Key points of investment:
Incident: On the evening of October 26, 2017, the company released its three-quarter report. In the third quarter of 2017, the company achieved revenue of 511 million yuan (YOY 41.62%) and achieved net profit of 21.57 million yuan (YOY 368.97%). In the first three quarters, the company achieved revenue of 1,399 million yuan (YOY 24.19%) and achieved net profit of 5.986 million yuan (YOY -42.13%).
Looking at the third quarter, production fell short of expectations due to equipment failure rates, higher costs, and significant year-on-year losses in performance. The company's revenue in the third quarter of 2017 increased 150 million (YOY 41.62%) year-on-year. The growth rate fell short of expectations mainly due to high summer temperatures. The failure rate of production equipment increased sharply compared to previous years, leading to a decline in production capacity and product production and sales. Furthermore, due to the decline in production capacity, sales orders for some products were completed through external processing, which led to an increase in costs, so gross margin fell 1.51 percent year over year, so the final gross profit increased by only 4.17 million (YOY 14.57%). Furthermore, due to a year-on-year increase of 12.82 million in three fees (YOY 32.23%) and a year-on-year decrease in non-operating profit of 18.93 million (YOY -93.11%, mainly due to a decrease in government subsidies in the third quarter), the final operating profit fell 10.61 million year-on-year, which was a loss of 22.94 million yuan, and the net profit of the mother fell 29.53 million yuan year on year, to a loss of 21.57 million yuan.
In the first three quarters, increased asset impairment and reduced investment returns eroded profit levels. In the first three quarters of 2017, the company's revenue increased 272 million (YOY 24.19%) year on year, and gross margin increased 3.69% year on year, so gross profit increased 68.25 million (YOY 99.36%) year over year. Furthermore, mainly due to a year-on-year increase of 25.85 million in three fees (YOY 21.93%), asset impairment increased by 29.82 million (negative in the same period last year, due to preparations to make up for bad debts), and a year-on-year decrease of 12.46 million in investment income (YOY -90.09%, due to the disposal of financial assets in the same period last year, which brought 14.5 million profits from disposal of financial assets in the same period last year), the final return profit decreased by 4.35 million (YOY -42.07%).
Military materials business: The military aluminum alloy market has great potential, and the inflection point of the company's military products business is gradually approaching. Aluminum alloy/aluminum-based composites are one of the key materials in the military industry. They play an important role in reducing the weight of army equipment and in reducing the weight of navy/air force equipment, and have great market potential. Since 2014, the company has cooperated with relevant military research institutes and participated in several new equipment research and development. Some products have already been shipped in small batches. Currently, all relevant qualification certifications have been completed, and the subsidiary Yinbang Defense is used as a platform to promote military products business. According to the semi-annual report, some of the company's military products projects are expected to receive batch orders this year. It is believed that some military products will soon enter the batch supply stage. We believe that the inflection point of the company's military goods business is gradually approaching, and the future is worth looking forward to.
Civil materials business: Performance is expected to benefit from the release of production capacity+expansion of downstream demand. The company ranks among the highest in the industry in terms of production and sales of civil materials products. Currently, customers include Valeo, Midea, Gree, Supor, Huawei, Oppo, etc. On the one hand, the company's 2016 IPO fundraising project freed up production capacity. On the other hand, according to the semi-annual report, mass production of the new alloy developed by the company for Tesla has already begun. Furthermore, the first mobile phone using the company's materials has already been put on the market in batches, and I believe it will appear on more phones soon. We believe that the company's civil materials-related performance is expected to continue to benefit from the release of production capacity and the expansion of demand for applications such as downstream consumer electronics in the future.
3D printing business: 3D printing is the key to technological innovation in military equipment manufacturing. At the same time, civilian products are widely used. I am optimistic that the company will participate in sharing a broad market in the future. 3D printing is the key to future military manufacturing innovation. It has been applied to military aircraft and aviation turbofan engines such as J-20, J-31, and Yun-20; at the same time, it is widely used in many civilian fields such as civil aviation and medicine. The subsidiary Feierkang is a leading metal 3D printing company in China and a leading international supplier of titanium alloy powder. It is also COMAC's official qualified batch supplier of 3D printing parts, and the only supplier of 31 metal 3D parts on the C919. We believe that China's 3D printing will develop rapidly in the next few years. The market size is expected to reach 30-45 billion yuan in 2020. At the same time, C919 has ordered a total of 730 units so far, and the company's 3D printing related business is expected to participate in sharing the broad market.
Complete two phases of employee shareholding, which is optimistic about stimulating the company's long-term development. The company officially completed the second phase of the employee stock ownership plan in June 2017. A total of 133 participants were the company's core personnel and key employees. The funding came from the employees themselves. Buying 18083 million shares of the company (accounting for 2.20% of the company's total share capital) with an average purchase price of 8898 yuan/share, we expect that the employee stock ownership plan will form a long-term and effective incentive and restraint mechanism to fully mobilize the enthusiasm and creativity of employees, and better promote the company's long-term stable development in the future.
Profit forecasts and investment recommendations. The company's 2017-2019 EPS is expected to be 0.19, 0.31, and 0.46 yuan respectively. Combined with comparable company valuations, the company was given 56 times the PE in 2017, with a target price of 10.64 yuan, giving a purchase rating.
Risk warning. (1) Uncertainty about military orders; (2) Competition in the civilian goods market intensifies; (3) Cost control of aluminum materials falls short of expectations.