Incident: On August 30, the company announced its 2019 semi-annual report. The company's 2019H1 revenue was 469 million (+19.22%), net profit to mother of 69.0352 million (+1.61%), gross profit margin 48.57% (-1.00pcts), and net profit margin 16.17% (-1.98pcts). Key investment points: Focus on military electronics, multiple businesses jointly develop 2019H1 with revenue of 469 million (+19.22%) and net profit of 69.0352 million (+1.61%); the company focuses on the military electronics industry, and the business is sorted into 6 categories (in descending order of revenue): embedded real-time information processing business revenue of 160 million yuan (17.07%), storage products revenue of 90 million yuan (+58.80%), high-precision microwave/millimeter wave imaging radar business revenue of 80 million yuan (+197.29%), microwave components , RF channel equipment revenue of 75 million (+39.50%), complex electromagnetic environment test/verification and evaluation business revenue of 0.23 million (-18.99%), and revenue of Beidou satellite navigation receiver business of 0.18 million (-34.51%). ① Military special radars are supplied in small quantities, and vehicle-mounted millimeter waves have become an important growth point. In terms of military radar, the company relied on its subsidiary Polytech Recco, which has leading technical accumulation and rich engineering experience in new radar systems, high-speed radar real-time signal processing, full-band phased array, and radar testing and simulation directions. In terms of civilian radar, the millimeter wave car radar independently developed by the company was successively listed as the only domestic partner manufacturer. Among them, the 804T6 millimeter-wave vehicle front collision avoidance radar and SRR402T6 angle radar Tens of thousands of batch orders have been received It has become an important growth point for the company. ② Military reinforced storage arrays have achieved a breakthrough, and the SSD business ushered in the 2019 H1 storage business and achieved revenue of 90 million yuan (+58.80%). The subsidiary Xi'an Qiwei is based on self-developed SSD control chips that support data encryption and decryption, involving military, industrial and consumer products, to provide secure data storage solutions for Party, government, and military computers. Among them, the nationally produced autonomous controllable fiber channel storage array developed by the company is included in the “Military Key Software and Hardware Autonomous Controllable Product List”. It has achieved breakthroughs in certain models, benefiting from the continuous advancement of military information technology. Demand for military memory for weapons and equipment is expected to gradually increase in the future. At the same time, low-end consumer SSDs will gradually be replaced by domestic production, and the company's memory business will usher in rapid growth. ③ Join Oriental Lianxing to further expand the Beidou navigation business space On April 20, 2019, the company cooperated with Beijing Oriental Lianxing Technology Co., Ltd., a subsidiary of China Ordnance Industry Group Co., Ltd., and Hefei New Economy Industry Development Investment Co., Ltd. to establish Beidou Satellite Navigation Technology Co., Ltd. The establishment of a subsidiary is an important layout for the company in the Beidou navigation field. In the future, the share of the company's Beidou navigation business will continue to increase 48.57%. The net profit growth rate is lower than the revenue growth rate of the company 2019H1 The comprehensive gross margin was 58.57%, and the overall margin was reasonable (the comprehensive gross margin range for 2016-2018 was 43.80%-51.15%). We believe that the main reason why the company's comprehensive gross margin has maintained a high level for a long time is that the company's main products and services are in the military industry, and the products have high gross margin characteristics. At the same time, the company is autonomous and controllable through epitaxial acquisitions of Polytech, Xi'an Qiwi, and Chengdu Elkot's core technology, and the products have strong market competitiveness. The net profit of the 2019H1 company was 69.0352 million (+1.61%), which was significantly lower than the company's 2019 H1 revenue growth rate (+19.22%), mainly due to the expansion of the company's sales scale and increase in operating costs and sales expenses. At the same time, due to the reduction in interest on the purchase of wealth management products and the increase in loan interest, the financial expenses of 2019H1 were 7.4473 million (+190.12%), which greatly increased the company's net profit to a certain extent. It is proposed to acquire Xi'an Hengda and Jiangsu Hengda to improve the industrial chain layout. On January 26, 2019, the company plans to purchase 100% of Xi'an Hengda and Jiangsu Hengda's shares for 625 million yuan by issuing shares, convertible bonds and cash payments to counterparties. At the same time, the company plans to raise no more than 397 million yuan in supporting capital from no more than 10 specific investors in non-public shares and convertible bonds. Xi'an Hengda is mainly engaged in the R&D, production and sales of microwave products. Jiangsu Hengda supports the production of related microwave products for Xi'an Hengda. Hengda Microwave has successively participated in the development and production missions of major national aerospace projects such as “Tiangong-1”, “Tiangong-2”, “Cargo Spacecraft”, and “Chang'e Moon Exploration Project”, and won the title of “Important Development Supporting Unit for Shenzhou-5 spacecraft”. According to the transaction plan, the total net profit commitments of Xi'an Hengda and Jiangsu Hengda for the three years of 2019, 2020 and 2021 are not less than 40 million yuan, 52 million yuan, and 65 million yuan respectively. The company has been deeply involved in the military electronics field for many years. If this acquisition is completed, it will benefit the company's industrial layout. Investment recommendations We believe that as the company's radar orders and demand for military storage drives increase, the company's performance is expected to continue to improve. We expect revenue for 2019-2021 to be 1,194 million, 1,439 million and 1,742 million, respectively, with net profit of 166 million, 209 million and 265 million yuan for EPS, 0.15 yuan, 0.19 yuan and 0.25 yuan respectively. The current stock prices correspond to 40.33 times, 31.84 times and 24.2 times PE, respectively; assuming that the acquisitions of Xi'an Hengda and Jiangsu Hengda are completed, it will enhance the company's performance, according to the performance promises of Rayco Defense and the acquisition targets (Xi'an Hengda and Jiangsu Hengda). The net profit commitments of the 2019, 2020, and 2021 target companies (Xi'an Hengda and Jiangsu Hengda merger) were not less than 40 million, 52 million, and 65 million, respectively; according to the company's announcement, it is proposed to use issued shares to pay transaction consideration of 113.75 million yuan, and the number of directly issued shares is 2068,1817 shares; it is intended to pay transaction consideration of 283.7499 million yuan by issuing convertible bonds. We only consider the share capital after issuing shares and calculate EPS amortization. The EPS in 2019-2021 was 0.19 yuan, 0.24 yuan, and 0.30 yuan. The current stock prices correspond to 31.84 times, 25.21 times, and 20.16 times PE, respectively. Risk warning: Uncertain acquisition risk, risk of private product promotion falling short of expectations, risk of business integration.