Incident: The company released its semi-annual report. It achieved operating income of 531 million yuan in the first half of 2018, an increase of 3.08% over the previous year; net profit attributable to the parent company was -5,5565 million yuan, a decrease of 4571.11% over the previous year; and the amount of new contracts signed reached 1,091 million yuan, an increase of 43.33% over the previous year. The company adjusted its 2017 profit distribution plan to no dividends, no transfers, and no shares. Meanwhile, the profit distribution plan for mid-2018 is: it is estimated that a cash dividend of 0.088 yuan will be distributed for every 10 shares.

After many capital operations, the company currently focuses on the three main industries of security, medical care, and electronic information. Currently, the company's products cover various business fields such as safe cities, security technology construction, emergency anti-terrorism, land border control, public security and police informatization, production safety supervision, medical equipment, medical informatization, operating room engineering, special computers, infrared optoelectronic products, etc. In order to further concentrate resources to develop the main business, increase the proportion of independent technology and products, and make adjustments to non-core business, the company reviewed and approved the public listing and transfer of all shares held by Beijing Beike Digital Medical Technology Co., Ltd. on April 27. In 2018, the revenue concentration of the company's three main businesses continued to be above 99%. We believe that in 2018, the company will continue to focus on the three main businesses to achieve steady growth in the overall performance of the sector.

Profits for the first half of the year continued to decline following 2017, and the amount of new contracts increased 40% year over year, which may support subsequent performance. In 2014-2016, the company's revenue growth momentum was good. In 2016, the net profit returned to the mother exceeded the 50 million mark for the first time, with a year-on-year growth rate of 97%. In 2017, the company's profit fell sharply by more than 80% due to increased management expenses and financial expenses. The main reasons why profits continued to decline in the first half of 2018 were: 1) Increased financial expenses: bank borrowings increased, and interest expenses increased 71.56% year over year due to higher interest expenses. 2) Net cash flow from investment activities decreased by 61,956.69% year-on-year: the company bought subsidiaries in the first half of the year to pay the purchase price. 3) R&D expenditure increased 71.63% year-on-year: “Aerospace Changfeng Science and Technology Innovation and Industrial Development Research Institute” was officially established, and the company continued to increase investment in R&D using the research institute as a starting point. During the reporting period, the amount of new contracts signed reached 1,091 million yuan, an increase of 43.33%, and the regional marketing network collaborated efficiently. We believe that the company's order situation has remained good, which is expected to provide some support for subsequent performance.

Outreach mergers and acquisitions expand product layout and collaborate with the main business to enhance profitability. In terms of capital operation, give full play to the role of listed companies as capital operation platforms, and carry out mergers and acquisitions around the main business industry chain in line with the company's development strategy. During the reporting period, the company raised 127 million yuan through the issuance of additional A-shares to acquire 51% of the shares of Parker New Energy (currently known as “Space Park”) and Jingyi Planning (currently named “Aerospace Precision One”), respectively. The asset delivery and commercial changes of Aerospace Park and Aerospace Jingyi have now been completed. Aerospace Park, a subsidiary of Aerospace Changfeng Holdings, recently signed a lithium battery equipment procurement contract with China Tower, with a total price of 205.32 million yuan. Through this restructuring, Aerospace Park's power supply series products and Aerospace's sophisticated police geographic information system products and services will complement Aerospace Changfeng's product shortcomings in the security field. Furthermore, it will promote the transformation of the company from a system integrator to a product provider and operation and maintenance service provider, optimize the business model, thereby enhancing the company's profitability and core competitiveness.

The overall asset securitization rate of the Aerospace Science and Industry Group is low. As the only listed company controlled by the Second Academy of Aerospace Science and Industry, the company's platform value is outstanding. The controlling shareholder of the company is the Second Academy of Aerospace Science and Technology. As of the 2018 semi-annual report data, the holding ratio of the Second Academy of Aerospace Science and Technology is 34.99%. The holding of the first meeting of the Civil-Military Integration Development Committee and the National Defense Bureau of Science, Technology and Industry initiated the restructuring of the first batch of 41 military research institutes showed the determination of the upper management to reform the military industry, and that the restructuring of institutions and the integration of the military and the civilian military progressed at an accelerated pace. Among the major military industry groups, the overall asset securitization rate of the Aerospace Science and Industry Group is currently at a low level, less than 25%. Compared with military industry groups such as China Electronics, AVIC, and Ordnance Equipment, there is still plenty of room for improvement. In this context, we believe that the company, as the only listed company controlled by the Second Academy of Aerospace Science and Technology, has outstanding platform value and is expected to benefit.

Investment advice: We expect the company to achieve net profit of 0.11, 0.12, and 013 million yuan respectively in 2018-2020, with corresponding earnings per share of 0.03, 0.03 and 0.04 yuan/share, respectively. The company's closing price on August 29 was 11.25 yuan, which corresponds to 2018 dynamic PE about 375 times, which is higher than the valuation of comparable companies. However, considering the company's platform background as the only listed company controlled by the Second Academy of Aerospace Science and Technology, an increase in holdings was given.

Risk warning: R&D progress falls short of expectations, national policy risks, increased market competition, and high valuation risks.