1H17 performance meets expectations

Contact Interactive to announce 1H17 results: operating income is 3.77 billion yuan, up 538.96% over the same period last year; net profit belonging to the parent company is 31.45 million, down 83.8% from the same period last year, corresponding to earnings per share of 0.01 yuan per share. The net profit of 2Q17 was-39.62 million, down 141.02% from the same period last year, while the non-net profit deducted from the mother was-39.17 million, down 148.6% from the same period last year.

Trend of development

1. The performance is in the middle of the forecast. 1) operating revenue increased by 539%, mainly due to 3.395 billion of e-commerce and distribution revenue brought by Newegg consolidated tables in the second quarter, and a substantial increase in e-commerce sales revenue. 2) the gross profit margin fell by 36.9ppt to 19.93%. The main reason is that the gross profit margin of new e-commerce and dealer business during the reporting period is only 14.5%, and the ratio of operating income is as high as 90.1%. 3) the cost has increased significantly. Contact building depreciation and smart hardware research and development costs to increase management costs by 300.7%. The interest expense resulting from the increase in bank borrowing led to an increase in financial expenses to 88.65 million.

2. Fierce competition in the market. The decline in investment by Internet advertisers has led to a decline in revenue from their own business. The revenue of application distribution and digital operation business reached 257 million yuan, down 46.7% from the same period last year. But the gross profit margin reached 68.6%, an increase of 0.96ppt over the same period.

3. The company is expected to play a synergistic effect with Newegg in terms of capital, channels and ecology in the future. Newegg effectively complements the company's online sales channels, helps promote and expand hardware products, and tamps the intelligent hardware ecosystem. The company is pushing ahead with the acquisition of the remaining 37.8 per cent stake in Newegg, which will be 93.5 per cent after the acquisition. Although Newegg has made a slight loss, with the completion of the company's integration of Newegg, follow-up synergies are expected.

Earnings forecast We have lowered our earnings per share forecasts for 2017 and 2018 by 44% and 41% from 0.20 yuan and 0.24 yuan to 0.11 yuan and 0.14 yuan, respectively. It is mainly due to the fact that Newegg has greatly increased the cost of R & D investment.

Valuation and suggestion

At present, the company's share price corresponds to the 2017 80x Pram E. We maintain the recommended rating, but lower the target price by 30.0% to 10.50 yuan. Mainly due to the fact that the profits of the main business are significantly lower than the previous forecast. Based on the segment valuation method, the company is given 17 years of main business 24xP/E, corresponding to the target market value of 5.8 billion, the total (including Newegg) target market value of 23 billion.

Risk

The competition of application distribution business is intensified, and the operation capacity of Newegg is lower than expected.