Event: The company announced its 2018 three-quarter report on October 15, 2018. The company's revenue for the first three quarters was 2,805 billion yuan, an increase of 19.96% over the previous year, and realized net profit of 331 million yuan, an increase of 176.62% over the previous year, corresponding to earnings of 0.48 yuan per share. Comment: The performance of the three-quarter report is growing rapidly, and it is optimistic that the company's military and civilian integration two-wheel drive will continue to improve. (1) The company's revenue increased by 28.05% year-on-year during the reporting period. The main reasons are: ① Supply-side reforms in the chemical industry and strict environmental inspection have driven the average sales price of the company's main products to varying degrees compared to the same period last year; ② Some of the company's military products have entered the batch supply stage. For example, a certain type of bus controller, which is one of the core products, has already fully entered mass production, and a certain type of chip for another core product has also entered the batch supply stage. The delivery volume in 2018 is expected to double that of the previous year. (2) The company's net profit increased sharply by 176.62% year-on-year, and the growth rate was significantly higher than the revenue growth rate mainly driven by the following factors: ① Product prices rose during the reporting period, the company reduced raw material costs through flexible use of price comparison procurement and determination of reasonable inventory, etc., and jointly promoted a 3.76 percentage point increase in the company's gross margin during the reporting period compared to last year; ② The company actively implemented personnel system reforms, implemented comprehensive remuneration optimization, reduced managers' labor costs, etc., which reduced management costs by 49.23%; ③ The company reduced management expenses by 49.23% during the reporting period. The sale of subsidiaries and investment in saleable financial assets led to a significant increase of 247.67% year-on-year in investment income; ④ During the reporting period, depreciation of the company's long-term idle assets ceased at the end of their useful life, driving enterprises to reduce non-operating expenses by 15.2 million yuan. (3) The net cash flow from the company's operating activities increased significantly compared to the same period last year, indicating that the company's currency payments and operations are doing well. With the deepening of supply-side reforms and environmental protection policies, the company's chemical business is expected to maintain a sharp rise in volume and price; the military chip and integrated circuit business is also expected to benefit from autonomous, controllable, and localized alternative policies to achieve relatively rapid growth. It is optimistic that the company's military-civilian integration of two-wheel drive will continue to improve. Continued expansion of the military electronics layout is expected to benefit from significant development in autonomous, controllable, and national defense informatization construction. The company acquired Changsha Shaoguang and Weike Electronics in 2017 and officially entered the military industry. Its main business includes military integrated circuit design, packaging testing, thick film integrated circuit business, etc., covering high-end fields such as aviation, aerospace, weapons, ships, electronics, etc., and has an advantageous position in the field of military electronics. The company has a stable customer base in military integrated circuits. Its subsidiary company, Shaoguang, Changsha, has been deeply involved in military integrated circuits for more than 40 years and has established cooperative relationships with hundreds of special equipment manufacturers, including China Telecom, China Electronics, Aerospace Science and Technology Group, and Ordnance Industry Group. In 2018, the company acquired 100% of CLP Huaxing's shares and continued to expand upstream in the military electronics industry chain; the increase in capital for the military reinforced computer business, the top nine information shield, resonated with the chip business related to Shaoguang in Changsha. The self-developed domestic high-performance graphics processing chip SG6931 has been included in the list of certain types of domestic military reinforced computer components. According to the China Semiconductor Industry Association, the total sales volume of China's integrated circuit industry reached 541.13 billion yuan in 2017, an increase of 24.8% over the previous year. According to the “National Integrated Circuit Industry Development Promotion Outline” plan, by 2020, the sales revenue of the entire integrated circuit industry will grow at an average annual rate of more than 20%, and the growth rate of the integrated circuit industry can be expected. In the future, with the major development of national defense informatization construction and the advancement of autonomous and controllable processes, the company's military electronics business market prospects are broad. Supply-side reforms combined with demand recovery led to high growth in the company's chemical industry. The company is a basic chemical raw material manufacturer, and is one of the country's top 500 large-scale chemical production bases and one of the country's 18 large-scale chemical production bases. The products include liquid alkali, liquid chlorine, chlorinated benzene, propane oxide, polyether and polyvinyl chloride, etc., forming a large-scale industrial production pattern dominated by the three major introduction devices of liquid alkali, propylene oxide, and polyether. The company's products are widely used in chemical fiber, medicine, polyurethane, construction and many other fields. Since 2016, the company has proposed a “big polyether” strategy, successfully promoted the upgrading of polyether and related products and new product research and development, and further enhanced the market competitiveness of the products. As environmental protection policies become more stringent and supply-side reforms continue to deepen, chemical production capacity with poor technology and environmental protection standards is being reshuffled one after another, and the market environment in the chemical industry continues to improve. The company directly benefits as a national large-scale chemical product manufacturer. Under stable downstream demand, the company's business revenue for products such as liquid alkali, polyether, and propylene oxide has grown rapidly. Implement employee stock ownership incentive plans to enhance enterprise vitality; introduce strategic investors to promote the expansion of military electronics business. On August 16, 2018, the company announced an equity incentive plan and granted 18 million restricted shares to a total of 348 incentive recipients, including directors, senior management, key middle managers and core personnel, at a price of 6.20 yuan/share. The company uses net profit and individual performance evaluation results of incentive targets as unlocking conditions, organically combines the individual interests of shareholders, companies, and employees, and fully mobilizes the company's vitality. On May 4, 2018, Xinyu Haoyue, the company's controlling shareholder, introduced Xinyu Huanya as a strategic investor. Zhang Ya, its executive partner, was one of the counterparties of the company's acquisition of subsidiaries Changsha Shaoguang and Weike Electronics, and also holds shares in a number of companies related to military electronic devices. The introduction of the company's strategic investors will help the company further expand its business scope in the military electronics industry chain. Profit forecasting and ratings: Considering that the company is expected to continue to benefit from supply-side reforms, the deepening of environmental policies, and the promotion of autonomous, controllable, and localized alternative policies, it is given a “recommended” rating. We expect the EPS of China Aviation Electric in 2018-2020 to be 0.71/0.86/1.02 yuan, and PE 13/10/9 times, respectively. Risk warning: The advancement of military business is blocked; downstream demand for chemicals is poor.