Incident: The annual report for the first half of 2018 was released on August 28, 2018. The first half of the year achieved operating income of 19.419 billion yuan, an increase of 0.99% over the previous year, and realized net profit of 953 million yuan, an increase of 51.73% over the previous year, corresponding to earnings of 0.044 yuan per share. Comment: 1. The company's revenue during the reporting period was basically the same as last year (YOY +0.99%). By product: 1) Marine defense and marine development equipment achieved revenue of 6.202 billion yuan (YOY +42.82%), which contributed to the main increase in revenue, mainly due to the termination of contracts with the company's subsidiaries during the same period last year, reducing operating income of 4.837 billion yuan, due to the recovery of the global marine engineering equipment operation market in the current period; 2) The emerging industries and other businesses achieved revenue of 2,425 billion yuan (YOY +18.53%). Mainly due to the obvious increase in the subsidiary's marine ballast water systems and other business; 3) deep-sea equipment and ship repair and modification business revenue was basically the same as the same period last year (YOY +0.94%); 4) due to unbalanced distribution of completion schedules, etc., the revenue of ship support, mechanical and electrical equipment (YOY -24.9%) and marine transportation equipment (YOY -16.13%) declined compared to the same period last year. However, new orders for ship support and mechanical and electrical equipment were added in the first half of the year. At $8.872 billion (YOY +72.2%), revenue from these two products is expected to grow significantly in the future. 2. During the reporting period, the company's net profit to mother grew rapidly (YOY +51.73%), and the growth rate exceeded the revenue growth rate. We judge the main reasons as follows: 1) The gross margin of the marine defense and marine development equipment business, which expanded rapidly in the first half of the year, increased to 3.86% from -1.19% in the same period last year, contributing to a gross profit increase of 291 million yuan; 2) Financial expenses decreased by 530 million yuan year-on-year in the first half of the year, mainly due to the company completing market-based debt-for-equity swaps and using the raised funds to repay the interest-bearing liabilities of financial institutions; 3) In the same period last year, interest income was greater than interest expenses; 3) In the same period last year The subsidiary Dalian Shipbuilding Heavy Industries prepared 759 million inventory price drops, and asset impairment losses fell 87.25% year-on-year in the current period. The core supplier of naval equipment directly benefits from China's naval modernization drive. The company is the main supplier of naval ship equipment in China, and is also the largest listed military company. It has undertaken a number of major military equipment R&D and production tasks. The military products cover aircraft carriers, nuclear-powered submarines (subcontracts), conventional-powered submarines, large, medium and small surface combat ships, large amphibious attack ships, military auxiliary ships, etc. The company completed the acquisition of 100% of the shares of Dachuan Heavy Industries and Wushuen Heavy Industries in the form of debt-for-equity swaps. In the first half of the year, Dachuan Heavy Industries conducted the first domestic aircraft carrier for final assembly and sea testing, construction of the first Malaysian coastal mission ship constructed by Wushuen Heavy Industries began, and two large anti-submarine patrol boats jointly built with Bangladesh's Kunla Shipyard were successfully delivered, and the profitability of the military business is expected to further improve. As the surrounding maritime security situation continues to be tense and the “Belt and Road” is progressing steadily, China has placed higher demands on naval offshore defense and ocean combat. It is estimated that China's marine equipment market space will reach trillion dollars in the future. As a core supplier of naval equipment, the company is expected to directly benefit from naval modernization. Major domestic civil ship equipment suppliers are deepening supply-side reforms to cope with industry cycle fluctuations. The company is the most important domestic developer and supplier of marine transportation equipment, marine development equipment, and marine scientific research equipment. The shipbuilding and marine engineering industry has obvious cyclical characteristics. It is deeply affected by factors such as the global economic situation, the shipping market situation and international crude oil prices. The international shipping market rose slightly in the first half of 2018, but the contradiction between insufficient demand and overcapacity still exists. The company seized the recovery opportunity, actively deepened supply-side reforms, actively developed the market, and completed product delivery in a timely manner. In the first half of 2018, the subsidiary Wuchang Shipbuilding Industry Group Co., Ltd. successfully delivered Deep Blue 1, the first self-developed large-scale full-submersible deep-sea fishery aquaculture equipment in China, and built the world's largest deep-sea intelligent fishing farm “Hainan Lingshui Deep Sea Fishery Aquaculture Platform”. The launch of this equipment will achieve China's major breakthroughs in industrialization, automation, large-scale, and cluster farming in open seas; the subsidiary Qingdao Shuangrui Balclor ballast water management system was highly recognized by NYK, the largest shipping company in Japan, and signed a large number of orders for ballast water equipment supply, covering large orders for VLCC and large-scale dispersion equipment cargo ship Various ship types, such as oversized container ships, chemical tankers, etc. The Group has plenty of room for asset securitization integration, and subsequent asset injections can be expected. According to official data from China Shipbuilding Heavy Industries Group, the group's asset securitization rate target for the 13th Five-Year Plan period is 70%. Currently, it is about 50%, and there is plenty of room for future integration. In the marine defense equipment sector, the group currently has two companies (Tianjin Xingang Shipbuilding and Chongqing Chuandong Shipping). The group promised to inject the assets of these two companies into the company within one year after meeting the trigger conditions. Currently, mixed ownership reform and the restructuring of research institutes continue to accelerate, and subsequent asset injections of the company can be expected, which may further enhance the company's performance. Profit forecast and rating: Optimistic about the long-term development of the company's marine equipment business, and considering that the company is expected to continue to benefit from naval modernization, give the company a “recommended” rating. Our EPS forecast for 2018/19/20 was 0.05/0.06/0.06 yuan, respectively, corresponding to 2018/19/20 PE 76/73/70 times. Risk warning: Navy procurement fluctuates; civilian ship orders fall short of expectations