Incident: On August 24, 2017, the company released its 2017 mid-year report. According to the interim report, in the first half of 2017, the company achieved a total operating income of 1.2 billion yuan, an increase of 27% over the previous year; the net profit returned to the mother was 29.42 million yuan, a decrease of 25% over the previous year; the net profit returned to the mother after deducting non-recurring profit and loss reached 26.83 million yuan, turning a loss into a profit compared to the same period last year (loss of 13.18 million yuan); as of the end of June 2017, the company's total assets reached 9.8 billion yuan, an increase of 12% over the beginning of the year.
The increase in expenses caused a split between revenue and net profit. The reason for the split between the company's operating income (up 27% year over year) and the weakening of net profit to the mother (25% year over year) was the increase in expenses. In the first half of 2017, the company's total operating costs rose sharply. Among them, operating costs rose sharply by 34% year on year due to the expansion of the financial sector, financial expenses rose 65% year on year due to the increase in financing scale, income tax expenses rose 536% year on year due to the increase in deferred income tax, and R&D investment increased 775% year on year due to the sharp increase in R&D investment in the metal products sector. The gross margins of the company's metal products sector and commercial factoring business segment declined by 2 and 16 percentage points, respectively. After deducting the impact of non-recurring profit and loss, Guimu's net profit turned loss into profit in the first half of 2017, which still shows the company's good profitability.
Mashan Factoring boosts the company's profits. The company acquired 100% of Moshan Factoring's shares in cash in March 2016, becoming the first factoring theme target in the A-share market. The company's factoring business brought in revenue of 350 million yuan in the first half of 2017, accounting for 30% of the company's total revenue (an increase of nearly 4 percentage points over the same period last year). The gross margin of the factoring business reached 22.08%, far higher than the gross profit margin of the main metal products business. During the interim reporting period, Mashan Factoring successfully issued the fourth phase of ABS worth 1.47 billion yuan. This period of ABS protected investors' interests to a greater extent through internal structured stratification, differential payment promises, accelerated settlement events, and credit triggering mechanisms set up by early termination events. By the end of the reporting period, Moshan Factoring had accumulated corporate accounts receivable of nearly 20 billion yuan and issued four phases of ABS, totaling 3.18 billion yuan, making it the industry leader in this market segment. We believe that due to the huge volume of industrial accounts receivable in China (as of June 2017, the net accounts receivable of industrial enterprises above the national scale reached 12.6 trillion yuan), there is broad scope for development in the factoring industry. Farson's own industrial background helps it develop factoring businesses in related industries.
The profitability of the main metal products business declined. Product market demand was weak in the first half of 2017, but while maintaining a reasonable production capacity scale, the company achieved an increase in operating income (up 15% to 820 million yuan over the previous year). At the same time, as the prices of the company's main raw materials, wire bars and zinc ingots continued to rise during the interim reporting period, the company's costs continued to rise, and the profitability of the main business declined (gross margin fell to 7.30%).
Investment advice: Buy an -A investment rating, the target price for 6 months is 10.40 yuan. We expect the company's EPS from 2017 to 2019 to be 0.42 yuan, 0.47 yuan, and 0.50 yuan respectively.
Risk warning: market risk, policy risk, operational risk
