Event: The company released its 2018 performance forecast. It is expected to achieve a profit of 266 million yuan to 305 million yuan for the whole year, an increase of 0% to 15% over the previous year, in line with expectations. Business 1: There is a lot of downward pressure on fiber cable prices. The company's fiber cable business is relatively cautious. The fiber optic cable business is the company's traditional main business, with full year revenue of 2,005 billion yuan in 2017; H1 achieved revenue of 927 million yuan in 2018, down 7.6% from the previous year, accounting for 36.25% of total revenue. Overall revenue in 2018 is expected to be basically the same as in 2017. The company was previously limited by reasons such as the supply of raw materials such as optical bars, etc., and production capacity was limited in the context of high domestic demand for optical fiber. In April 2018, the company and Changfei Optical Fiber and Cable jointly invested in the establishment of a joint venture, which is mainly engaged in the manufacture and sale of optical fiber prefabricated bars. After the joint venture is put into operation, the production capacity of 600 tons of prefabricated bars per year will gradually be formed, providing a stable source for the supply of optical fiber prefabricated bars required for the company's fiber cable production, marking the extension of the company's fiber cable industry chain to the field of optical fiber prefabricated rod supply, which will help the company enhance the market competitiveness of the optical fiber optic cable business. As China Mobile's FTTH construction enters the second half, fiber-optic cable demand from the three major operators has clearly slowed compared to 2017. At the same time, the gap between supply and demand for optical bars has been further narrowed, the downward pressure on domestic fiber optic cable prices is strong, and some manufacturers are less willing to expand production. Judging from H1 in 2018, the company's fiber-optic cable gross margin reached 20.66%, a year-on-year increase of 3.72 percentage points against the backdrop of increased competition in the industry. Looking ahead, the company's investment in the fiber cable business remains relatively cautious. Against the backdrop of increasing downward pressure on prices, the business aims to increase capacity utilization and profitability. In the future, it is expected to maintain good profits while the overall scale is expected to remain stable. Business 2: The equipment business was greatly affected by the ZTE incident. In the future, the customer structure may continue to be optimized by the company's acquisition of Shenzhen Dongzhi to deepen the communication equipment manufacturing layout. Communications equipment has now become the company's largest source of revenue. In 2017, the company's communications equipment business had revenue of 3.162 billion yuan; in 2018, H1 achieved revenue of 1,526 billion yuan, an increase of 10.56% over the previous year, accounting for 60% of total revenue. Due to factors such as increased competition in the industry and tight supply of raw materials such as basic components for upstream electronics, etc., the gross margin of H1 communication equipment fell 4 percentage points year-on-year to 9.14% in 2018. According to the acquisition performance promise, Tefa Dongzhi promised to achieve a total net profit of no less than 143 million yuan from 2015 to 2017, and the actual realized net profit was 208 million yuan, which greatly exceeded the promised performance. At the same time, the former shareholders of Dongzhi promised that the annual net profit from 2018 to 2020 would not be less than 58.6 million yuan, demonstrating the confidence of Dongzhi management in future performance. As Dongzhi's main customer, ZTE was sanctioned by the US in 2018, which had a significant negative impact on Dongzhi's business. With the resolution of the “ZTE incident,” we expect Dongzhi's business to gradually resume in 2019. Furthermore, Dongzhi continues to expand multiple product lines and customers in multiple industries other than PON and set-top boxes to minimize the risk of major customers. It is expected that ZTE's revenue share will drop to less than 50%. Take Dongzhi's customer Huasan as an example. Huasan's total foreign-sourcing total is 15 to 20 billion yuan each year, yet the company's current revenue in Huasan is only a few tens of millions of yuan. With the smooth implementation of the controlling interest transfer between Huasan's shareholder Ziguang Group and Shenzhen Investment, Dongzhi's share in Huasan is expected to break through significantly in the future, relying on a common shareholder background. Business 3: The military reform dividends have entered a period of centralized release, the military informatization space has gradually opened up, and the tasks of phased military reform reforms have basically been completed. The military reform dividends have entered a period of centralized release. The performance of military information technology companies is expected to continue to grow in 2019. The company has successively acquired Chengdu Fourier and Shenzhou Aviation, and will benefit from military informatization construction for a long time in the future. Chengdu Fourier in military business: The company acquired Chengdu Fourier in 2015 and entered the field of military informatization. Chengdu Fourier mainly provides R&D and production of aeronautical communication equipment, data recorders, and missile-borne computers. It is used in military wireless communication, flight control missiles, radar signal processing, and electronic warfare, etc., and its customers are major military research institutes and military enterprises. The military business is highly profitable. Chengdu Fourier promised a net profit of no less than 87 million yuan in 2015-2017. At present, the performance promise for the first three years has been exceeded. In 2017, Chengdu Fourier achieved revenue of 114 million yuan and net profit of about 412.9 billion yuan. Furthermore, Chengdu Fourier promised an annual net profit of no less than 35 million yuan from 2018 to 2020, demonstrating its confidence in future development. Shenzhou Airlines in the military business: In October 2018, the company announced the acquisition of 70% of Shenzhou Air's shares. Shenzhou Aviation is mainly engaged in the development, sales and service of military computers, military bus testing and simulation equipment, signal processing and navigation, and industrial automation data acquisition and test platforms. It has a rich product line in the fields of industrial computers and platforms, communication interfaces, data acquisition, embedded systems, signal processing, flight control, and reinforced computers. From 2018 to 2020, Shenzhou Aviation promised net profit of no less than 3000, 40, and 50 million yuan, respectively. The company acquired Shenzhou Airlines to expand the scope of business in the military industry based on existing business, improve the distribution of military customer resources, enhance technology accumulation in the military equipment industry, and at the same time achieve collaboration in channels, business, technology and strategy, and open up military informatization market space. Maintaining the “increase in holdings” rating. Considering that the company was affected by the slowdown in demand in the cable industry and the “ZTE incident” in 2018, we lowered the company's net profit from 2018 to 2020 to 2.87, 3.48, and 421 million yuan respectively, and EPS from 2018 to 2020 to 0.46 yuan, 0.56 yuan and 0.67 yuan respectively, corresponding to PE of 21X/18X/15X from 2018 to 2020. We are optimistic about the company's growth potential as a key enterprise for state-owned enterprise reform in Shenzhen in the 5G era and maintain the “increase in holdings” rating. Risk warning: the risk that the peak of operator investment will fall, and the military business expansion will fall short of expectations