Junzhi Group announced its results for the first half of 2016, with turnover falling by about 15.48 billion yuan, or 10.4 percent, to about 133.56 billion yuan compared with the same period last year. The gross profit margin decreased by about 1.2 percentage points year-on-year to about 21.4%, and the net profit margin also decreased from about 9.4% to about 5.7%. Earnings per share fell from 10.75 cents to 4.88 cents, and the company declared an interim dividend of 1.2 Hong Kong cents per share. The performance was worse than we expected, so we lowered our profit forecast and target price. The new target price of HK $1.36 corresponds to 8 times forecast 2017 earnings, maintaining a "buy" rating.
The average selling price and gross profit margin fell. Junzhi Group adopts the cost-plus pricing model, and the price of copper, its core raw material, has dropped by about 16.2% compared with the same period last year, so the price of the group's products has fallen with the copper price, resulting in a decline in turnover and gross profit of these products during the period.
Non-recurrent expenditure has increased. Due to the extension of payment period by customers, the company has made a provision for doubtful and bad debts of about RMB 81.7 million for trade receivables. In addition, the company also recorded an exchange loss of approximately RMB 7 million during the period because some bank loans were denominated in foreign currencies and were therefore affected by fluctuations in the RMB exchange rate.
The outlook is cautiously optimistic. With the promotion of "Broadband China" in recent years, China's high-speed broadband coverage and the proportion of fiber-to-the-home users have been increasing, and we remain cautiously optimistic about the company's prospects.
Maintain a "buy" rating. As the performance was worse than we expected, we lowered the company's profit forecast and target price. The new target price of HK $1.36 corresponds to 8 times forecast 2017 earnings. As the company's share price has fallen sharply in recent months, the current price has 27% room to rise, so we maintain the "buy" rating.
The main risks include 1) fluctuations in raw material prices, 2) reliance on major customers, 3) fierce competition, and 4) a slowdown in investment in China's telecommunications network.
