Event: the company released its 2016 semi-annual report, with operating income of 3.29 billion yuan in the first half of 2016, an increase of 6.3 percent over the same period last year, of which the operating income of subsidiary Zhongnuo Communications reached 1.81 billion yuan, and the net profit belonging to shareholders of listed companies was 36.172 million yuan, an increase of 53.1 percent over the same period last year.
4G smartphones infiltrate quickly, and ODM manufacturers share the cake. From January to July 2016, China's mobile phone market shipped nearly 300 million units, an increase of 8.1% over the same period last year, of which 280 million 4G phones were shipped, an increase of 20.4% over the same period last year. By the end of June, China had about 610 million 4G mobile phone users and 780 million non-4G users. According to the layout plan of 5G technology, it will not be officially commercial until at least 2018, and operators are expected to mainly promote the upgrading of their users to 4G in the next three years; for mobile phone manufacturers, the huge demand for 4G smart phones will be the main driver of the performance growth of China's mobile phone market. Due to the high-quality strategy of mobile phone manufacturers and the concentration of shipments, the proportion of non-contract orders and shipments is expected to continue to grow in the next 3 years, and mobile phone ODM will directly benefit.
Mobile ODM business to build the cornerstone of performance. Subsidiary Zhongnuo Telecom has shifted its business focus to the manufacture of mobile phone ODM. SinoCom shipped more than 3 million units in the first half of 2016, ranking first among domestic mobile phone design companies. Sinochem's main customers include Huawei, Lenovo, Xunrui, Zhiyuan and other leading domestic smart electronics manufacturers. At present, the main model shipped is Huawei Changxiang 5, which is more profitable than the old model.
In addition, China Nuo is actively strengthening the expansion of overseas customers, and overseas mobile phone orders will increase significantly. We believe that with the continued popularity of major customers Huawei and the expansion of domestic well-known customers and overseas markets, SinoCom's profitability will continue to improve, providing strong support for the company's performance.
Relying on the big tree, it is expected to benefit from the reform of state-owned enterprises. The company is one of the two holding listed companies of Fujian Electronic Information Group. after listing, it actively realizes the strategic transformation through resource integration, asset reorganization, structural adjustment and so on. Fujian Electronic Information Group is the docking unit of LED, IC, LCD and communications industry between Fujian and Taiwan determined by Fujian Provincial Party Committee and Provincial Government, and builds a 12-inch wafer joint venture with TSU in Xiamen; as a key enterprise in the field of integrated circuits, consumer electronics and LED, the company is expected to become an important pilot target for the reform of Fujian Electronic Information Group, and we expect the company to become an important platform for the group to develop the semiconductor industry in the future.
Profit forecast and investment advice. It is estimated that the EPS from 2016 to 2018 is 0.31,0.39 and 0.48 yuan respectively, and the corresponding PE is 40 times, 32 times and 26 times respectively. The company's net profit will maintain a compound growth rate of about 23% in the next three years. Maintain the "overweight" rating.
Risk hints: the risk that SinoCom's market promotion may fall short of expectations; the risk that the reform of state-owned enterprises may fall short of expectations; and the risk that the performance of mergers and acquisitions may be less than promised.