2017 performance is in line with expectations, 1Q18 performance is lower than expected
Leo AG announced 17-year results: operating income of 10.573 billion yuan, an increase of 45.06%, net profit of 421 million yuan, a decrease of 25.13%, and a deduction of 306 million yuan of non-net profit, a decrease of 41.2%. Every 10 shares will be paid a cash dividend of 0.11 yuan (including tax). At the same time, the 1Q18 results were announced: operating income was 2.848 billion yuan, up 35.75%; net profit was 110 million yuan, down 26.73%; lower than expected, mainly due to a sharp decline in net profit in the manufacturing sector.
Trend of development
Marketing business revenue has increased significantly, but the gross profit margin has declined due to industry trends. In 17 years, the revenue of the Internet sector of the company was 8.376 billion yuan, an increase of 58.31% over the same period last year, and the proportion of revenue increased by 6.64pct to 79.23%. Affected by the trend of the agency industry, gross profit margin decreased by 4.38pct to 13.08%. Pump business achieved revenue of 2.151 billion yuan, due to the rise in raw material prices, gross profit margin decreased 6.59pct.
A number of adverse factors led to a 17-year decline in profits, 1Q18 was dragged down by the downturn in the water pump business. In addition to the decline in gross profit margin, goodwill impairment, bad debt provision and other factors are the main reasons for the decline in 17-year deduction of non-net profit: the operating performance of Zhiqu Network did not meet the expected goodwill impairment of 100 million yuan, Letv system and other individual provisions for bad debts of receivables exceeded 80 million yuan. Without considering the impairment of goodwill, the net profit of 6 marketing companies exceeded 500 million yuan, and the basic operation was normal. 1Q18's net profit continues to be affected by negative factors such as exchange losses in the water pump business, increased depreciation of fixed assets and amortization of intangible assets due to the opening of new plants, and lower gross profit margin due to higher raw material prices. We expect the full-year net profit of the water pump sector to be basically the same as last year.
1H18 performance is expected to grow rapidly, and the impact of adverse factors in the dimension for the whole year is expected to improve. The company estimates that the net profit of 1H18 is 3.51-447 million yuan, an increase of 10-40%, corresponding to the net profit of RMB 2.41-337 million of 2Q18, an increase of 43-99%. It is expected that the investment income resulting from the sale of equity in some investment projects will be recognized. From the perspective of the whole year, the company actively deals with the problems in the water pump sector, further strengthens the business cooperation of marketing companies, enhances the influence of Leo digital network in the industry, and maintains steady growth.
Profit forecast
Due to the downturn of the water pump business and the pressure on the gross profit margin of the marketing business, without considering the investment income for the time being, we lowered our 2018 profit forecast by 21.3% to 622 million yuan, and introduced a profit forecast of 693 million yuan in 2019.
Valuation and suggestion
The company's current stock price corresponds to 2018 Universe 23 times Pmax E in 1919. Due to the strengthened cooperation of the main marketing industry and continued steady growth, the company maintains the recommended rating, but reduces the target price by 30% from 4 yuan to 2.8 yuan, corresponding to 25 times Phammer E in 18 years. There is 10.2% room compared to the current stock price.
Risk
Zhiqu network goodwill impairment risk, water pump business remains in the doldrums.