1H22 performance is slightly lower than our expectations
Dongfang Tong announced results for the first half of 2022: realized revenue of 201 million yuan, -3.38% year on year; net profit of the mother - 91 million yuan, net profit of the mother after deduction - 98 million yuan, an increase in losses over the same period last year (1H22 VAT is collected and refunded and government subsidies decreased by about 26 million compared to the same period last year). Looking at 2Q22 in a single quarter, revenue was 120 million yuan, a year-on-year increase of +108.2%, an improvement in growth rate; Guimu's net profit - 44 million yuan, net profit after deduction - 49 million yuan, an increase in losses over the previous year. The pandemic has objectively disrupted business development. In particular, the progress of middleware replacement on the government side has slowed, causing overall performance to fall slightly short of our expectations.
Development trends
Under the epidemic, the growth rate of the middleware business on the government side is under pressure, and the revenue structure has been adjusted in the short term. By industry, 1H22's government business development was greatly affected by the epidemic, from -24% to 73 million yuan compared to the same period last year, accounting for a decrease of about 10 ppt compared to the same period last year, and the telecom industry bucked the trend and increased 52% to 81 million yuan, accounting for an increase of about 15 ppt compared to the same period last year. By product, 1H22's basic software business, mainly middleware, was under pressure, with revenue of -40% year-on-year, accounting for a decrease of about 22ppt compared to the same period last year; security/digital transformation business was +31%/+299%, respectively. Overall gross margin declined markedly due to structural adjustments, and the gross profit margin of basic software remained steady. The rise in the share of security and digital transformation businesses with low gross margins was compounded by the large impact of upfront investment in some strategic expansion projects. 1H22's comprehensive gross margin fell by 24ppt to 64%; among them, the gross margin of the basic software business remained steady, +1.4ppt over the previous year. Performance such as profit and cash flow has also been hampered by the pandemic. The increase in sales investment in 1H22 (sales expense ratio increased 10ppt year on year) combined with a decline in government subsidies (the share of other revenue fell 12ppt year on year) affected profits; orders placed due to the pandemic and delays in repayment progress were also reflected in contract liabilities (-18% compared to the end of 2021) and cash flow levels (net operating cash gap widened significantly year-on-year). The first half of the year focused on the uncertainty brought about by the epidemic. We expect business conditions to improve in the second half of the year as the epidemic recovers and fixed increases are implemented.
The middleware business has expanded new industries and new sales models under adversity. The high-end equipment market has achieved remarkable results, with revenue +150% over the same period last year. At the same time, the company strengthened cooperation with cloud vendors to achieve cloud-based middleware applications and promote the evolution of the service model. The security business maintained its leading edge in the telecommunications industry. Core IDC network and information security products entered a period of rapid growth. 1H22 won bids related to China Mobile and China Unicom, leading the market share. Actively expand digital transformation business. In the central state-owned enterprise market, it focused on the electricity and manufacturing industries, participated in the construction of business systems in 10 network provinces, and helped CRRC, Shell, etc. achieve digital transformation.
Profit forecasting and valuation
Revenue structure adjustments and the like under the pandemic in the first half of the year had an impact on profits. We kept our 2022/2023 revenue forecast unchanged and lowered the 2022/2023 profit forecast by 22.0%/10.3% to 31/48 billion yuan. Maintaining an outperforming industry rating and maintaining a target price of 24 yuan (switched to 23 times the price-earnings ratio of 2023), there is room for 34% upward from the current stock price. The current stock price corresponds to 27/17 times the price-earnings ratio of 2022/2023.
risks
The progress of domestic substitution fell short of expectations, the risk of market competition, and the impact of occasional outbreaks of the epidemic.