Core views:
1. Incidents
Yunyi Electric released its 2016 three-quarter report on October 25. In July-September 2016, the company achieved operating income of 125 million yuan, an increase of 55.14% over the previous year; net profit attributable to the parent company was 154.9942 million yuan, an increase of 255.01% over the previous year; basic earnings per share were 0.07 yuan, an increase of 250.00% over the previous year. By the end of September 2016, the company achieved operating income of 380 million yuan, an increase of 23.01% over the same period last year; net profit attributable to the parent company was 77.1805 million yuan, an increase of 50.46% over the same period last year; basic earnings per share were 0.46 yuan, an increase of 38.46% over the same period last year.
2. Our analysis and judgment
(1) Downstream demand increased the share of LIN bus products, and the year-on-year growth rate of revenue in a single quarter reached 55.14%
The company's main products are automotive core electronic products such as automotive rectifiers, regulators, LIN buses, and high-power automotive diodes. It has now entered the supporting system of mainstream joint ventures, supporting SAIC Motor and Changan's own brands, as well as Ford Mondeo and Fox. At present, import substitution has been gradually achieved, and the products compete directly with overseas parts giants such as Bosch, Denso, and Valeo. The rapid increase in revenue in the third quarter mainly benefited from (1) demand release affected by the end of the purchase tax halving policy for supporting downstream models. For example, Changan Ford sold 165,300 units in the third quarter, an increase of 42.50% over the previous year, boosting the company's performance. (2) The LIN bus business grew significantly in the second and third quarter, contributing revenue to 10% of the company's revenue from 1% at the beginning of the year.
(2) Gross margin increased by more than 3 percentage points in a single quarter, and LIN bus volume greatly increased profitability
The gross margin for a single quarter in the third quarter was 34.55%, an increase of 3.32 percentage points over the same period last year. This is mainly due to (1) the acceleration of the company's import substitution process, a further increase in the proportion of supporting joint venture models, and the simultaneous increase in gross margin due to the advancement of high-end customer processes; (2) the optimization of the company's product structure and the rapid increase in the proportion of high-margin LIN bus products. The company's net profit growth rate in the third quarter reached 4.62 times the revenue growth rate during the same period, and profitability increased dramatically.
(3) The acquisition of Yunbo Technology has strengthened its main business. The supply of high-power diodes, which can be expected to develop steadily in the future, has now begun, and Valeo, a leader in the supporting industry, has also entered the final sample delivery stage. During the reporting period, the company acquired 85% of Yunbo Technology's shares, which began to be consolidated in July. Yunbo Technology specializes in automotive regulators. Customers cover domestic and foreign suppliers such as BOSCH, Remy, and Huachuan Electric, and support automakers such as FAW, SAIC-GM-Wuling, Changan, etc., leading the domestic market share. After the acquisition is completed, the company will add 3.8 million sets of regulators to achieve complementary advantages in product structure and customer resources with Yunbo, accelerate the company's import substitution process, which is expected to become another growth point for the company's future revenue and gross margin.
3. Investment advice
Maintain a “Recommended” rating. The company has now successfully entered the supporting system of mainstream joint ventures, bringing new growth points to both revenue and gross margin. At the same time, the release of LIN buses in the second and third quarter made a core contribution to increasing revenue and comprehensive gross margin. Furthermore, the company's acquisition of 85% of Yunbo Technology's shares will further consolidate its main business, which will complement the advantages of product structure and customer resources. We expect the company's net profit to be 125 million and 160 million yuan respectively in 2016-2017, corresponding to dilution of EPS 0.55 and 0.70 yuan, PE48X and 38X, maintaining the “recommended” rating.
4. risk factors
1) The growth rate of supporting vehicle sales was lower than expected due to the economic impact; 2) the progress of acquisition and integration fell short of expectations.