Investment suggestion

Ruiling Co., Ltd. (300154.SZ) is a leading enterprise in the domestic welding industry, committed to "becoming a world-class comprehensive welding enterprise group". The company continues to increase technical investment in high-end welding equipment products to enhance the competitiveness of the industry. The company's welding robot business has significant advantages in customer service and technical reserve, and is expected to become a bright spot in the company's profits. We expect the company to achieve net profit of 92 million yuan, 101 million yuan and 110 million yuan respectively from 2017 to 2019, and EPS of 0.21,0.23,0.25yuan respectively. The current stock price (8.36yuan / share) corresponds to PE of 40.6X, 36.9X and 34.1x, respectively. At present, the market capitalization of the company is only 3.74 billion. After excluding the impact of "2017.3.31 days, the monetary funds on the account is 1.41 billion", based on the 2016 net profit of 73 million, the price-to-earnings ratio of the company's remaining assets is only 31.9X. Considering the value of shell resources (conservatively estimated at 3 billion), the margin of safety is relatively sufficient. The company focuses on the layout of high-end welding equipment, welding robot business, market value flexibility, maintain the [recommended] rating.

Main points of investment

Event: on April 25, 300154.SZ released its "Annual report 2016" and "first quarter report 2017". The company achieved operating income of 545 million yuan in 2016, down-1.34% from the previous year. Net profit belonging to shareholders of listed companies was 73 million yuan, down-10.05% from the previous year, and basic earnings per share was 0.16 yuan per share, down-11.11% from the previous year. In the first quarter of 2017, the operating income was 162 million yuan, an increase of 19.96 percent over the same period last year, and the net profit belonging to shareholders of listed companies was 29 million yuan, an increase of 36.41 percent over the same period last year.

The 2016 performance was slightly lower than market expectations, and Q1 performance rebounded strongly in 2017 through strengthening channel management and market development: according to the 2016 Annual report, due to "no significant improvement in downstream market demand in the welding and cutting industry", the company achieved operating income of 545 million yuan in 2016, down-1.34% from the same period last year. Affected by the decline in revenue, the decline in interest income on RMB funds for overseas investment, and the recognition of equity incentive fees, the company's net profit belonging to shareholders of listed companies in 2016 was 73 million yuan, down-10.05% from the previous year. The growth rate of net profit is lower than that of the 2016 performance Forecast (- 9.34%), and slightly lower than market expectations. Realized basic earnings per share of 0.16 yuan per share, down-11.11% from the previous year. In terms of sub-products, the revenue of the company's inverter welding and cutting equipment series was 464 million yuan (85.01%), down-2.05% from the previous year, and that of welding automation products was 33 million yuan (6.03%), down-10.82% from the previous year. The revenue of welding accessories products reached 46 million yuan (8.39%), an increase of 12.45% over the previous year. According to the first quarter report of 2017, through strengthening channel management and market development, the company realized operating income of 162 million yuan in the first quarter of 2017, an increase of 19.96 percent over the same period last year, and realized a net profit of 29 million yuan belonging to shareholders of listed companies, an increase of 36.41 percent over the same period last year.

By adjusting the product sales structure, the gross profit margin of Q1 products rose 4.11% year on year in 2017. In 2016, the company's gross profit margin was 28.29%, an increase of 0.68% over the same period last year, and the gross profit margin increased slightly.

Among them, the gross profit margin of inverter welding and cutting equipment series was 29.60%, an increase of 1.00% over the same period last year, mainly due to the reduction of "direct material costs". In 2016, the company's direct material cost was 335 million yuan (86.10% of the operating cost), down-3.29% from the previous year, lower than the corresponding revenue growth rate of-1.34%, thus improving the gross profit margin of the product. At present, the company's main raw materials are semiconductor power devices, external components, frame components, resistors and capacitors, transformers, PCB boards, etc., raw material prices are mainly affected by electronic components and copper, steel, aluminum and other metal price trends, in view of the continuous price increase trend of raw materials since 2017, we expect the potential to "reduce direct material costs to increase gross profit margin" is relatively limited. In terms of period expenses, the sales expenses in 2016 increased by 3.15% compared with the same period last year, and the increase in sales expenses made the "2017 Q1 performance" realized. The management expenses decreased by-18.70% compared with the same period last year, and the sharp decline was mainly due to "the company terminated the first phase of the restricted stock incentive program in 2015 and confirmed that the relevant equity incentive fees were 10 million yuan"; the financial expenses decreased by-30.97% compared with the same period last year. The sharp decline in financial expenses is mainly due to the decrease in the total amount of RMB funds held by companies, such as overseas investment, and the decline in interest income on RMB funds. In addition, according to the first quarter report of 2017, Q1 in 2017, the company adjusted the sales structure of products, and the gross profit margin of products increased by 4.11% compared with the same period last year. In 2016, the company's revenue from foreign sales accounted for 33.44%, and the gross profit margin of its foreign business increased by 2.34% over last year. In the future, the company will continue to benefit from "exchange gains from RMB depreciation."

There are abundant cash flow and strong extension development expectations: in 2016, the net cash flow generated by the company's operating activities was 175 million yuan, a sharp increase of 291.55% over the same period last year, mainly due to the "small base last year". As the proportion of net operating cash flow to net profit in 2016 is as high as 240%, the company has high operating quality and strong sales recovery ability. The net cash flow generated by investment activities was 104 million yuan, a sharp increase of 710.32% over the same period last year, mainly due to "the current maturity of the purchase of financial products and the current maturity of forward settlement and sale of foreign exchange". The net cash flow generated by fund-raising activities was-67 million yuan, which decreased by-27.01% compared with the same period last year, mainly due to the implementation of equity incentive scheme. As "net cash flow from operating activities and net cash flow from investment activities" increased significantly in 2016 compared with the same period last year, the monetary funds on the company's account reached 1.364 billion yuan (accounting for 76.51% of the total assets) at the end of 2016. there is a strong expectation of extension development.

Domestic leading enterprises in the welding industry, increase investment in high-end welding equipment, benefit from industry shuffle integration dividend: Ruiling shares is a leading enterprise in the domestic welding industry, adhere to the main welding industry, develop high-end welding equipment and welding robot Noumenon on the basis of welding machinery, and strive to "become a world-class comprehensive welding enterprise group" to continuously enhance the competitiveness of products. The company's main business covers the R & D, production, sales and service of inverter welding and cutting equipment, welding automation products and welding accessories, among which high-end welding equipment and welding robot are the focus of the company's future development. The company has a strong core competitiveness in the field of welding equipment, by the end of 2016, a total of 21 invention patents, strong scientific research force and sufficient technical reserves. The company continues to increase technical investment in high-end welding equipment products, and speed up the industrial transformation of existing technological achievements, and enhance the competitiveness of the company's products in high-end welding equipment products. Compared with foreign countries, the market concentration of Chinese welding industry is relatively low, the scale of manufacturers is generally small, and the technical strength is weak. With the intensification of competition in the welding market, the enhancement of scale effects of leading enterprises, and the increased customer demand for efficient, energy-saving and environmentally friendly products, it is expected that the production capacity of the welding industry will accelerate clearance and enhance market concentration. As a leading company in the domestic welding equipment industry, the company will profoundly benefit from the industry reshuffle and integration dividend.

The risk reveals that the downstream market demand of the welding industry remains sluggish; the research and development of high-end welding equipment is not as expected; the market development process of welding robot is blocked; the price of raw materials continues to rise sharply and the gross profit margin reduces the risk.