Investment advice

The company released its 2016 annual report on the evening of April 27. During the reporting period, the company achieved total operating income of 486 million yuan, a decrease of 4.10% over the previous year; net profit attributable to shareholders of listed companies was 40.2713 million yuan, an increase of 112.41% over the previous year; net profit attributable to shareholders of listed companies after deduction was 8.334 million yuan, a year-on-year decrease of 560.84%. The company's performance is in line with expectations and is basically in line with the Express Report. The main reason for the decline in the company's revenue is the reduction in the scale of the spare parts business, which has a low gross margin, while the core business, which mainly specializes in electronic tags and reading and writing devices, has achieved relatively rapid growth. The main reason for the decline in net profit after deduction was a sharp increase in management expenses due to the company's integration of resources for overseas mergers and acquisitions and the introduction of talent building teams. The company is a leading target focusing on the UHF RFID industry, which is scarce in the market. The application of UHF RFID in the clothing retail industry has begun to explode, and the industry has moved from an early age to a period of growth. The company's customers include well-known international and domestic retailers such as Walmart, Decathlon, and Heilan Home. New single-item supply chain and store management solutions are expected to expand rapidly in the future. Since 2014, the company has successively acquired overseas UHF RFID industry leaders such as SML, FETechnologies, Tagsys, etc., boosting the retail, logistics, library, textile and washing industries, showing strong resource integration capabilities. Overseas business revenue doubled for two consecutive years in 2015-2016, gross margin increased simultaneously, and performance elasticity was huge. The company recently announced that it plans to invest 700 million yuan to establish an industrial investment fund for fields related to the Internet of Things. It is expected that in the future, the company will continue to integrate industrial resources, enhance its comprehensive competitive strength and enhance the company's performance. In the future, the company is expected to fully benefit from the boom in the UHF RFID industry and gradually move out of the investment period. An inflection point in performance is imminent, and flexibility is huge. The company is expected to achieve operating income of 754 million yuan, 1,138 million yuan and 1,708 million yuan respectively in 2017-2019, and achieve net profit of 49.72 million yuan, 117 million yuan and 216 million yuan respectively. The corresponding EPS is 0.07 yuan, 0.16 yuan and 0.29 yuan respectively, maintaining the “highly recommended” rating.

Key points of investment

The increase in management costs is dragging down performance, and the inflection point of focusing on UHF RFID is approaching. During the reporting period, the company's electronic tag business, reading/writing device business, software business, spare parts business, and other business revenue increased by 22.40%, 36.39%, -69.64%, -69.63%, and -32.26% respectively, accounting for 42.95%, 45.05%, 0.64%, 9.51%, and 1.86% of total operating revenue, respectively. The software business, which accounts for a relatively small revenue share, and the spare parts business, which has a low gross margin, declined, while the core main electronic tag business and the spare parts business with low gross margin still achieved relatively rapid growth. The main reason for the decline in the company's net profit after deduction was due to the company's integration of resources for overseas mergers and acquisitions and the introduction of talent building teams, the amount of management expenses continued to increase 21.26% year-on-year, to 173 million yuan, and the management expense ratio increased 7.42 percentage points over the previous year to 35.46%. The company's gross margin increased 6.88 percentage points year over year to 45.55%, mainly due to a sharp decline in revenue from the spare parts business with low gross margin and a further increase in gross margin from overseas business. At the same time, the company announced a loss of 154.282 million yuan in the first quarter and expected a loss of 25.20 to 20.18 million yuan from January to June 2017, mainly due to increased business development expenses. The company is a leading target focusing on the UHF RFID industry where the market is scarce. It is deeply segmented into clothing retail, logistics, libraries, textile washing and other industries. It is expected that in the future, along with the boom in the industry, it will gradually move out of the investment period, and the inflection point of the company's performance will be reached.

The in-depth layout of the footwear retail market is expected to take advantage of the new retail trend and become a hot spot. New retail has fully exploded, and retail technology Retail Tech has completely transformed traditional retail formats and supports the future of retail. As an important part of Retail Tech's sensing layer technology, UHF RFID can be applied to solve core pain points in the footwear retail industry, such as high inventory, untimely replenishment, inaccurate data, low logistics efficiency, lengthy inventory, anti-counterfeiting, anti-theft, anti-theft, etc. It has been launched in batches by domestic and foreign clothing brands and department stores, and the application effect has been repeatedly verified by the market. The clothing retail industry is currently the fastest growing application market for UHF RFID. The growth rate reached more than 60% in 2016, but currently the penetration rate of RFID tags is only about 5%, and there is huge room for growth. The company has continued to strengthen its domestic and foreign footwear retail market layout in recent years. In terms of overseas markets, US subsidiaries were set up in 2012, and subsidiaries were set up in Europe, Singapore and other places in 2014. The company deployed business platforms and investment platforms globally, greatly increasing the competitiveness and market share of the company's products in the international market. In October 2016, the company acquired 10% of the shares of SML, which had the second largest market share of RFID tags in the footwear retail market, and expanded its international retail business layout. With the gradual deepening of R&D and the continuous advancement of outreach, the company made great strides into the international retail market. Customers include Walmart, Decathlon, etc. In terms of the domestic market, the market in the Asia-Pacific region, led by China, continues to rise. It is the fastest growing region in the world. Yuanwanggu launched a new single-item supply chain and store management solution based on UHF RFID technology in 2016. It has successful application cases of smart storage and smart stores such as Heilan Home, Huaying Fashion, and Terina in China, leading the layout, and is expected to lead the Chinese clothing market into a new era of retail RFID in the future.

