Event: On August 26, 2020, the company released its semi-annual report, achieving revenue (695 million yuan, +5.54%) and net profit from the mother (160 million yuan, +12.28%). Comment: 1) The overall performance was in line with expectations, and the net profit of the subsidiary Starwave Communications 2020 H1 increased 40% year over year. 2020H1 achieved revenue (695 million yuan, +5.54%) and net profit from the mother (160 million yuan, +12.28%). Revenue achieved steady growth, mainly on the basis of the implementation of epidemic prevention and control measures by the company and various subsidiaries, and began various tasks steadily. Overall, steady growth was achieved. During the reporting period, various businesses in the company's power sector, military sector, and railway and rail transit sectors progressed steadily; the 100MW wind power project built by Sun Company's Zhongning County Yinbian New Energy Co., Ltd. passed 240 inspections and was officially put into commercial operation. By segment, the Electric Power Division achieved revenue of 283 million yuan, a slight decrease of 5% over the previous year, and achieved operating profit of 90.77 million yuan, a year-on-year decrease of 21%, mainly due to the epidemic having a certain impact on product delivery. According to the same caliber in '19, the Railway and Rail Transit Division and the New Energy Division achieved total revenue of 405 million yuan, an increase of 29% over the previous year, gross margin increased from 35% to 43%, and operating profit increased 54.7% year-on-year, mainly due to the high gross margin of the power generation business in the new energy division, driving an increase in the overall margin of railway rail transit and new energy; the military division; Revenue comes from subsidiary Starwave Communications. The military division achieved revenue of 39.874 million yuan during the reporting period, a year-on-year decrease of 16%, but the net profit of Starwave Communications increased 40% year-on-year, mainly benefiting from the boom in the military industry. The growth rate of net profit from 2020H1 was higher than revenue, mainly due to higher gross margins in rail, new energy, and military businesses. The combined gross profit margin of 2020H1 was 48.89%, up 4.75pct year on year. Among them, the gross margin of the power division decreased slightly by 3 pct, the gross margin of the railway, rail transit and new energy division increased by 8 pct to 43% due to the high gross margin of the power generation business, and the gross margin of the military business increased by 15 pct to 77%. Considering that Starwave Communications announced contracts in the early stages reached 500 million yuan, it is expected that with the continuous increase in the share of military business, the company's gross margin will reach a new level. The cost ratio during the 2020H1 period was 22.76%, up 3.17% year on year. Among them, the sales expense ratio decreased by 2.38 pct. The main system calculation caliber led to the reclassification of sale-related freight costs to operating costs. The R&D expense ratio decreased slightly by 0.4 pct, the management cost rate increased slightly by 0.35 pct, while the financial expense ratio increased by 5.6 pct year-on-year, mainly due to the increase in interest adjusted for convertible bonds issued during the reporting period according to actual interest rates. 2) Looking at the balance sheet, accounts receivable at the end of the period increased 25% from the beginning of the period. The company's main customers came from large state-owned enterprises such as electricity, military, railways, etc., and some overseas customers, influenced by its settlement practices. The company's accounts receivable collection cycle was relatively long, resulting in relatively high accounts receivable at the end of the period; year-end inventory increased 22% from the beginning of the period, of which raw materials increased 74% from the beginning of the period, products increased 68% from the beginning of the period. Semi-finished products increased by 41% from the beginning of the period, while stocks, in-transit materials, and low-value consumable products were basically at the same level. Commodities fell 32% from the beginning of the period. The above reflects that the company is stepping up Status of production; Projects under construction at the end of the period increased by 51% compared to the beginning of the period. The increase was mainly due to successive investments in projects such as the subsidiary Zhejiang Hanpu's new plant project, the renovation of the Xingbo Communications Test Building, and the renovation of the Yinchuan Wolong Test Station. 3) Looking at the cash flow statement, the net cash inflow from operating activities was $89.95 million, and the net outflow for the same period last year was $19.21 million, mainly due to a decrease in guarantees and bank underwriting operations handled by the subsidiary Yinchuan Wolong, which led to a decrease in guarantees and bank underwriting, and a decrease in cash outflow during the reporting period due to last year's Yinlong payment lawsuit, which did not occur during the reporting period; net cash outflow from investment activities decreased by 49.93%; net cash outflow from investment activities was RMB 94.19 million, and net outflow decreased by 49.93%, mainly due to investments in long-term fixed assets, intangible assets and other assets purchased in the current period. Same as cash This is due to a decrease in the ratio; the net cash inflow from financing activities was 154 million yuan, an increase of 29.48% over the previous year. The increase in cash received from loans was higher than the outflow due to the issuance of convertible bonds during the reporting period. Starwave Communications, a wholly-owned subsidiary, accounts for a high share of the aerospace equipment business, is full of on-hand orders, and is highly flexible. Starwave Communications, a wholly-owned subsidiary of the company, is the core supporting unit for radar guides for space equipment. The company's annual report shows that Starwave Communications is one of the few private enterprises in China that provide combination-grade products for multiple ballistic weapon platforms. The support level is high, there are many supporting weapons and equipment, and the amount of supporting value is high. The boom in the aerospace equipment sector will contribute considerable performance elasticity to the company. From the perspective of technology accumulation, Starwave Communications has long focused on the fields of radar and electronics