Investment advice
The target price was lowered 48% to 5.8 yuan/share, and the rating was lowered to neutral. The reasons are as follows:
Gross margin declined sharply, which dragged down performance. The company released 1H17 results: operating income of 4.473 billion yuan (YoY +0.91%); net profit attributable to the parent company of 190 million yuan (YoY -26.62%). The overall gross margin was 14.95% (YOY-2.56 pct). Among them, the gross margin of the media agency business fell 3.65 pct year-on-year, dragging down performance. The main reason was that the media agency business of traditional channels (such as TV station subscriptions) was hit hard by competition from new media, etc., and the gross margin of the new advertising business was low; at the same time, high-margin digital marketing revenue increased by only 12.52%, which failed to offset the downward impact of media agencies.
The performance of subsidiaries fell short of expectations, and the risk of impairment of goodwill increased. In order to cope with the downturn in traditional media agents, some of the company's acquisitions took the initiative to reduce the scale of traditional businesses, but the digital marketing transformation was not on track. Among them, Yarun Culture (loss of 2.88 million yuan), Shanghai Kaida (net profit of 15,000 yuan, promise fulfillment of 0.03%), and Guangzhou Zhongmao (net profit of 1.61 million yuan) performed the least well. The net goodwill of the companies mentioned above has accumulated 501 million yuan, and the risk of future impairment will increase.
We are in a painful period of transformation, but our brand and business advantages still exist, and we look forward to reversing the decline.
Currently, the company's traditional media agency business is being impacted by competition, gross margin is under pressure, and net profit may continue to be dragged down in the short to medium term; the risk of impairment of goodwill of some subsidiaries has not yet been released.
The company is actively transforming into a comprehensive marketing group with digital marketing as the core. By establishing big data alliances, developing big data products to expand the scope of services and increase profit margins. In the future, as the transformation deepens, performance may be expected to achieve restorative growth.
Our biggest difference from the market. Looking at the short to medium term, the risk of goodwill impairment may increase or further drag down performance. However, the company's comprehensive competitive strength is still strong, and if it successfully achieves digital transformation, it is expected that the decline will be reversed.
Potential catalyst: The performance of M&A targets has improved dramatically, and the digital marketing business is growing rapidly.
Profit forecasting and valuation
Net profit attributable to the mother in 17/18 was reduced by 41%/39% to 410 million yuan/489 million yuan respectively. If you consider Shanghai Tuochang Trading, the net profit for exam preparation in 17/18 was 48/549 million yuan, and the EPS exam preparation was 0.26/0.31 yuan (none of the above takes into account potential impairment of goodwill).
The target price was lowered 48% to 5.8 yuan/share (the original target price of 14.50 yuan was adjusted to 11.15 yuan after 10 revolutions of 3), corresponding to the 22x/18x price-earnings ratio in 17/18, and the rating was lowered to neutral, considering the company's profit decline, the risk of impairment of goodwill, and the overall downward valuation center.
risks
There is a risk of impairment of goodwill, and progress in business transformation has fallen short of expectations.
