Investment highlights Tongding Internet announced the interim report: achieving operating income of 2,333 million yuan, an increase of 14% over the previous year; net profit of 350 million yuan, an increase of 25%, lower than expected; net profit after deducting non-return to the mother of 285 million, an increase of 29%. Among them, revenue was 1,243 billion in the second quarter, up 8% year on year; net profit was 197 million, up 2% year on year; the trade war affected the supply capacity of main equipment suppliers, thereby slowing down the pace of operator network construction, which was the main reason for the slowdown in the company's growth rate in the second quarter. It is expected that as the trade war slows down, the growth rate in the second half of the year is expected to pick up. By product, fiber-optic cable revenue was $1,227 million, up 31%, and gross margin increased by 7 percentage points to 33%; communication equipment (ODN) revenue was $222 million, down 29%, and gross margin fell 7 percentage points to 30%; communication cable business revenue was $315 million, basically flat, and gross margin fell slightly to 18%; traffic and data marketing revenue was 147 million, down 25%, and gross margin fell 28 percentage points to 24%; Internet security revenue was 190 million, up 67%, and gross margin fell 7 percentage points to 53%. In terms of expenses, sales expenses were well controlled, and only increased by 8%; management expenses increased by 14%, of which R&D investment increased 17%. Finance costs increased by 54%, mainly due to increased interest on bank loans and increased exchange losses. A two-wheel drive for fiber-optic cable and network security services. The first batch of 300 tons of the company's own light bars has a full production capacity. Combined with Hainan Corning Changxie's supply, the self-sufficiency rate of light bars has increased significantly. Coupled with rising product prices, the gross margin of the fiber-optic cable business has increased markedly. Although the ZTE incident affected the pace of operator network construction in the second quarter, overall demand for optical fiber cables increased by about 15% in the first half of the year, maintaining a high level of prosperity. It is expected that in the context of free traffic, demand for optical fiber cables is expected to grow steadily. The company's second phase of expanding the production capacity of light bars by 300 tons is expected to be fully produced in August, driving continued improvement in gross margin in the second half of the year. The cybersecurity business sector, with Baizhuo Network as its core, continues to grow rapidly, benefiting from the increasing level of informatization and the country's continued attention to the field of information security. Segmented gross margin declined due to the addition of SDN intelligent gateway services with relatively low gross margins in the first half of the year. As the company continues to develop new products, develop new customers, and expand from cybersecurity to public safety and urban safety, it is expected to become the company's second largest performance growth driver. The scope of business was added, and the communication equipment business was strengthened. There is a lot of room for development in the fields of 5G, Internet of Things, and private network communication. The company announced an increase in business scope during the same period. The new business scope mainly targets the field of communication equipment, including wireless communication equipment, transmission equipment, data communication equipment, broadband multimedia equipment, and IoT equipment. Relying on the advantages of a new executive team, building on its own passive communication equipment foundation, and gradually expanding communication equipment products in the fields of access, transmission and wireless through self-research, mergers and acquisitions and cooperation, it is expected to become the company's main business direction in the future, opening up room for growth for the company. Profit forecast: Currently, the company's fiber-optic cable business is growing well, and the cybersecurity business is gradually becoming the second largest driving force for growth. ODN business, traffic, and data operations are under heavy pressure in the short term. According to the latest information, we have adjusted our profit forecast. It is estimated that Tongding Internet's 2018-2020 revenue will be 51.0/58.4/6.91 billion yuan, net profit is 7.6/9.0/1.07 billion yuan, and EPS is 0.60/0.71/0.85 yuan, corresponding to the closing price of August 31, 2018 (9.54 yuan), PE is 16/13/11 times, maintaining a “prudent increase in holdings” rating. Risk warning: 1. Demand for optical fiber cables falls short of expectations due to the decline in operators' capital expenses; 2. Industry optical bar production capacity has expanded beyond expectations, leading to excessive release of supply affecting product prices; 3. SDN home intelligent gateway orders face the risk of single customer risk and increased competition and a decline in share; 4. ODN business, traffic and data operations have declined.