Incident: The company released its 2019 semi-annual report, achieving operating income (1,123 million yuan, +18.63%), net profit of the mother (553066 million yuan, +80.12%), and net profit of the non-return mother (52.3951 million yuan, +152.46%).

Comments:

1. Military revenue and gross margin both rose, driving high growth in the company's performance

Among the company's three main businesses during the period, optical components achieved revenue (396 million yuan, -5.22%), gross profit margin (19.34%, +0.26%); optoelectronic defense and site monitoring achieved revenue (306 million yuan, +25.07%), gross profit margin (33.5%, +1.63%); projectors and accessories realized revenue (339 million yuan, +63.20%), gross profit margin (3.34%, +0.26%). In addition, machinery products and other businesses achieved revenue (82 million yuan, +7.43%), and their overall gross margin was estimated to be about 33.61%, a slight decrease from the 36.67% level for the whole of 2018. Among them, the optoelectronic defense and site monitoring business was mainly military goods. In the first half of the year, the company's revenue and gross profit accounted for 27.26% and 47.03% respectively. The revenue and gross margin of this business both increased in 2019H1, and the gross profit contribution increased by 24.554,500 yuan year-on-year, which is the main driving factor for the company's current performance growth. Looking at business owners, the subsidiary Henan Zhongguang Optics Group Co., Ltd. mainly undertakes various businesses other than optical components. Among them, the optoelectronic defense and site monitoring business accounted for 40% and 70% of revenue and gross profit in the first half of the year, respectively; China Optics Co., Ltd. achieved revenue (733 million yuan, +43.7%) and net profit (30 million yuan, +94.0%) in the first half of the year, showing a strong growth momentum.

Also, overall, there was a slight decrease in the company's rate during the period. 2019H1 was 13.36%, a slight decrease of 0.46 percentage points over the previous year.

2. Benefiting from the construction of national defense informatization, military products are expected to continue to strengthen China's military. The goal of strengthening China's military requires ensuring that significant progress is made in the construction of information technology by 2020. We believe that information power will surely become an amplifier for the doubling of the combat power of our country's military. The company's military products include a variety of light weapon scopes, stable control optoelectronic systems, and detection and interference systems. Some of the listed military products are exclusively supplied to the military. As China's military spending increases and military informatization construction continues to advance, it is expected that the company will continue to benefit from it. In addition, the company also has surveillance products for key border and coastal defense sites, etc., and is the only domestic military unit designated by the National Border Guard Commission to be shortlisted for land defense and coastal defense surveillance at the same time. In the first half of the year, security surveillance actively expanded domestic and foreign markets, winning bids for a number of domestic border and coastal defense projects one after another.

3. The acquisition of Zhongfukang's shares will increase the company's strategic support for the company's plan to use its own capital to acquire 27.45% of the shares of Zhongfukang Company held by Pulihua Technology. The transaction consideration is 90171,000 yuan. After the acquisition is completed, China Optics Co., Ltd.'s shareholding ratio in Zhongfukang Company will increase to 60%, and Zhongfukang Company will be included in the scope of the company's consolidated statement. Zhongfukang's 2018 revenue was 638 million yuan, net profit was 1,529 million yuan, and January-July 2019 revenue was 343 million yuan, and net profit (-49773) was 10,000 yuan. Previously, the company's complete projectors for mass markets such as business, education, and home entertainment were independently designed and developed by China Optics. The specific component procurement, production, assembly and commissioning work was entrusted to Zhongfukang, and China Optics purchased complete products from them according to the cost addition method. After the transaction is completed, it is possible to further strengthen the company's control over Zhongfukang and enhance Zhongfukang's strategic support for the company. At the same time, Zhongfukang's external and core employee teams hold 20% of Zhongfukang's shares, which is also conducive to mobilizing the enthusiasm of core employees, which is conducive to business expansion and market competitiveness.

4. Transfer the shares of third-level subsidiaries directly under the listed company, and further rationalize the organizational structure. The listed company plans to transfer 100% of Chuanguang Electric Power's shares, 100% of Zhongyuan Smart Elevator's shares, 60% of Zhongfukang Digital Display's shares, 51% of Nanyang Southern Smart Optoelectronics's shares, Chengdu Guangming Optoelectronics 0.74% of the shares of Chengdu Guangming Optoelectronics, and 33.3% of Nanyang Mingguang's shares to the listed company free of charge. The above company was changed to a second-tier company through an equity transfer. The company acquired China Optics Limited in 2018. Since then, the company changed its name to “China Optics Group Co., Ltd.” and invested the operating assets and liabilities of the original parent company's optical components, and set up a wholly-owned subsidiary, Nanyang Lida, to undertake the company's optical component related business. This share transfer further adjusted the organizational structure, which is conducive to more effective group management.

5. Profit forecast

The company's net profit from 2019 to 2021 is estimated to be 173 million yuan, 206 million yuan and 274 million yuan respectively. The corresponding EPS is 0.66 yuan, 0.79 yuan and 0.94 yuan respectively, maintaining the “Highly Recommended - A” rating.

Risk warning: Product development progress falls short of expectations; competition in the civilian goods market is intensifying.