What happened: the share price of Junzhi Group (1300 HK) fell sharply last Friday. The company held a conference call after the close. The summary is as follows:
Management denied rumors raised by investors about financial fraud and equity pledge by major shareholders. The Chairman stressed that there were no plans for stock lending or reduction, and there were plans to increase shareholdings in the short term.
The recent business progress is good: management said that recent orders from China Mobile (the company's largest customer, accounting for more than 50% of revenue contribution) are relatively strong, and the business prospects are promising in the second half of the year. At the same time, after the rights issue in October, the company's operating cash flow and net debt level (from about RMB 640 million in the middle of the year to 340 million) has improved significantly; the company expects operating cash flow to become positive at the end of the year (mid-year operating cash flow is-206 million). In addition, the company is confident that it can maintain its current gross profit margin and have room to improve its operating efficiency.
Return on the 4G investment cycle: communications equipment companies often face tight cash flow in the middle of the year, and operators usually make large-scale repayments at the end of the year. At the same time, the second half of the year is the peak for the implementation of traditional operators' capital expenditure; in particular, China Mobile aims to build 200000 4G base stations this year. The company's growth prospects remain optimistic in the second half of the year.
Attractive valuation: keep the profit forecast for 2013-14-15 at 0.30 pound 0.36 13/14PE; the target price based on the DCF model is HK $3.9, equivalent to 8.6 times RMB 10.4 pound. After a sharp correction in the share price, it is now valued at about 5.8cm 4.8 times 13/14PE. Attractive valuations and maintain buy ratings.
Catalyst: 4G licensing is approaching, operators'4G capital expenditure implementation is accelerating; 4G brings better-than-expected results in the second half of the year.
Risks: 4G licensing, operator 4G capital expenditure postponement; increased competition brings higher-than-expected ASP pressure
