The company achieved EPS 0.11 yuan in 2018, with steady revenue growth and a decline in gross profit margin. Accordingly, the company lowered its 2019 EPS forecast to 0.22 yuan 0.24 yuan (the original forecast was 0.34 yuan 0.41 yuan), and gave an EPS forecast of 0.27 yuan in 2021. Considering the gradual deepening of the reform of the Arms Industry Group, the possibility of the company as an integrated platform for optoelectronic information products has been enhanced, and the "overweight" rating has been maintained with a target price of 14 yuan.

Income has increased steadily and gross profit margin has fallen due to changes in product structure. In 2018, the company achieved revenue of 2.422 billion yuan (+ 28.43%), net profit of 57.95 million yuan (+ 30.51%) and EPS of 0.11 yuan. During the reporting period, the company's performance delivery products increased, product structure changes (confirmation of the price difference and cost of components outside the final assembly products) and the increase in the price of raw materials for optoelectronic materials and devices led to a decline in gross profit margin (4pcts), the company strengthened quality improvement and efficiency, the expense rate reduced 1.4pcts, the asset impairment loss decreased by 87% compared with the same period last year, and the net interest rate increased slightly. It is expected that in the future, with the improvement of the profitability of the defense business and the continuous development of the optoelectronic market, the company's performance is expected to maintain rapid growth.

Defense sector orders are improving, profitability is expected to improve. During the reporting period, the subsidiary Xiguang defense revenue of 1.845 billion yuan (+ 29.4%), due to the current period confirmed more low gross profit margin of the total assembly product income, net profit decreased 20.7% compared with the same period last year. The general assembly of the company's large-scale weapon system has developed towards ethnic grouping and serialization, and a number of project development tasks have been obtained during the reporting period; the order task of the seeker continues to increase, the output ranks the largest in China and in the forefront of the world, and the application field of the seeker is expanded. A certain type of project has been bidding successfully, and optoelectronic information equipment has been continuously expanded in aviation and ground fields. The advance payment of the company has increased from 1.28 million yuan at the beginning of the period to 25 million yuan, which may indicate that the order for its defense products is good. The proportion of the company's final assembly products is expected to decline in 2019, and the profitability of the defense business is expected to improve.

The market share of optical materials has increased and the high-end market has been continuously developed. In 2018, the revenue of New Huaguang Company was 660 million yuan (+ 25.6%). Due to the expansion of operation scale and the income from land disposal, the net profit increased by 38.4% compared with the same period last year. During the reporting period, fluorophosphate glass products were serialized, Dalian melting production line technology was broken through, and infrared materials and precision molding projects were pushed forward. Sales of high-end optical materials continued to rise sharply, customers and product structure further improved, and the global market share steadily increased to 13% from 12% in the previous year, ranking second in China and the top four in the world. In the future, the company will focus on the end market and explore the needs of high-end customers, and the market share of optoelectronic devices is expected to be further improved.

The mixed reform of the group is advancing steadily, and the injection of high-quality assets is worth looking forward to. The Arms Group plans to increase the asset securitization rate to 50% by the end of the 13th five-year Plan. With the landing of the "double hundred Action" in 2018, many subsidiaries of the Arms Group have been shortlisted, and the mixed reform of the group and the restructuring of scientific research institutes are expected to accelerate. We expect that the company, as the optoelectronic information business platform of Northern Optoelectronics Group and even the entire weapons industry, may be injected into the high-quality assets of Northern Optoelectronics Group in the future, and is expected to become a comprehensive listing platform for laser, night vision and other sub-groups.

Risk factors. The profit growth rate of military and civilian products is not up to expectations; the time and content of asset injection are uncertain.

Investment suggestion: taking into account the decline in gross profit margin of the company's products, reduce the 20-year EPS forecast in 2019 to 0.22 yuan 0.24 yuan (the original forecast is 0.34 yuan 0.41 yuan), and give the 2021 EPS forecast 0.27 yuan. The current price is 12.32 yuan, corresponding to the PE of 2019-20-21 is twice that of 57-51-45. Considering the gradual deepening of the reform of the Arms Industry Group, the possibility of the company as an integrated platform for optoelectronic information products has been enhanced, maintaining the "overweight" rating with a target price of 14 yuan (corresponding to 65 times PE valuation in 2019).