Key points of investment:
Incident: On the evening of August 17, 2017, the company released its 2017 semi-annual report. In the first half of 2017, the company achieved operating income of 887 million yuan (YOY 15.96%) and achieved net profit of 27.523 million yuan (YOY 1077.86%).
Higher gross margins and government subsidy programs have led to a sharp increase in profits. Benefiting from increased product sales, higher product prices, and product structure optimization in the first half of 2017, the company's revenue increased 122 million (YOY 15.96%) year on year, and gross margin increased 6.22 percentage points year on year, so gross profit increased 64 million (YOY 159.92%) year over year. Operating profit increased 8.32 million (YOY 848.98%) due to a year-on-year increase in expenses of 1.33 million (YOY 16.68%) and asset impairment losses increased by 27.99 million (accounting for bad debts). Benefiting from the acceptance and transfer of government subsidy projects before 2017, non-operating profit increased by 16.87 million (YOY 1249.63%), total final profit increased 25.19 million (YOY 1081.12%), and net profit of the mother increased 25.18 million (YOY 1077.86%) over the same period last year.
Military materials business: The military aluminum alloy market has great potential, and the company will continue to explore the military products market in the future. Aluminum alloy/aluminum-based composites are one of the key materials used in the military industry. They play an important role in the lightweighting and strong protection of army equipment and in reducing the weight of navy/air force equipment, and have great potential for the future military market. Since entering the military industry in 2014, the company has made great progress after 3 years of hard work. It has successfully participated in the research and development of several new types of equipment, and some products have already begun to be shipped in small batches. Currently, the company uses its subsidiary Yinbang Defense as a platform to promote military products business. According to the semi-annual report, some of the company's projects are expected to receive batch orders this year and will soon enter the batch supply stage.
3D printing business: 3D printing of military and civilian products is widely used, and the company is expected to get a share of the vast market in the future. On the military side, 3D printing technology has been applied to military aircraft and aviation turbofan engines such as China's J-20, J-31, Yun-20, etc.; on the civilian side, 3D printing is widely used in many fields such as civil aviation and medicine. The company's subsidiary Feierkang is an international leading supplier of 3D printed titanium alloy powder, and has a wide range of applications and a good reputation in the aerospace field. Among them, Feilicon is the only supplier of metal 3D printed parts for the C919, providing 31 metal 3D parts for each C919. According to Xinhuanet, there are currently 600 C919 orders, and there is huge market space for Feilikang related businesses in the future.
Civil materials business: Performance is expected to benefit from the release of production capacity+improvement in gross margin and operating efficiency+increase in downstream demand. The company's civil materials product production and sales rank high in the industry. Downstream customers include Valeo, Tesla, Huawei, Oppo, etc. On the one hand, the company's IPO fundraising project released production capacity in 2016, increasing annual production capacity from 75,000 tons to 200,000 tons. At the same time, with the improvement of the product structure and the improvement of the company's overall management level, product gross margin and daily operation efficiency have improved. On the other hand, according to the semi-annual report, the first mobile phone using the company's materials has already been put on the market in batches, and it is believed that it will appear on more phones soon. We believe that the company's civil materials-related performance is expected to continue to benefit from the release of production capacity, improved operating efficiency, and increased demand for downstream applications in the future.
Complete the second phase of employee shareholding, which is optimistic about stimulating the company's long-term development. On the evening of June 21, 2017, the company announced that it had completed the second phase of the employee stock ownership plan (the purchase of 1808,3012 shares of the company's shares, accounting for 2.20% of the company's total share capital, with an average purchase price of 8.898 yuan; the source of funding was provided by employees themselves). We expect that the employee stock ownership plan will form a long-term and effective incentive and restraint mechanism, fully mobilize the enthusiasm and creativity of employees, and better promote the company's long-term stable development in the future.
Profit forecasts and investment recommendations. The company's 2017-2019 EPS is expected to be 0.25, 0.37, and 0.49 yuan respectively. Combined with comparable company valuations, the company was given 52 times the PE in 2017, with a target price of 13.00 yuan, and a purchase rating.
Risk warning. (1) Uncertainty about military orders; (2) Competition in the civilian goods market intensifies; (3) Cost control of aluminum materials falls short of expectations.