Main points of investment:
Event: the company released its third-quarter 2017 earnings report on the evening of October 26, 2017. In the third quarter of 2017, the company completed revenue of 352 million yuan (YOY-13.69%) and net profit of 28.275 million yuan (YOY28.31%). In the first three quarters of 2017, the company completed 1.121 billion yuan (YOY8.25%) and realized net profit of 70.27 million yuan (YOY-20.10%).
Investment income in the third quarter led to a pick-up in performance. In the third quarter of 2017, the company's operating revenue fell 55.83 million (YOY-13.69%) year-on-year, and gross profit margin fell 1.76 percent year-on-year, an improvement from the first half of the year, so gross margin fell 19.62 million year-on-year (YOY-19.99%). On the one hand, expenses decreased by 7.05 million compared with the same period last year (YOY-9.08%, but the expense rate increased by 1.02%), on the other hand, investment income increased by 10.35 million (YOY222.10%, is mainly due to changes in accounting preparation for government subsidies), in addition, non-operating profit increased by 3.65 million year-on-year (YOY62.38%, is a breach of contract damages due to tight optical fiber supply). Final operating profit increased by 2.43 million (YOY11.42%) Net profit from homing increased by 6.24 million (YOY28.31%) compared with the same period last year.
The first three quarters were mainly affected by the decline in gross profit margin, and the overall performance declined. In the first three quarters of 2017, the company's revenue increased by 85.418 million compared with the same period last year, but due to the rise in the price of major raw materials such as aluminum ingots and optical fibers, the gross profit margin of the company's products fell by 7.28 percent year-on-year, so gross margin fell by about 57.926 million (YOY-19.25%). On the one hand, the expense rate decreased by 1.08%, while the third fee only increased by 4.44 million (YOY2.21%), on the other hand, the asset impairment decreased by 9.668 million (YOY-64.22%), the investment income increased by 24.319 million (YOY183.63%), the final operating profit decreased by 25.903 million (YOY28.09%), and the homed net profit decreased by 17.677 million (YOY-20.10%).
Power cable business: benefit from the construction of smart grid during the 13th five-year Plan. The company is one of the few domestic enterprises with mature power and optical cable production technology, with obvious advantages in core technology and the top two in market share for many years in a row. During the 13th five-year Plan period, the investment in smart grid construction remains high, with a total investment of 175 billion yuan. As one of the major suppliers of transmission line materials for State Grid and Southern Power Grid, the company is expected to benefit from its performance.
Communication cable business: 5G has a huge development prospect and actively arranges submarine cables. In recent years and during the 13th five-year Plan period, 5G R & D will be supported by major special projects. The company's industry is the middle link of the communications industry chain, corresponding to 5G related market prospects. At the same time, the company has completed the acquisition of group assets through optical information (the main communication optical fiber cable, the main customers are China Mobile Limited, China Unicom, etc.), the business scope of the new subsidiary, and the establishment of a new subsidiary Haimen Guan optical wire, further broaden the related product structure and consolidate the leading position in the industry.
In addition, the company actively arranges submarine cables and announced in April 2017 that it intends to jointly establish China Shipping Ocean Engineering Co., Ltd. in the future, it is also expected to benefit from the broad development space brought by the construction and maintenance of cable high-end products such as submarine optical cable, submarine optoelectronic composite cable and related marine engineering.
Equipment cable business: the localization of aerospace cables is urgently needed. The company has the qualification of production access for military products, and is the qualified supplier of related products of Aviation Industry Corporation of China, Aerospace Science and Technology Group, Aerospace Science and Industry Group and China Electric Power Group, and ranks in the market share of equipment and cables. In 2014, the phase-stabilized cable passed the design appraisal review, laying the foundation for the comprehensive opening of the military phase-stabilized cable market. At present, the company's aerospace cables have been used in bulk instead of similar foreign products, and it is the first company in the domestic cable industry to obtain the comprehensive capability evaluation of Comac suppliers. It is imperative to replace the import of aerospace cables in the future. at the same time, according to the relevant news report of CAAC on September 19, 2017, 730 C919 aircraft have been ordered, and the company is expected to participate in taking a share of the broad market.
Flexible cable business: acquisition of de-rou cable, improve the layout of high-end special cable. In June 2017, the company acquired 51% stake in Derou Cable in cash and increased its capital by 2 million yuan.
Derou promises that the deduction non-net profit in 2017, 2018 and 2019 will not be less than 6.304 million yuan, 7.9092 million yuan and 11.8638 million yuan respectively, and the total deduction for three years will not be less than 26.077 million yuan. Derou Cable is committed to high-end flexible cables and their solutions, and its products are mainly used in high-speed robots and their integration, port machinery and unmanned terminals, automobile automatic production lines, high-precision numerical control equipment and railway rail vehicle cables, etc. at present, the market share is increasing, gradually reversing the situation that high-end flexible cables rely on imports. This acquisition will improve the company's layout in the field of high-end special cables and enhance the company's position in the industry.
The parent company, Tongguang Group, has high-quality in-vitro assets and is expected to deposit and inject. In June 2017, the company announced that due to the great changes in the objective situation of the securities market and the uncertainty of the order size at the present stage of the transaction, the company terminated the purchase of 100% equity interest in Tongguang Ocean Optoelectronics, the assets of Tongguang Group, the controlling shareholder. In the future, after the market of Tongguang marine optoelectronic products is stable, the company does not rule out the possibility of continuing to plan for acquisition. In addition, the net profit of Tongguang Group in 2015 was 200 million yuan (the company's net profit in the same period was only 90 million yuan). In 2016, mergers and acquisitions included Changlong Electric, Jingli Electric and Jinbo Technology. As the only listed company in the group, the company is expected to deposit high-quality external assets.
Profit forecast and investment advice. It is estimated that the EPS of the company from 2017 to 2019 is 0.40,0.50,0.72 yuan respectively. Taking into account the company's low performance this year, while the acquisition of major shareholder assets has not been completed, but the subsequent performance growth and asset injection expected changes are worth looking forward to, combined with comparable company valuation, give the company 2018 25 times PE, target price 12.50 yuan, "overweight" rating.
Risk hint. (1) uncertainty of military orders; (2) intensification of competition in the civilian products market; (3) uncertainty injected into assets.