The company achieved revenue of 695 million yuan in 20H1, an increase of 5.54% over the previous year, and realized net profit of 160 million yuan, an increase of 12.28% over the previous year. The company announced that Starwave Communications has received major contracts totaling 500 million yuan, indicating strong downstream demand. At the same time, the company is actively expanding production capacity, stocking and production, and projects under construction, machinery and equipment, and raw materials are all rising rapidly. Considering the steady development of the company's civilian goods business, the military goods business is expected to reach an inflection point, maintaining the company's “buy” rating and target price of 40.25 yuan. Excluding the financial impact of convertible bonds, the performance increased by 17.4%, and profitability is expected to increase after the release of military products. The company achieved revenue of 695 million yuan in 20H1, an increase of 5.54% over the previous year, and realized net profit of 160 million yuan, an increase of 12.28% over the previous year. On the revenue side, although revenue from military electronics and railroad traction power supply equipment declined slightly, the company's power testing and power equipment revenue increased 21.25% year over year to 474 million yuan, and overall revenue increased slightly. The profit side may be affected by factors such as changes in revenue structure. The company's gross margin increased 4.75pcts to 48.89% year on year during the reporting period; due to matters such as convertible bonds and Sun Company's Ningxia New Energy Financial Leasing, financial expenses increased 269% year over year to 54.55 million yuan, causing the period's expenses rate to increase by 3.17 pcts to 22.76%; after combining various influencing factors, the company's net profit margin of 22.66% during the reporting period was basically the same as last year; however, due to the company's acquisition of minority shares in Starwave Communications, minority shareholder profit and loss in the first half of the year - 2.33 million yuan, a year-on-year decline 130%, so the growth rate of net profit of the mother was higher than the growth rate of revenue. In particular, the company issued 585 million convertible bonds on March 12, of which the debt portion after deducting issuance fees was 499 million yuan, while the balance of bonds payable by the company at the end of the reporting period was 508 million yuan, or indicating that the convertible bonds from March 12 to the end of June generated 9.43 million interest based on market interest. The first year of convertible bonds had a coupon interest rate of 0.5%. According to the calculation of actual interest payable and 15% income tax, the company's net profit was about 167 million yuan, an increase of 17.4% over the previous year. It is expected that in the future, with the gradual expansion of the company's military products business and the successive conversion of convertible bonds, the company's profitability is expected to continue to increase. Projects under construction, machinery, equipment, and raw materials are increasing rapidly, and the company may be preparing for an explosion of orders. On July 23 and July 29, respectively, the demand-side company announced that its subsidiary Starwave Communications signed contracts totaling 500 million yuan with special agency customers, with delivery mainly concentrated in 2021; the company's contract liabilities increased by 42.73% year-on-year to 56.97 million yuan at the end of the reporting period, which also confirmed the company's strong demand. In order to cope with the explosion of orders, the company invested more in both fixed costs and variable costs. The Starwave Communications Comprehensive Experimental Building Project invested 7.95 million yuan in the current phase, with a final balance of 13.55 million yuan, an increase of 142% from the beginning of the period, and the current project progress of 74%; during the reporting period, the company purchased 56.43 million yuan of machinery and equipment, with a final book value of 153 million yuan, an increase of 40% over the beginning of the year; the raw materials in stock at the end of the period were 74.8 million yuan, an increase of 68% over the beginning of the year. Projects under construction, machinery and raw materials have increased significantly, or indicate that the company is actively expanding production in the future. The company's performance is expected to experience explosive growth. The temporary decline in revenue will not change the long-term positive trend. Starwave is expected to become an important support point for the company's development. During the reporting period, the subsidiary Starwave Communications achieved revenue of 39.87 million yuan, a year-on-year decrease of 15.7%, or due to the impact of the epidemic, floods, etc., on projects under construction. However, based on segment data, the gross margin of Starwave Communications increased sharply by 15.75pcts to 77.47%, achieving a net profit of 25.14 million yuan, a year-on-year increase of 39.6%. Starwave Communications specializes in microwave component development, and its products are mainly used in airborne radar and missile guides. Demand for microwave components continues to improve as new models of aircraft are being installed at an accelerated pace and missile consumption increases under the trend of practical warfare. Starwave communication products have been widely recognized by the market, formed stable supporting relationships with downstream research institutes, military industry groups, etc., and have strong competitive strength, and are expected to continue to support the company's performance growth in the medium to long term. Zhiliang's mergers and acquisitions are progressing steadily, and the promise of continued prosperity and good performance is expected to be successfully completed. The company announced that it plans to acquire Zhiliang Electronics and lay out electronic countervailing business. Currently, the company has received review opinions from the National Defense Bureau of Science, Technology and Industry. The declassification method has been approved, and the acquisition is still progressing steadily. The future plan still needs to be approved by the shareholders' meeting, and submitted to the Shenzhen Stock Exchange for review and registration with the Securities Regulatory Commission. From January to May, Zhiliang Electronics achieved revenue of 36.56 million yuan, gross profit ratio of 78.03%, and net profit of 22.52 million yuan. It has completed 47% of the 2020 47.8 million yuan performance promise. On the other hand, the company issued products of 24.56 million yuan at the end of the period. Combining the above factors, and considering that military revenue confirmation is mostly concentrated in the fourth quarter, we think there is a high probability that Zhiliang Electronics will complete its performance promise in 2020. As of the end of May, Zhiliang Electronics' contract debt was 41.78 million yuan, up 353% from the beginning of the year, and the inventory was 43.25 million yuan, up 62% from the beginning of the year, or indicating that the company's business prosperity was high. It is expected that after the acquisition is completed and the results are consolidated, Zhiliang Electronics is expected to become a new bright spot in the company's development. Risk factors: macroeconomic and industrial policy changes, product quality control, accounts receivable not being collected in a timely manner, risk of increased industry competition, rapid business expansion, risk of impairment of goodwill, inability to transfer convertible bonds smoothly, failure to raise supporting capital, failure of mergers and acquisitions of Zhiliang Electronics, etc. Investment suggestions: The company is a leader in power equipment testing. Its subsidiary, Yinchuan Wolong, has a significant competitive advantage in railway traction transformers. Hefei Starwave missile ancillary products are expected to be released rapidly, and the smooth progress of mergers and acquisitions in Shanghai Zhiliang is expected to become a support point for the company's long-term growth. Maintain the company's 2020/21/22 EPS forecast of 0.71/1.34/1.70 yuan, and the company's current price of 29.45 yuan, corresponding to 2020/21/22 PE of 41/22/17 times, maintaining the “buy” rating and target price of 40.25 yuan.