In 2018H1, the company's operating income was 2,557 billion yuan, up 2.75% year on year; net profit was 97.54 million yuan, down 7.92% year on year. Core view: Due to factors such as the ZTE incident, rising raw material prices, and increased R&D projects, the performance fell short of expectations. In terms of revenue, the company achieved revenue of 1,526 billion yuan (+11%), 927 million yuan (-8%), and 38.74 million yuan (+40%) respectively for intelligent access, fiber optic cable, and military informatization. Tefa Dongzhi's expansion of production capacity and market development is the main reason driving the increase in revenue. In terms of profit, Tefa Dongzhi's gross margin fell 4.1 percentage points due to rising prices of raw materials such as chips, resistors, and capacitors; Chengdu Fourier's gross margin declined 7.2 percentage points due to increased R&D projects and increased investment. Furthermore, the ZTE incident and trade friction put pressure on the communications industry. Under the influence of multiple factors, the company's performance in the first half of the year fell short of expectations. The third fee was reduced by 3% year on year. With the lifting of the ZTE ban and the delivery of ongoing research projects, performance is expected to resume growth in the second half of the year. The company's cost control situation in the first half of the year was relatively good, with three fees reduced by 3% over the same period last year. The company actively added new customer sources. The number of contracts completed by Tefa Dongzhi in the first half of the year was the same as in the same period in '17; the number of overseas contracts increased by 12.5% year-on-year. The ZTE ban was lifted in July, and communications orders will gradually resume; most of Fourier's ongoing research projects will be delivered in the second half of the year, and the company's performance is expected to resume growth. Convertible bonds were approved to expand the scale of optical communication production and promote the development of military information business. The company's issuance of convertible bonds was approved by the Securities Regulatory Commission. It plans to raise 419 million yuan for the development of optical fiber expansion projects, Tefa Dongzhi production line expansion projects, and Fourier data line projects. By issuing convertible bonds, the company will expand the production scale of the optical communication business and accelerate the development of the military informatization business. It is planned to acquire 70% of Shenzhou Aviation's shares with 315 million yuan, which will expand the scale of the military information technology industry. Shenzhou Airlines mainly produces information technology products such as military computers and buses, and can form synergies with its subsidiary Chengdu Fourier in terms of technology, products, and markets. Shenzhou Aviation promised to deduct 120 million yuan in non-net profit in 18-20 years. The acquisition of Shenzhou Airlines will effectively expand the scale of the company's military information technology industry and increase the company's performance. Profit forecast and investment advice: We believe that the company's customer development results in the first half of the year were good. As the ZTE ban was lifted, orders from ZTE will show restorative growth in the second half of the year, and the optical communication industry will have a good synergy effect; the military informatization business benefits from the PLA's informatization construction, which is in a period of rapid growth, and the profit margins of ongoing projects are high, and most of them will be delivered in the second half of the year. Without considering acquisitions and convertible bonds for the time being, net profit for 18-20 is estimated at 327/4.02/496 million yuan, corresponding to EPS of 0.52/0.64/0.79 yuan, and PE corresponding to the current stock price of 15/12/10 times. It is optimistic about the development prospects of the company's optical communication industry and military informatization industry, and maintains a “buy” rating. Risk warning: The continued rise in raw material prices has led to a decline in gross margin, affecting the company's profitability; the recovery of ZTE orders is lower than expected.