Overseas business performance has doubled for two consecutive years, and the pace of outreach development will not stop. Since 2014, the company has successively acquired foreign UHF RFID industry leaders such as SML, FE Technologies, Tagsys, etc., and promoted retail, logistics, libraries, textile washing and other fields, showing strong resource integration capabilities. With the continuous expansion of foreign markets, the company's foreign business performance is extremely elastic: foreign revenue doubled for two consecutive years in 2015-2016, reaching 227 million yuan in 2016, a year-on-year growth rate of 107%, accounting for 46.71% of total revenue. At the same time, the gross margin of foreign business also continued to rise, reaching 36.36% in 2016, an increase of 3.05 percentage points over the previous year.

The pace of the company's outreach development will not stop. Recently, the company announced that it plans to raise no more than 800 million yuan by issuing exchangeable bonds (exchangeable A-shares controlled by the thinking of listed companies held by Yuanwanggu), of which it plans to invest nearly 700 million yuan with Qinzhi Capital to jointly establish industrial investment funds for fields related to the Internet of Things. It is expected that in the future, the company will continue to integrate industrial resources, enhance its comprehensive competitive strength and enhance the company's performance.

Acquired TAGSYS textile business and entered the specialty label market. The company acquired the textile leasing solutions business, RFID tag design and product business-related assets of TAGSYS, an industry-leading RFID product and solution provider, for 6 million euros in 2016. TAGSYS has a certain influence in the luxury goods and apparel retail market, particularly in specialty labels — waterproof labels. Due to cost limitations, the special label market is small, but the growth rate is about 50-70%. It is expected that waterproof labels will be applied to hotel textile management in the future, disrupt traditional cleaning models, or achieve automatic sorting, folding and distribution of laundry, and record the number of cleanings for replacement in real time to improve management efficiency, reduce manpower, and improve service quality; textile leasing is relatively mature and has a high penetration rate of RFID. Textile leasing solutions have a lot of room for market development.

It is deeply involved in the self-service library business, and its market share has increased rapidly. The company began expanding its library business in 2005, focusing mainly on high-frequency and ultra-high-frequency RFID products. The company invested in Haiheng Intelligence in 2013 to enrich its product layout in the high-frequency field. The overall market share is expected to exceed 60%, achieving full control of the library market. At the same time, by holding FE Technologies Pty Ltd, an Australian book industry solution provider, the company achieved the highest overall market share of the book RFID application market in the Asia-Pacific region. During the reporting period, FE's book business grew rapidly and expanded smoothly into the Southeast Asian and South Asian markets. At present, the penetration rate of RFID in the library field is still low. Most of them are still in the form of magnetic stripes. The use of RFID products also mainly focuses on high-frequency products to achieve independent book borrowing and return functions. In the future, with the full popularization of RFID systems and the reduction in the cost of UHF tags, UHF products are expected to open up the market.

The railway business is expected to maintain steady growth. As the core supplier of automatic railway number recognition system engineering, the company has established an absolute competitive advantage in the railway RFID market, occupying half of domestic railway freight RFID projects. In recent years, the company has continuously expanded new fields of domestic railway RFID applications. It already has complete solutions and product reserves, waits for the market to mature, and uses IoT technology to help build a smart vehicle management system for China's railways. The company has already initially entered the field of high-speed rail and urban rail transit, and is expected to continue to benefit from increased investment in the 13th Five-Year Rail Transit and railway construction in Xiong'an New Area to achieve steady growth.

Continue to explore other new application markets such as tobacco and alcohol. The company entered the tobacco and liquor RFID market earlier. It is an IoT strategic partner of the National Tobacco Administration, and has established a long-term cooperative relationship with Wuliangye, focusing on production management processes and sales channels. On this basis, the company strengthened the expansion of new applications of tobacco and alcohol, and extended its products to the Internet of Vehicles, Finance, Textile Washing, Electricity, Warehousing and Logistics, Ports and other industries. More growth is expected to provide a new flashpoint for the company's future growth.

Risk warning: The development rate of the UHF RFID market is lower than expected; there is uncertainty about the implementation of matters such as fixed increase and equity incentives.