Summary of the report
1H16 performance explosive growth. Revenue in the first half of 2016 surged 243.6 per cent year-on-year to 1.91 billion yuan, with manufacturing / O2O/ exchanges accounting for 29.9 per cent of revenue, 65.2 per cent and 4.9 per cent respectively. Manufacturing ASP rose 16.7 per cent year-on-year to 3.5 million yuan per tonne amid a rebound in international silver prices, driving related revenue up 114 per cent to 430 million yuan. Driven by economies of scale, operating profit margins improved by 2 percentage points year-on-year to 7.2 per cent, which led to a year-on-year increase in 1H16 net profit of 586.7 per cent to 94.24 million yuan.
O2O business growth is gratifying. Since 2014, the company has expanded from traditional smelting business to downstream O2O business, and 1H16-related revenue has increased significantly by 480.5% to 1.24 billion yuan compared with the same period last year. B2C online sales account for about 70% of 1H16 O2O business revenue. As of June 30, the company's "Golden Cat and Silver Cat" platform registered more than 2.9 million members, with 33.6 PV/ UV/ IP 15.8 million times per month respectively. At present, the platform has more than 130 own and third-party brands to provide customers with diversified products. On the other hand, the company has more than 130 O2O stores as of the end of June, mainly including franchise stores, providing customers with offline shopping experience and support services. The company introduces a new multi-brand store concept, "CSmall Golden Cat and Silver Cat". Unlike a single-brand store, it is essentially a small shopping mall that sells three to eight silver jewelry and jewelry brand products, providing customers with a wide range of choices to meet their needs and tastes.
Silver trading business is beginning to bear fruit. The total transaction volume of the company's 1H16 silver trading business is more than 130000 tons, with a transaction value of 560 billion yuan and a contributed income of 93.62 million yuan. Shanghai Huatong, a subsidiary of the company, is currently the largest silver spot trading center in China, with more than 300 member units covering more than 80% of domestic silver production enterprises, and 42 silver brands have been identified. Its official website China Baiyin.com daily spot silver quotation is the universal pricing basis for China's silver industry. The company will also gradually internationalize its exchange business. the company has signed a memorandum of understanding with the Dubai government commodity department and has jointly established a central platform for commodity settlement and financing in the Shanghai Free Trade Zone.
Maintain a "buy" rating. The company currently trades on a dynamic price-to-earnings ratio of only 8.0 2016E/17E 5.1 times. We believe that I) the stabilization of silver prices will lead to a rebound in upstream business performance; ii) O2O business is developing faster than expected; and iii) Silver trading business entering the harvest period is expected to become an upward catalyst for share prices. We give the company a target price of HK $3.33 based on the SoTP valuation method, reiterating the company's "buy" rating.
Risk tips: I) Silver prices fell sharply; ii) O2O business development did not meet expectations; iii) Exchange-related policy changes.
