Event

The company released its 2017 half-yearly report. In the first half of 2017, the company achieved operating income of 353 million yuan, and the net profit attributed to the shareholders of the parent company was-18 million yuan, up 8.46% and 42.69% respectively over the same period last year.

Revenue growth, gross profit margin increase, loss narrowing

The domestic optical and lithium battery markets maintained steady growth in the first half of the year. The company's optical processing business achieved an operating income of 186 million yuan, an increase of about 4.39% over the same period last year, accounting for 52.67% of the operating income. The operating income of lithium battery processing business reached 130 million yuan, an increase of 13.43% over the same period last year, accounting for 37%. Most of the narrowing of the loss comes from the increase in gross profit and a small part comes from the increase in non-operating income. Gross profit margin rose to 12.6% from 7.2% in the same period last year, the highest level in recent years, indicating that China Electric Power Haikang's involvement in the company has had a positive effect. The increase of gross profit margin comes from the implementation of lean production, reducing costs and tapping potential. Non-operating income mainly comes from profits from the disposal of fixed assets and a small amount of government subsidies. Regardless of the ongoing major asset restructuring project, the company proposes to achieve sales of 800 million yuan in 2017 to reverse losses.

Carry out lean production and optimize organization and management

The company promotes lean production to reduce costs and tap potential as much as possible. At the same time, the company optimizes the organizational structure, improves human resources, production safety and supply chain management, strengthens financial management, information standardization construction, and tamps the foundation of enterprise management. Liu Xiang, chairman of the company, once served as deputy general manager of CLP Haikang and director of Haikangwei. Liu Rui, general manager of the company, worked at Sunny Optical for ten years and served as group vice president. Their industry experience in Haikangwei TV and Sunny Optical will bring Phoenix Optics into the fast lane of rapid growth.

Improve the R & D system and launch new products

The company improves the R & D process and technical quality system, continuously enhances the R & D capability of new projects around new business, and promotes quality system certification and customer quality improvement. During the reporting period, the company established a project management system for research and development, accelerated the progress of new product development, completed 8 new product trials and mass production of 10 new products, including 6 of monitoring and other lens products, 10 of which were converted to mass production, and 2 of car lens products, in order to better meet customer needs and further develop the market.

Focus on the main business and speed up the liquidation and withdrawal of loss-making subsidiaries

The company is listing to sell its 3360.62 million shares in Shangrao Bank, accounting for 1.97 per cent of its total share capital. The listing price is not less than 107 million yuan, and the value-added is 78 million yuan. If the sale is successful, it will increase the non-recurrent profit and loss of that year, the corresponding profit will increase by about 58.5 million yuan, and the EPS will be thickened by about 0.246 yuan. At the same time, the company is also selling properties in Xi'an.

In April and May 2017, the company cancelled its controlling subsidiaries Phoenix Optics (Shanghai) Co., Ltd., and Nanchang Phoenix-Pan Fulai Professional camera Co., Ltd. Phoenix Optics (Guangdong), a holding subsidiary, is also about to be cancelled. The sale of some assets and the closure of subsidiaries will help the company to reduce losses and focus on its main business.

Actively integrate resources to prepare for transformation and upgrading

The company is actively integrating resources and expanding the application field of optical products. Based on independent products and supplemented by OEM and ODM, the company builds four pillars supporting the future development of Phoenix Optics: optical lens, image module, electronic components, movement engine, and realizes the application of optoelectronic products in digital cameras, cameras, intelligent monitoring, automotive, smart wearable and intelligent manufacturing and other industries.

In 2016, the company acquired a 49% stake in Phoenix Optical Security (Shanghai) Co., Ltd., a wholly-owned subsidiary of the company, and increased capital by 10 million yuan to speed up industrial upgrading and product transformation. In 2016, the company increased its capital and shares in Suzhou Xieyi, holding a 26% stake in the company. Suzhou Xieyi has resources and experience in on-board lenses. All these are conducive to the company's industrial transformation and upgrading, extend the industrial chain, expand and strengthen the optical lens business.

The company plans a major asset restructuring and intends to issue shares to acquire 100% stake in Haikang Technology. The issue price and the number of shares issued are 22.15 yuan per share and 32.5056 million shares respectively, with a total price of 720 million yuan. It was accepted by the CSRC in June 2017 and is still under review. Once the reorganization is completed, the company will add intelligent controller, Internet of things, smart device business. Haikang Science and Technology promises that the net profit attributable to the owner of the parent company after deducting non-recurring profits and losses from 2017 to 2019 will not be less than 0.53,0.65 and 75 million yuan. This helps to improve the profitability of the company. Part of the company's functions in Hangzhou, where Haikang Technology is located, is conducive to attracting high-end talent.

Layout lens and module business, take advantage of the opportunity to develop rapidly

The business of the company and Haikang Technology are highly complementary. The company lacks experience in electronic processes, while Haikang Technology has rich experience. The company's business is extending from lenses to lenses, and the manufacturing process of optical lenses, including design, R & D and manufacturing, is being improved. after joining the electronic process of Haikang Technology, the lens and electronic process are superimposed to make image modules. The combination of optical component processing advantages and high-quality electronic R & D and manufacturing capabilities to open up every link from lens to module to terminal application will accelerate the company's transformation from traditional optical processing business to image module business. to provide customers with opto-mechatronics solutions. From lenses to lenses, the output value has the possibility of expansion, while from the lens business to the module business, the output value may increase several times or even ten times.

