3Q2017 performance meets expectations
Liyuan refined announced 1-3Q2017 results: operating income was 2.37 billion yuan, an increase of 27% over the same period last year; net profit attributed to the parent company was 450 million yuan, an increase of 8.7% over the same period last year, corresponding to 0.37 yuan per share; net profit after deducting non-parent net profit was 440 million yuan, an increase of 9.5% over the same period last year. 3Q17's single-quarter operating income was 860 million yuan, up 24% from the same period last year, down 0.6% from the previous year, and its net profit was 140 million yuan, down 0.8% from the same period last year and 33% from the previous year. The decline in the company's third-quarter results from the previous quarter was mainly due to a decline in gross profit.
Comments: 1) the gross profit margin in the third quarter decreased compared with the same period last year and month-on-month. 3Q2017 gross profit margin fell 5.1ppt/7.7ppt to 31.9% year-on-year / month-on-month respectively, mainly due to rising costs (domestic aluminum prices rose 20% year-on-year / month-on-month 11% respectively in the third quarter of this year). The company adopts the "aluminum price + processing fee" product pricing model to reduce the impact of aluminum price fluctuations. 2) the financial expenses of 1-3Q2017 increased by 22% compared with the same period last year, affecting EPS by about 0.03 yuan. Financial expenses in the third quarter increased by 25% compared with the same period last year and 14% from the previous quarter. 3) the sales cost of 1-3Q17 increased by 72% compared with the same period last year, mainly due to the increase in product sales.
Trend of development
Increase investment in Shenyang Liyuan to provide financial support for business development. Shenyang Liyuan Rail Transit equipment Co., Ltd. is the main contractor of the company's rail vehicle manufacturing and aluminum profile deep processing construction project. After the completion of related projects, the company will have an annual production capacity of 1000 passenger rail vehicles (EMU, aluminum alloy metro, stainless steel metro), 1000 aluminum alloy trucks and 60,000 tons of aluminum profile deep processing products.
At present, the project has entered the final stage and is progressing smoothly, which will help the company to further achieve transformation and upgrading. In September, the company approved a plan to increase the capital of Shenyang Liyuan by 3 billion yuan with self-raised funds, of which 1 billion yuan is used to increase registered capital, which helps to enhance the financial strength of subsidiaries and further tap the growth potential.
Profit forecast
Based on hypothetical changes such as costs, we have lowered our earnings per share forecasts for 2017 and 2018 by 9 per cent and 8 per cent respectively from RMB0.57 and RMB0.65 to RMB0.52and RMB0.60 respectively.
Valuation and suggestion
At present, the company's share price corresponds to 18.1x 2018e P Universe E. We maintain our recommended rating and target price of 16.30 yuan, which is 48.99% upside from the current share price. The target price corresponds to 27.1x 2018e Phand E.
Risk
The progress of the project is not as expected, and the price fluctuation of raw materials is higher than expected.
