Key points of investment:
Maintain the “prudent increase” rating and raise the target price. Performance fell slightly short of expectations, operations continued to decline, and the company's future transformation layout and profit prospects for its own brands are still uncertain. We lowered the 2016-18 EPS forecast to -0.14/-0.16/-0.16 yuan (previously 0.00/0.04 yuan in 2016-17) and raised the target price by 6.40 yuan, corresponding to 8.5 times P/S in 2016, a careful increase in the rating.
The main business was adjusted, and net revenue and profit both declined. 1) Revenue for the reporting period was 308 million yuan (-5.06%), mainly due to continued low demand in the middle and high-end sports knitted fabrics and garments market. Guimu's net profit was -37 million yuan (-19.48%). The loss was due to the company's multiple layout, the impact of various expenses such as the construction of production bases in Hubei and Pakistan and private brand investment; 2) Q2 revenue was 164 million yuan (+20.23%), which rebounded, but net profit dragged down H1's performance, with operating profit of -28 million yuan (-30.11%) and net profit of -24 million yuan (-35.92%).
Expenses have risen slightly, and profit levels have declined. The overall gross profit margin was 20.05% (-0.87pct), which is basically the same. The sales/management expenses ratio is 17.63% (+0.08pct)/15.25% (+0.82pct), which is basically the same. The financial expense ratio was 5.95% (+1.87pct), mainly due to an increase in bank loans and an increase in interest expenses. The net interest rate is -13.61% (-1.95pct), mainly due to large deferred income tax effects.
Supply chain changes have consolidated the main business, and participation in subsidiaries may obtain agency rights for Nintendo. 1) The production base in Hubei has basically been completed, and the synergistic effect of production orders from Shanghai, Hubei and Pakistan is expected to consolidate the main middle and high-end sports textile fabric business and enhance profitability; 2) Participate 25.87% in Panliu Software. The latter is an official developer certified by Nintendo and Sony, involving the development of original mobile games. It is expected to obtain agency rights for “Pokemon Go” in the future, or exceed market expectations.
Risk warning: domestic and foreign demand continues to be sluggish, transformation does not meet expectations, etc.