Main points of investment:
Factors such as increased competition, industrial policy adjustment and rising prices of upstream materials led to a decline in the company's performance in 2017. Galaxy's operating income in 2017 was 1.624 billion yuan, down 17.99 percent from the same period last year, while its net profit was 187 million yuan, down 39.58 percent from the same period last year. The company's profits fell for the first time since it went public in 2010. In terms of business, the set-top box business achieved sales revenue of 766 million yuan, a gross profit margin of 14.14%, a decrease of 23.74% and 9.75 pct over the same period last year, while the new energy auto parts business achieved sales revenue of 157 million yuan, a gross profit margin of 29.93%, a decrease of 29.25% over the same period last year and 14.28pct. In addition, the revenue and gross profit margin of the intelligent mechanical and electrical business have also declined slightly. Among them, the decline in sales revenue and gross profit margin of the set-top box business stems from the sharp increase in the price of major raw materials (including memory, PCB board and steel plate, etc.) upstream; the decline in sales revenue and gross profit margin of the new energy auto parts business is mainly affected by the adjustment of industry subsidy policies and intensified competition.
Set-top box business to reduce the scale, reduce cost and increase efficiency in response to market pressure. Since the fourth quarter of 2016, the prices of upstream raw materials such as DDR memory, FLASH flash memory and PCB boards have risen sharply, weakening the profitability of set-top boxes. The gross profit margin of the set-top box business was only 14% in 2017, compared with an average gross margin of about 24% from 2010 to 2016. In 2017, the company took the initiative to reduce product shipments (cumulative shipments of more than 3.5 million units), but still suffered a small loss. In the future, the company will continue to reverse the unfavorable business situation by reducing costs, reducing costs and protecting key markets and key customers. At the same time, based on the industry prospect judgment, the company focuses on the two businesses of new energy automobile parts and military equipment.
Strategy refocus, new energy auto parts business to refine and strengthen products. The subsidiary Jiasheng Power supply develops its business around electric vehicle charging products, continues to expand the sales scale of charging piles and charging modules, and focuses on the research and development of vehicle chargers and power supplies. Yinhe Tongzhi New Energy, a subsidiary, focuses on the field of electric vehicle air conditioning compressors. After two years of mass production in 2016 and 2017, the product has the basis for large-scale market promotion, and product serialization and mainframe factory promotion will be carried out in the future. In addition, the company plans to terminate the previous fund-raising project "New Energy Automobile Air conditioning system industrialization Project" and use 425 million yuan of related funds to replenish the flow.
Continue to develop new products to ensure the steady growth of military business. Yinhe electronic military products are mainly military special vehicle parts. In 2017, the company made many achievements in product optimization and technological innovation. In the existing mechanical and electrical products technology of military equipment, the company upgraded the equipment with intelligence, automation and networking, and formed seven professional research directions for the development of supporting market breadth, to create new performance growth points.
Buy back shares to boost investor confidence. Galaxy completed its share buyback in early February 2018: 29.1755 million shares were repurchased with its own funds, with a total amount of about 201 million yuan. The cumulative repurchased shares accounted for 2.56% of the company's total share capital, with the highest transaction price of 8.28 yuan per share and the lowest transaction price of 5.45 yuan per share. The buyback shares will be used as employee stock ownership plans, equity incentive plans, etc. Share buyback helps to maintain the company's secondary market price and enhance investor confidence.
Profit forecast and investment advice. We estimate that the EPS of Galaxy Electronics from 2018 to 2020 is 0.20,0.24 and 0.28 yuan per share, respectively. Taking into account the good development prospects of the company's military industry and new energy vehicle business, and combined with the valuation of comparable companies, we value Galaxy Electronics at 35 times PE in 2018, with a corresponding target price of 7.00 yuan, maintaining the "overweight" rating.
Risk hint. The continuous rise in the price of raw materials (chip, memory, PCB, etc.) has a negative impact on the set-top box business; the risk of bad debts of receivables; the adjustment of military equipment procurement policy may have a negative impact on military business; new product development technology risk.