At present, with the penetration of ADAS, the vehicle camera industry has entered a stage of rapid development. Haikang Weishi is a leading video surveillance enterprise, the company's products in its upstream, is expected to enter its industrial chain. All these are conducive to the rapid growth of the company's performance.

Sunny Optical's successful person has the first experience.

The company will transform from traditional optical processing business to lens and image module business, and the company will have a very similar business structure with Sunny Optical in the future. Sunny Optical Technology (2382.HK), formerly known as the second Optical instrument Factory of Yuyao City, was listed in Hong Kong in 2007 after transformation and development, and has now become one of the largest optical parts and optoelectronic module companies in China. The company's main business is divided into three parts: optoelectronic products (modules), optical parts (lenses, lenses), optical instruments (microscope, optical measurement and analytical instruments).

In 2007, the company's operating income was 1.39 billion yuan and its net profit was 225 million yuan. The company's performance was basically flat in 2008 and 2009. Then, with the help of the rapid penetration of smartphones, car cameras and the rise of domestic mobile phone brands, the company's operating income and net profit entered a period of rapid growth for seven consecutive years, with an annual growth rate of about 40%. In 2016, the company's operating income was 14.61 billion yuan and net profit was 1.27 billion yuan. Sunny Optical is already the world's largest supplier of mobile camera modules and the second largest lens supplier in the world. it has the largest shipments of car lenses in the world and is a Hong Kong stock star company with a market capitalization of HK $105.9 billion. The company's optoelectronic products provide multi-megapixel dual camera modules for a number of domestic smartphone brands, and have begun to mass produce ultra-thin non-bracket front dual camera modules. The company's optical parts can provide high-end products such as multi-megapixel dual photography, 1300 megapixel wide angle, 1600 megapixel large aperture / optical anti-shake, 6p mobile phone lens above megapixel, VR/AR equipment lens and so on.

The revenue growth of the company's optoelectronic products (modules) is significantly higher than that of optical parts (lenses and lenses), accounting for 78% and 20% of revenue in 2016, respectively, from 37% and 53% in 2007. In 2016, the company's gross profit margin for optoelectronic products, optical parts and optical instruments was 10.5%, 39.8% and 40.4%, respectively. Thus it can be seen that optoelectronic products (modules) are the most important driving force for the rapid growth of business income, while optical parts (lenses, lenses) have higher gross profit margins, and their contribution to gross profit is basically the same. Optical parts (lenses, lenses) and optoelectronic products (modules) are the most valuable parts of the company.

Sunny Optical's development path points out the direction for the company.

Phoenix Optical's original optical business has a domestic first-class and world-leading processing level, and the company's business is extending from lenses to lenses. Combined with Haikang's leading electronic process, it will accelerate the transformation from traditional optical processing to image module business. The company absorbs the R & D and management experience of China Electric Power Haikang, with the help of the business synergy of Haikangwei, and with the rapid development of vehicle, security and other industries, we believe that the company's performance will enter a period of rapid growth. the future output value is expected to reach several times or even ten times the scale, the company's industrial layout to learn Sunny Optical is worth looking forward to.

Key hypothetical point

The key assumptions for the company's earnings forecast for 2017 to 2019 are as follows:

1. The company will complete the acquisition of Haikang Technology this year, and the results will be consolidated from December.

2. Vehicle and security lenses began to ship in 2017. with the improvement of management level and product technology, the gross profit margin increased year by year.

3. The camera module began to ship in 2018. With the improvement of management level and product technology, the gross profit margin increased slightly year by year.

4. Security lenses and security camera modules will contribute more revenue with the help of the business synergy with Haikangwei TV.

5. The operating income of the existing optical processing business, mainly digital cameras, remains unchanged. With the improvement of the management level and the technical content of the products, the gross profit margin improved greatly in 2017, and then increased slightly year by year.

6. the business income of cell processing and optical instruments has maintained an annual growth rate of 10%, and the gross profit margin has increased slightly in the previous two years.

7. The operating income of the precision processing business will remain unchanged, and the gross profit margin will change from negative to positive and increase year by year.

Profit forecast and investment suggestion

2017 is the key year for the transformation and upgrading of the company. Although the company's medium report predicts that the net profit from the beginning of the year to the end of the next reporting period may be at a loss, in view of the fact that the company is still in a period of transition, asset restructuring, product research and development, and management improvement are all in progress. It is expected that the company will enter a stage of rapid development after completing the early adjustment and accumulation.

Regardless of the non-recurrent gains and losses of additional issuance and the sale of Shangrao Bank for the time being, we predict that the company's operating income from 2017 to 2019 will be 875 million yuan, 3.284 billion yuan and 5.425 billion yuan respectively, with a growth rate of 17%, 275% and 65%, respectively. From 2017 to 2019, the net profit of the company belonging to the shareholders of the parent company was 7 million yuan, 172 million yuan and 316 million yuan respectively, with a growth rate of 106%, 2515% and 90% respectively. The corresponding EPS from 2017 to 2019 is 0.03,0.65 and 1.23 yuan respectively. The corresponding price-to-earnings ratios are 665, 32 and 17 respectively. According to the consistent forecast of Wind, the price-to-earnings ratio of Sunny Optical, the industry leader, is 48 in 2017, and the average price-to-earnings ratio of the industry is 42. According to the average valuation of the comparable company, we give the company 40 times PE in 2018, corresponding to the target price of 26 yuan. For the first time, coverage gives an "overweight" rating.

Risk hint

The risk of M & An integration; the risk of intensified competition in niche areas; the risk that the progress of research and development is not as expected.