first quarter were 1.09 billion yuan and 150 million yuan respectively, up 22.5% and 75.2% year on year. The company also predicted net profit attributable to shareholders of listed companies from January to June 2018, up 35%-65% year on year. The company also predicted net profit attributable to shareholders of listed companies from January to June 2018, an increase of 35%-65% over the previous year. The company's restorative growth logic was verified, and performance slightly exceeded expectations. The increase in performance was mainly due to the increase in the self-sufficiency rate of optical fiber prefabricated rods, the stabilization of the supply of optical bars from strategic partners, and the rapid growth in information security business of Baizhuo Network after completing a wholly-owned acquisition of Baizhuo Network. 2. The gross profit margin is basically stable, the three fees receivable have increased steadily, the company's financial indicators have remained stable, the gross margin has increased slightly, the comprehensive fee rate has risen steadily, and the growth rate of R&D expenses has accelerated. In terms of breakdown, gross profit margin: the gross profit margin of the company's main business is 30.8%, up 1.1 percentage points from last year, mainly due to the increase in gross margin network security equipment and fiber-optic cable gross margin. Among them, the gross profit margin of fiber optic cable was 29.7%, an increase of 2.1 percentage points; Baizhuo's Internet security business gross margin reached 58.9%, which is significantly higher than that of traditional business. In the future, with the increase in Baizhuo's network business share, the company's gross margin is expected to continue to increase. Accounts receivable and inventory: At the same time as sales revenue increased steadily, the company's accounts receivable were 1.74 billion yuan, accounting for 20.08% of total assets, down 2.6 percentage points from the same period last year; inventory was 1.09 billion yuan, accounting for 12.54% of total assets, down 1.4 percentage points from the same period last year, indicating that the company's repayment capacity and inventory turnover have improved, and operating efficiency has continued to improve. Comprehensive expenses: sales expenses of 190 million yuan, management expenses of 340 million yuan, and financial expenses of 120 million yuan, respectively, up 12.3%, 12.1% and 10.9% from the previous year. The revenue ratio was 4.5%, 8.1% and 2.9% respectively, up 0.4, 0.7 and 0.2 percentage points respectively. The cost rate remained stable, and Baizhuo Network brought about a certain increase in the cost rate. R&D expenses: R&D expenses were 210 million yuan, up 27.2% year on year, accounting for 4.9% of operating income, an increase of 1 percentage point. It is worth noting that after the acquisition of Baizhuo Network, while the company's R&D investment increased, the capitalization rate of R&D investment also increased from 0% to 11.1%. Benefiting from continuous investment in R&D, in 2017, the company was granted 69 new patents, 4 high-tech products passed provincial certification, 4 more products were recognized as leading in China, and 1 product was recognized as internationally advanced. By the end of 2017, the company participated in 56 national standard drafting projects. 3. The self-sufficiency of optical bars has improved, and the optical fiber business is expected to achieve restorative growth. The optical fiber prefabricated rod project raised by the company has basically reached production capacity of 300 tons. The company's optical bar supply has initially been reduced. The company's optical bar expansion project is expected to be completed in mid-2018, and the company's optical fiber production capacity will be further released. Furthermore, as Corning's domestic light bar company gradually reaches production, Corning of the United States, as a strategic partner of the company, will increase its supply capacity for light bars to the company, solidifying the foundation for future light bar supply. In the future, the company's own production and Corning's total supply of light bars will exceed 1,000 tons, reaching the first level of domestic light bar supply. The company won the bid for China Mobile's general optical cable product collection in 2018. The winning ratio was 7.54% and the allocation amount was 8.2871 million core kilometers. The estimated total bid amount was about 1,082 million yuan, accounting for 25.6% of the company's total revenue in 2017. The revenue and profit generated by the company's fiber-optic cable business will further increase in 2018. 4. Focus on the main business of optical communication and information security, and gradually divest mobile Internet business companies while focusing on collaborative development in the field of optical communication and information security, while gradually divesting non-communication business. Recently, the company took 51% of its shares in Zhejiang Microenergy Technology Co., Ltd., at a consideration price of about RMB 200 million. Zhejiang Weineng Technology's 51% equity interest was purchased by the company in October 2016, with a transaction consideration of 190 million yuan and a cash dividend of 10.2 million yuan in 2017. The sale of shares not only locks in earnings of 20.2 million yuan during the holding period, but also enriches the company's cash flow, providing a guarantee for the main business to continue to expand production investment and seize the two major opportunities of broadband China and cybersecurity. Since this year, the company has fully integrated Baizhuo Network's business, increased investment in R&D and market channel construction on the basis of existing business, focused on developing network security and communication equipment business, and further promoted the company's industrial upgrading. Up to now, the network security and communication equipment business has developed rapidly. On the basis of providing products such as network security and big data equipment to telecom operators through integrators, the proportion of businesses directly bidding and supplying to operators has continued to increase, and has actively expanded public security, national security, and government customers at all levels outside of the operator market. The company has established an extensive marketing network within the communication cable and optical cable industry. It has innate channel advantages in the three major operators in all provinces and cities. Businesses in various sub-sectors such as Tongding Broadband, Baizhuo Network, and Ruiyi Information are positioned in different segments of the major communications industry. The synergistic effects of various sectors are obvious, and customer advantages are concentrated. 5. The two-wheel drive for optical communication and information security. Maintain the “Highly Recommended - A” rating company while consolidating the main optical communication business such as optical fiber and optical cable, while actively laying out the field of information security, forming a strategic layout of two-wheel drive for optical communication and information security. In the future, with the gradual release of production capacity for self-produced light bars, the field of information security will also enter a period of rapid growth. At the same time, the company's new management team was put in place at the end of 2017. The new team has senior operators and middle and senior management backgrounds in top equipment vendors. The company's overall strategy will be further focused, and corporate governance expectations will be gradually optimized. We expect the company's net profit for 2018-2020 to be 9.1 billion yuan, 1.21 billion yuan and 1.49 billion yuan respectively, and EPS of 0.72 yuan, 0.96 yuan and 1.18 yuan respectively, corresponding to the current stock prices of 2018-2020 PE of 18X, 13X and 11X respectively. Maintain a “Highly Recommended - A” rating. Risk warning: The expansion of optical rod production has fallen short of expectations, demand for optical fiber cables is slowing down, and policy changes in the information security industry.