1H21 performance is lower than we expected.
The company announced 1H21 results: revenue was 1.166 billion yuan, down 1.24% from the same period last year; net profit from home was 50.24 million yuan, down 32.9% from the same period last year; and net profit from non-return was 555.8 billion yuan, down 31.6% from the same period last year. Of this total, 2Q21 income was 622 million yuan, down 9.62% from the same period last year; the net profit from home was 58.83 million yuan, up 5.78% from the same period last year; and the net profit from non-return was 45.59 million yuan, down 6.74% from the same period last year. The company's performance was lower than we expected, mainly due to the decline in cable TV revenue, higher-than-expected growth in costs and sales expenses, and lower-than-expected return on investment.
Development trend
The market share of cable TV has declined further, and revenue continues to be under pressure. On the revenue side, the company said that the current trend of transferring the carrying form of video content services to mobile video, IPTV and Internet video business was obvious, and users' viewing habits were greatly affected, resulting in a continuous decline in the cable TV industry, intensified internal and external competition, and an obvious trend of user loss, under this background, the company's revenue declined compared with the same period last year. On the cost side, we believe that the increase in the number of set-top box replacements has led to a continuation of the rising trend of depreciation charges, so the company's 1H21 gross profit margin decreased by 2.4ppt to 12.6% year-on-year, resulting in a decline in profitability.
The expense rate has increased and the net interest rate has declined. The company's 1H21 sales expense rate was 5.3%, an increase in 0.71ppt compared with the same period last year. We believe that mainly due to the strengthening of the company's community marketing and online publicity activities under the overall stability of the epidemic, user development, business promotion, product sales and on-site maintenance work have increased; the management expense rate has been reduced to 3.7% compared with the same period last year; and the financial expense rate has been increased to-4.5%, mainly due to the implementation of the new rental standards. Due to the overall increase in the expense rate, the negative investment income, and the decrease in government subsidies in other income from the same period last year, the company's 1H21 net interest rate decreased by 2.0ppt to 4.3% compared with the same period last year. O follow the progress of the new business after the "national network integration" and look forward to business transformation and upgrading. The company said that with the formal establishment of China Radio and Television Network Co., Ltd., in accordance with the requirements of unified construction, unified management, unified standard and unified brand, a unified operation and management system for cable TV network and radio and television 5G network has been established; the company is promoting intelligent radio and television research to speed up the landing of 5G, ultra high definition, cloud platform and other new technology applications. We believe that large-scale, intensive and fixed-shift integration or gradual embodiment, it is suggested to pay attention to the release of the company's service capacity enhancement potential and the progress of business transformation and upgrading under the intelligent radio and television strategy.
Profit forecast and valuation
Taking into account the increased competition in the industry and the continued pressure on the company's performance, we cut our net profit by 51.6% in 2021 and 2022 by 33.6% to 2.35 / 373 million yuan. The current share price corresponds to 48.1 times 2021 / 2022 / 30.3 times earnings. To maintain its neutral rating, the target price was lowered by 27.8% to 6.71 yuan due to the downgrade of earnings forecast, corresponding to 25 times 2022 price-to-earnings ratio, which is 17.4% lower than the current share price.
Risk
The progress of national network integration is better than expected; the recovery speed of user scale is faster than expected; and the industry policy changes.