Main points of investment

Events:

According to the company's semi-annual report for 2017, the operating income during the reporting period was 287 million yuan, an increase of 33.2 percent over the same period last year, and the net profit was 64.88 million yuan, an increase of 11.4 percent over the same period last year. The net profit after deducting non-return was 58.36 million yuan, an increase of 0.1 percent over the same period last year, and basic earnings per share was 0.74 yuan.

The company expects the net profit from January to September to vary from 84.4 million yuan to 126.6 million yuan, an increase of 0% 50% over the same period last year.

Comments:

With the deepening of marketing channels and the gradual start of the project, the revenue continues to grow rapidly. The company's Q2 achieved revenue of 198 million yuan in a single quarter, an increase of 32.8% over the same period last year, continuing the rapid growth momentum since Q4 last year, mainly due to the deepening expansion after the adjustment of marketing channels and the gradual release of engineering supply. The company increased the intensity of channel sinking in the first half of the year, and the network was further expanded, with the number of specialty stores reaching 1364. In terms of products, the company's revenue from functional modules and basic modules in the first half of the year was 92 million yuan and 156 million yuan respectively, an increase of 9.9% and 58.3% respectively over the same period last year. The company signed a strategic cooperation agreement with Evergrande in May. In addition to the purchase amount of 500 million yuan in three years, the total amount of intentional procurement from 17 to 21 years is expected to reach 1 billion yuan. In addition, there have also been new developments in the development of other real estate developers. It is expected that the volume of the project side will provide a good support for the company's rapid growth in the next few years.

Brand promotion efforts led to a substantial increase in sales costs, the profit end of the pressure is obvious. The company's comprehensive gross profit margin in the first half of the year was 48.4%, a decrease of 1.6 percentage points compared with the same period last year, mainly due to the increase in the proportion of basic module income with lower gross profit margin and the increase in sales volume of engineering channels. In terms of expenses, the company greatly strengthened its brand promotion efforts in the first half of the year. It increased advertising in transportation media such as CCTV and airport high-speed rail, as well as the Internet. During the reporting period, advertising expenses were 18.61 million yuan, an increase of 234.0% over the same period last year, resulting in a year-on-year increase of 110.8% in sales expenses and 14.5% in sales expenses, an increase of 5.3% over the same period last year. In addition, the rate of company management expenses also increased slightly, with an increase of 1.5 percentage points to 11.3% compared with the same period last year, mainly due to the increase in company consulting fees and managers' fees in holding subsidiaries. Financial expenses further decreased, with a total of-5.32 million yuan in the first half of the year, a decrease of 1.68 million yuan compared with the same period last year, and the financial expense rate decreased by 0.2% compared with the same period last year. Taken together, affected by the sharp increase in sales costs, the company's expense rate reached 23.9% during the period, an increase of 6.7 percentage points over the same period last year, putting a lot of pressure on the profit side, resulting in a net interest rate falling 4.8 percentage points to 22.2%. In addition, the company's financial products recognized 6.84 million yuan in investment income in the first half of the year, forming a corresponding non-recurrent profit and loss.

The business expansion of the engineering side brings about changes in the performance of cash flow. The net cash flow generated by the company's operating activities in the first half of the year was 220 million yuan, an increase of 154.2% over the same period last year, mainly due to the 150 million yuan prepaid payment paid by Evergrande, but if the influence of prepayment was excluded, the net operating cash flow decreased by 18.8%. Combined with balance sheet analysis, the balance of the company's accounts receivable continued to grow to 23.56 million yuan, the highest level since listing, mainly due to the continuous expansion of the company's B-end business; the inventory balance increased significantly, from 25.61 million yuan to 68.14 million yuan at the beginning of the year. among them, there is a significant increase in inventory goods and commissioned processing materials, which is expected to be caused by the strengthening of the company's stock preparation under the vigorous situation of production and sales. There was also a substantial increase in prepayments, an increase of more than 40 million yuan over the same period last year. Correspondingly, there is a significant increase in the balance of notes payable and accounts payable, indicating that while increasing the scale of procurement, the company is also transmitting a certain period of pressure to the upstream, so the overall change of cash flow is still within a reasonable range.

Investment advice:

The company's retail channel and engineering channel have made positive progress, but the short-term profit performance due to the expansion of marketing expenses is mediocre. After channel adjustment, the improvement of quality and efficiency of the retail end and the release of engineering sales still need to be further revealed.

In the long run, residents' improved housing purchase gradually occupies a dominant position, and the upgrading of built-in consumption is obviously accelerated. Integrated ceiling can meet the dual needs of consumer decoration and functionality, and has a strong consumer attribute. As the first brand in the industry, the company has a good development prospect.

We expect the company's 2017-2019 net profit to be 152 million yuan, 215 million yuan and 272 million yuan, respectively, and EPS 1.73,2.45 and 3.10 yuan, corresponding to 32,23,18 times PE, maintaining the "buy" rating.

Risk hint: the real estate falls faster than expected, and the competition in the industry intensifies.