Key points of investment:
Lianjun Ceramics is on the same page, and Q3 performance increased significantly. In the third quarter of '17, the company achieved revenue of 166 million yuan, an increase of 113.01% over the previous year; Guimu's net profit was 117.217 million yuan, an increase of 12.30% over the previous year. In the first three quarters of '17, revenue was 387 million yuan, an increase of 83.21% over the previous year; Guimu's net profit was 3212.64 yuan, an increase of 20.78% over the previous year; after deducting non-net profit of 2,80611 million yuan, an increase of 11.59% over the previous year. The increase in performance in the third quarter benefited from 1) Lianjun Ceramics's consolidated performance. 2) The current investment income was 206,200 yuan, an increase of 54.09% over the previous year.
3) Other income for the current period was 1,0538 million yuan. There was no other income for the same period last year. Also, the increase in the three fees in the first three quarters was due to the merger of “Lianjun Ceramics”. Sales expenses increased in the first three quarters (27.1643 million yuan, a year-on-year increase of 64.55%), management expenses increased (41,7672 million yuan, a year-on-year increase of 71.00%), and financial expenses increased (134.38,800 yuan, same period last year - 329,800 yuan).
With capital increases and education, the Daigo Brothers' business changes have been completed, and the prototype of an online and offline education ecosystem is beginning to take shape. On September 24, the company increased Fanxue Education's capital to 20 million yuan. After the capital increase, it held 2.22% of Fanxue Education's shares. On September 30, the business change registration for Daigo Brothers (leading Internet education live streaming technology service provider) was completed, and the company held 51% of Daigo Brothers's shares. By participating in Mingshi Education, holding Daigo Brothers, increasing capital for FanXue Education, and actively deploying the layout of the online and offline education industry, the company formed a synergistic effect of “Internet Education Live Streaming Platform+K12 Counseling” and determined the pace of education transformation.
“Ceramic+Education” is a two-wheel drive, implementing equity incentives in the early stages of transformation to stimulate the enthusiasm of the management team. Currently, the ceramics industry has problems such as unreasonable product structure, supply of high-quality products in short supply, and fierce homogenization competition for low-end products. The company actively adjusts production structures, integrates and optimizes resources, acquires high-quality companies in the industry (such as Lianjun Ceramics), and increases market share. Furthermore, using July 25, 2017 as the award date, the company granted 1.384 million restricted shares to 75 incentive recipients, and completed the grant registration process on September 13, 2017. The total share capital increased by 1.384 million shares accordingly. The company is currently in the early stages of education transformation, and there are high requirements for management motivation and professional ability. The introduction of equity incentives will help the company further improve operational efficiency, attract professional talents, and lay the foundation for subsequent development.
Profit forecasts and investment recommendations. Based on the company's brand and scale advantages in the ceramics industry, the company is expected to maintain steady growth in its main ceramics business. At the same time, since listing, the company has tried many mergers and acquisitions in the education industry, and its persistence in transforming and laying out the education sector can be seen. Since 2016, by investing in Mingshi Education and Daigo Brothers, which have significant regional or product barriers, on the one hand, has brought positive profits and investment returns to the company, and on the other hand, it has also shown the company's strict and responsible attitude in investing in education. Based on the company's investment layout, the company's current main business and target target's past profit trends, and target counterparty performance promises, we expect net profit to be 67.6 million yuan, 96.59 million yuan, and 117.83 million yuan respectively in 2017-2019. The corresponding EPS is 0.76, 1.08, and 1.32 yuan respectively. Compared with other transformational education companies, we gave Songfa Co., Ltd. a 45-fold valuation of the 2017 E45 times, corresponding to the target price of 34.20 yuan/share, and gave it an increase in holdings rating.
Risk warning. The main ceramics business fell short of expectations, extension mergers and acquisitions fell short of expectations, etc.