against microwaves, and has developed into the first tier of military microwave private enterprises. Its microwave hybrid integrated circuit business has plenty of room for growth, and the growth rate is faster than the overall growth rate of the military industry. Judging from orders, only the last two announced orders have reached 3.6 times the 2019 revenue of Xingbo Communications (140 million yuan). The delivery time is mainly in 20 and 21, while the supporting level and profitability of Starwave Communications's aerospace equipment field is high. In 2019, the net interest rate of Starwave Communications was as high as 46.4%. According to the net interest rate level in 2019, the announced order alone is expected to bring the company more than 160 million yuan in net profit, and the company's future performance is expected to grow high. A draft for the acquisition of 100% of the shares of Zhiliang Electronics Company, an electronic warfare target, was announced earlier to further strengthen the military electronics business. Zhiliang electronic products cover the four major categories of electronic reconnaissance, electromagnetic protection, radar anti-jamming, and simulation training. It is a typical high-quality, growing enterprise with high barriers, light assets, and high technology content. According to the MarketsandMarkets forecast report, the global electronic warfare market space will exceed 30 billion US dollars by 2022. With the urgent need for domestic system confrontation, the domestic electronic warfare sector is expected to grow at a high rate of growth. Electronic warfare equipment is the focus of development in the context of our military system confrontation. Currently, in addition to China's 29 China Power Company, Aerospace Science and Industry Institute 8511, China Shipbuilding 723, etc., Zhiliang Electronics is one of the few domestic enterprises with radar anti-system level and supporting cooperation capabilities throughout the industry chain. It has multiple product lines for military electronic warfare, electronic reconnaissance, electronic defense, and radar simulation. Zhiliang Electronics' performance is growing rapidly. According to the performance promises of the counterparty in this transaction, Zhiliang Electronics' performance promises for non-net profit from 2020 to 2022 are: 47.8 million yuan, 57.36 million yuan, and 68.83 million yuan, with growth rates of 18.80%, 20%, and 20%, respectively. In 2019, it achieved revenue of 87.82 million yuan (up +52% year on year) and deducted non-net profit of 42.2317 million yuan (+72% year on year). From January to May 2020, revenue was 36.55 million yuan, net profit was 22.52 million yuan, and net profit margin was as high as 61.2%. Strengthening the development of the military business sector is the company's long-term development strategy. The high growth of the military industry has led to a rapid increase in its share. In 2017, it quickly entered the military electronics field through the acquisition of Starwave Communications, adding military industries such as microwave devices, microwave components, and subsystems. According to the company announcement, Chengdu Dingyi, a subsidiary of the company, has successfully developed military infrared products such as infrared guide heads, laser guide heads, and target infrared caliber components. In the future, it will vigorously expand sales channels to the military industry and expand market share. After considering the acquisition of 100% of Zhiliang Electronics's shares, a new force was added to the military industry business and entered the field of electronic warfare. The company revolves around endogenous+epitaxial development in the military electronics field, and the share of military electronics business is expected to increase rapidly. 2020 is a key year for the development of the company's military strategy, and it is worth looking forward to the in-depth layout under the high-quality track of military electronics. The electricity and rail transit sectors are growing steadily, benefiting from investment in new infrastructure such as UHV and rail transit, and steady profits. The company is a leader in the power monitoring and testing industry segment. Its products are mostly used in the field of power grids of 110kv and above. Benefiting from power grid companies continuing to promote the state maintenance equipment management model, strong smart grid+ubiquitous power IoT construction and distribution network construction, it has maintained steady growth. Its Yinchuan transformer is a leading railway traction transformer. Its core benefits include the construction of railway infrastructure that China continues to invest in, including the main line in the central and western regions of China, the construction of double, branch, and link lines in the central and western regions of China, the electrification of old lines, and the natural replacement of lines that have been in operation for more than 15 years. Investment advice: I am optimistic that after the company's share of military business increases, it will become the core target of military electronics. It is expected that with the entry of electronics against the company Zhiliang Electronics, the military business will have higher growth potential, and the company's share of military profits is expected to increase rapidly. Its subsidiary, Starwave Communications, is a relatively pure company in the space equipment circuit. The aerospace equipment business accounts for a high proportion. It is in the early stages of product release. It has already signed a full range of orders, and its performance is highly flexible. Furthermore, the company's long-term layout in the military industry anticipates that after Zhiliang Electronics enters, the company's share of military business will increase rapidly. We believe that the value of the company's military business has not yet been fully reflected, and the valuation aspect is expected to continue to be reshaped. Without considering Zhiliang's merger, we expect net profit of 330 million, 450 million, and 580 million dollars in 2020, 2021, and 2022. The corresponding valuations for 2020, 2021, and 2022 are only 32X, 24X, and 18X. As a growth target for military electronics, there is plenty of room for flexible valuation restructuring, and maintaining a “buy-A” rating. Risk warning: bidding for power monitoring and testing products falls short of expectations, railway investment falls short of expectations, weapons and equipment procurement falls short of expectations, and the acquisition of Zhiliang Electronics falls short of expectations