Main points of investment:
The net profit of 17Q1-Q3 increased by 31%. In 2017, Q1-Q3, the company's operating income was 331 million yuan, an increase of 40.3% over the same period last year. The net profit of shareholders belonging to listed companies was 54 million yuan, an increase of 30.7% over the same period last year. The net profit of non-return companies was 52.7 million yuan, an increase of 28.7% over the same period last year. In the single quarter of Q3 in 2017, the company's operating income was 133 million yuan, an increase of 38.4% over the same period last year. The net profit returned to the company was 25.96 million yuan, an increase of 27.6% over the same period last year. The net profit after deducting non-return was 24.72 million yuan, an increase of 23.2% over the same period last year. The rapid growth in performance was mainly due to the increase in software development and technical maintenance income of the company over the same period last year. The company's performance has shown a trend of rapid growth in the past year, with 16Q3/16Q4/17Q1/17Q2/17Q3 revenue growth of 55.8%, 34.2%, 57.6%, 29.3%, 38.4%, respectively, and net profit growth of 192.5%, 120.8%, 65.7%, 15.5% and 27.6%, respectively.
How to understand the sustained and rapid growth of the company's performance. The company's performance has shown rapid growth for five consecutive quarters, and in the field of domestic bank IT, the company's performance is at a relatively rapid growth level. We believe that the main reasons include: (1) related to the product structure, the proportion of software product revenue is gradually increasing. From 2014 to 2016, the company's software revenue accounted for 80.1%, 87.2% and 90.5% respectively, and system integration revenue accounted for 17.1%, 7.9% and 5.4%, respectively. It can be seen that the proportion of software products with high gross profit margin, reflecting the company's product ability and core competitive advantage has increased significantly. The slight decline in the company's performance in 2015 is mainly related to the decline in system integration revenue in that year. We believe that this does not preclude the company from taking the initiative to reduce the volume of system integration business in order to optimize its business structure. Moreover, in the 2015 IPO investment project, the company increased its investment in banking core business systems, software product delivery and inclusive financial cloud services. (2) it is related to the structure and quantity of customers. In the early days, the company mainly served Bank of China Ltd. system, including Bank of China Ltd. and BOC Hong Kong (Holdings) Limited. Therefore, the early corporate revenue structure is characterized by a relatively large share of Bank of China Ltd. system revenue (nearly 80 per cent in 2012) and a large share of overseas revenue (48 per cent in 2011). In recent years, the company's customer structure has been gradually optimized. According to the top five customers disclosed in the company's annual report, we estimate that the revenue of Bank of China Ltd. system will account for about 60% in 2016. The number of domestic customers has gradually increased. At present, the company's customers include Bank of China Ltd., BOC Hong Kong (Holdings) Limited, Bank of East Asia, Wing Hang Bank, Dah Sing Bank, Agricultural Bank Of China and so on.
Invest 7.5% equity in Shenzhen Baosheng Village Bank. In September 2017, the company plans to subscribe for 5350 shares of Baosheng Village Bank at RMB 78.11 million, accounting for 7.5% of the total shares after the completion of the issuance of Baosheng Village Bank. At present, the investment matter has been examined and approved by the company's board of directors, and it needs to be submitted to the general meeting of shareholders of the company and the shareholders' meeting of Baosheng Village Bank, and approved by Shenzhen Banking Regulatory Bureau before it can be implemented. At present, the top three shareholders of Shenzhen Baosheng Village Bank are Luoyang Bank Co., Ltd. (45.5%), Shenzhen Yuanyu Industrial Development Co., Ltd. (9.1%), and Shenzhen Tongwei Asset Management Co., Ltd. (9.1%). In 2016, Shenzhen Baosheng Village Bank had total assets of 6.478 billion yuan, operating income of 309 million yuan and net profit of 111 million yuan. We believe that the company has accumulated deep in the field of business processes of large commercial banks, served Bank of China Ltd. for many years, and accumulated for many years in the understanding of banking business and the IT realization of business processes. This investment in Baosheng Village Bank is conducive to the expansion of business model and the opening of business space.
The third equity incentive since listing. On September 23, 2017, the company disclosed the 2017 restricted stock incentive plan (draft). The number of shares the company intends to grant to the incentive target is 3.1663 million shares, accounting for about 3% of the total share capital of the company when the incentive plan was signed. The recipients include the company's core technical (business) personnel, managers, etc., a total of 174 people, and the restricted stock price granted is 21.26 yuan per share. The stock source of the equity incentive is for the company to issue A shares to the incentive object. The performance indicators of the companies covered by the restricted stock incentive scheme are: based on 2017, net profit growth in 2016-2019 is no less than 10%, 20% and 25%. The company estimates that the amortized cost of the equity incentive from 2017 to 2020 is 569000 yuan, 6.534 million yuan, 3.17 million yuan and 1.34 million yuan respectively. The equity incentive program is the third since the company went public, and the first two restricted stock awards were completed in May 2016 and May 2017, respectively. We believe that the company continues to absorb and gather core technical personnel through equity incentives, which will help to enhance the company's core technology competitiveness in the field of bank IT.
Profit forecast and investment advice. We believe that the IT experience of large commercial banks accumulated by the company is expected to be gradually reflected in terms of product capability and customer expansion. In addition, the company's layout in the field of Fintech is also in an orderly manner, including cooperation with IBM in the field of blockchain and Qian Fangjin in the field of financial payment and blockchain (its subsidiary has been established in Hong Kong). We estimate that the company's EPS for 2017-2019 will be 1.07 pound 1.47pm 1.97 yuan. Refer to comparable companies in the same industry, give 2017 dynamic PE 50 times, 6-month target price 53.50 yuan, maintain the "buy" rating.
Risk hint. The risk of customer expansion is lower than expected and the risk of Fintech business development is lower than expected.
