The performance was in line with expectations, and the proportion of products with high gross profit margin increased. 2018H1 achieved a revenue of 877 million yuan (+ 78.19%), a net profit of 24.86 million yuan (+ 233.46%) and an EPS of 24.86 million yuan. During the reporting period, the company's defense final assembly product price difference income was confirmed to lead to revenue growth. Affected by the increase in the proportion of defense business products with high gross profit margin, the reduction in the cost of optical materials products, and the increase in the ratio of investment to income, the growth rate of performance is higher than that of income. It is expected that in the future, with the steady progress of the defense business and the continuous development of the optoelectronic market, the company's performance is expected to continue to grow rapidly.

Defense business is growing steadily and its development prospects are promising for a long time. 2018H1's defense business revenue was 579 million yuan, a sharp increase of 134.41% over the same period last year, mainly due to the recognition of the price difference income of final assembly products. During the reporting period, the company obtained a number of project development tasks in the field of large-scale weapon system assembly, the seeker field was full of orders, the industry position was stable, and the cooperation between the optoelectronic information equipment field and the overall unit was strengthened. the development of new projects contributes to the development of foreign trade orders in the future, and a successful bidding for an intelligent helmet display technology project reflects the company's technical competitiveness. The company's market position is expected to further improve in the future, and is optimistic about the long-term development prospects of the company's defense business.

The market of optoelectronic devices is stable, and efforts are made to open up the terminal market. The revenue of 2018H1's optoelectronic materials and devices business was 346 million yuan, an increase of 31.56% over the same period last year. During the reporting period, the market for optoelectronic materials and devices was stable, and the company's sales increased in terminal areas such as video surveillance, front-loaded vehicles, intelligent projection and so on. Xinhua Huaguang, a subsidiary in the optoelectronic field, actively promotes the cooperation and promotion of end products, broadens the high-end market of military and civilian products, and participates in the publication and implementation of a number of international national standards in the field of infrared chalcogenide glass. Xinhuaguang Company has made progress in the research of precision molding technology, and cooperated with downstream terminal enterprises to form an upstream and downstream industrial alliance and further broaden its product line. In the future, the company will focus on the end market and explore the needs of high-end customers, and the rapid growth of optoelectronic equipment business is expected.

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 August this year, 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 as the optoelectronic information business platform of Northern Optoelectronics Group and even the entire weapons industry, there is the possibility of injecting high-quality assets under Northern Optoelectronics Group in the future, and it 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.

Profit forecast, valuation and investment rating. Taking into account the strong competitiveness of the company's defense business and stable customers downstream of the optoelectronic equipment business, we maintain the company's annual EPS forecast of 0.22 EPS of 0.34 shock 0.41 yuan in 2018-19-20, and the current share price of the company is 12.2 yuan, corresponding to the PE of 56-36-30 in 2018-19-20. 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 only the expected injection of assets of the Northern Optoelectronics Group has been taken into account, maintaining the "overweight" rating with a target price of 14 yuan.