Report summary:
The decline in 2017 H1 performance was due to the company falling short of expectations. In the first half of 2017, the company achieved revenue of 4.473 billion yuan, an increase of 0.91% over the previous year; net profit attributable to the parent company was 190 million yuan, a decrease of 26.61% over the previous year; net profit attributable to the parent company after deduction was 180 million yuan, a decrease of 27.84% over the previous year.
The company's gross profit was drastically reduced during the reporting period, down 13.82% year-on-year from the same period in 2016. The company expects to achieve net profit of 171 million to 299 million yuan from January to September 2017, a year-on-year decrease of 30%-60%. The main reason for this is that due to industry segmentation, some subsidiaries are still in the transformation and upgrading stage, their ability to withstand risks is weak, the performance of some mergers and acquisitions companies has not met expectations, and there is a phenomenon of impairment of goodwill. On the cost side, the company set a fixed increase to supplement working capital in the second half of 2016. Financial expenses fell 43.88% from the same period last year, but R&D expenses increased 12.11% year-on-year, and the rest of the expenses remained relatively stable.
The company's shareholding structure is scattered, and mixed reform dividends can be expected. Among them, Guangxin Holdings, the majority shareholder, held 15% of the shares, and the top ten shareholders of the company included four social security funds. The social security funds held a total of 8.71% of the shares.
The shareholding structure of Shengguang Co., Ltd. is still relatively scattered. During the reporting period, Guangxin Group further increased its holdings to 15.3% by an amount of 4,074 million yuan. Furthermore, the company distributed cash dividends (cash dividend of 0.38 yuan for every 10 shares), adjusting the exercise prices of stock options in 2015 and 2016 to 17.98 yuan/share and 10.67 yuan/share respectively. There is still some room for the current stock price of 7.45 yuan (closing price on September 6). Under the big wave of mixed reform of state-owned enterprises, the majority shareholders took the lead in launching the first mixed reform of state-owned enterprises in Guangdong. The increase in the holdings of Guangxin Holdings, the recent dividend distribution of provincial shares, and the adjustment of the options plan all show that the company is progressing smoothly in the mixed reform of state-owned enterprises.
The rise of digital marketing is expected to become a new pillar of the company's business. In the first half of 2017, the company's media agency business revenue was 2,487 billion yuan, accounting for 55.59% of total revenue, a decrease of 3.48%; the digital marketing sector achieved revenue of 1,635 million yuan, accounting for 36.54% of total revenue, an increase of 12.52% over the same period. In a situation where competition in traditional industries is increasing, the company's top big data service providers inside and outside the United Nations have created more than 100 diverse and customized big data products, increased customer stickiness, and increased digital marketing revenue significantly in a short period of time. It is expected that digital marketing will become the mainstay of the company's revenue in the future.
Provincial Guanghanwei and Shanghai Tuochang, which invested and established the company, laid out integrated marketing and mobile marketing respectively. 1) The company plans to establish a joint venture with Havas S.A., to establish Provincial Guanghan Weishi. Provincial Guangzhou Co., Ltd. holds 49% of the shares. The company will use Havas S.A.
Advantages in international network services accelerate the company's layout of integrated marketing and communication. 2) The company acquired 80% of Shanghai Tuochang's shares to lay out mobile marketing. The company used its own capital of 528 million yuan to acquire 80% of Shanghai Tuochang's shares. The growth rate of the mobile Internet advertising industry is far higher than the average of the entire Internet advertising industry. Furthermore, the company has guaranteed performance promises. Shanghai Tuochang's net profit in 2017-2019 was no less than 60 million, 75 million and 88 million yuan respectively.
The company continues to deepen the strategic planning of the six major business segments of brand marketing, digital marketing, media marketing, content marketing, scenario marketing, and its own media.
Investment advice: Profits from the company's traditional media agency business have shrunk, and the digital marketing business may become the backbone of the company's profits. The company's revenue is expected to rise sharply when it has bottomed out. According to the increase in the company's majority shareholders' holdings, the social security fund's heavy shareholding, and the company's equity incentive plan, there is still some room from the target price. The company's largest shareholder, Guangxin Holdings, was one of the first enterprises in the mixed reform of state-owned enterprises in Guangdong, and the social security fund held 8.71% of the shares. However, it is important to note that the company will lift the ban on 214 million shares and expire on September 22, accounting for 15.12% of the shares traded before the ban was lifted. It is recommended to pay attention.
We expect the company to have net profits of 773 million, 921 million and 1,161 million yuan in 2017-2019, EPS of 0.44 yuan, 0.53 yuan and 0.67 yuan, and corresponding PE 16 times, 14 times and 11 times, giving a “buy” rating.
Risk warning: M&A integration risk, goodwill impairment risk, market competition risk.
