3Q17 performance meets expectations

Leo shares announced 3Q17 results: operating income of 7.743 billion yuan, an increase of 54.2% over the same period last year; net profit belonging to the parent company was 445 million yuan, an increase of 2.2% over the same period last year, falling into the forecast net profit range of 4.36 yuan to 566 million yuan, in line with expectations; corresponding to a profit of 0.08 yuan per share.

Trend of development

Revenue is growing normally and gross profit margins are under pressure as a drag on net profit. The company's gross profit margin for the first three quarters of 2017 was 15.9% (YoY-6.9pct). Of this total, the third quarter operating income was 3.165 billion yuan (YoY+61.7%), the net profit was 126 million yuan (YoY-22.4%), and the gross profit margin was 13.5% (YoY-8.3pct). The revenue growth of the company's digital marketing business sector is steady, but the digital marketing subsidiary represented by Wansheng Weiye has been intensified by industry competition, resulting in a continuous decline in gross profit margin and a drag on net profit.

The utility of the scale of the rate is prominent. In the first three quarters of 2017, the sales expense rate, management expense rate and financial expense rate were 4.0%, 4.6%, 0.7%, respectively, and the year-on-year change was-0.5pct/-1.6pct/+0.2pct. The scale of sales expenses and management expenses was highlighted, and the interest expense increased rapidly with the increase of bank borrowing. The net cash flow of the company's operating activities in the first three quarters of 2017 was-330 million yuan, down 170 million from the same period last year, mainly due to changes in settlement policies between the company, the client and the media.

The digital marketing industry chain is complete, and the annual performance is growing steadily. The company expects to return to its mother in 17 years with a net profit of RMB 563-731 million, an increase of 0-30% compared with the same period last year. The company constructs a digital marketing service system from horizontal and vertical dimensions, achieving full coverage of head media, long-tail media and precision media, and partially sacrificing gross profit margin in order to increase market share and maintain competitiveness in the environment of intensified competition in the industry. as a result, the profit growth rate is temporarily lower than the revenue growth rate, in the long run, relying on high-quality media and customer resources, professional technical teams and multi-channel launch design. Profit margins are expected to pick up.

Profit forecast

Taking into account the fluctuations in the water pump business and the continued decline in gross profit margin, we have lowered our earnings per share forecast for 2018 by 6% from 0.15 yuan to 0.14 yuan.

Valuation and suggestion

At present, the company's share price corresponds to 17 EPS 28.3X/25.3X 18 years. We maintain the recommended rating, but raise the target price by 6.67% to RMB 4.00, which is 20.85% upside from the current share price.

Risk

The competition in the digital marketing industry intensifies, the performance of the acquisition company falls short of expectations, and the goodwill impairment risk.