Investment suggestion

The company's operating income maintained rapid growth, but due to a decline in gross profit margin and a sharp increase in financial expenses, net profit fell sharply compared with the same period last year. We downgraded the company to neutral and lowered the target price to 1.90 yuan. The reasons are as follows:

Internet business has led to the rapid growth of operating income, and the intensification of industry competition has put pressure on gross profit margin. The company released the 2018 mid-term report that the revenue from the Internet business reached 5.452 billion yuan, an increase of 54.48% over the same period last year, accounting for 83.07% of the total revenue, which led to a 43.35% year-on-year increase in total revenue. However, due to fierce competition in the industry and an increase in the proportion of media agency business, the gross profit margin of the Internet business fell by 5.90pct to 8.70% compared with the same period last year. At the same time, the company's manufacturing income reached 1.086 billion yuan, due to the rise in raw material prices, the opening of new factories and exchange rate changes, the gross profit margin decreased 5.17pct. In addition, the company expects a net profit of 2.2-310 million yuan from January to September, down 50% and 30% from the same period last year.

Financial expenses increased significantly, and net profit fell by more than 40% compared with the same period last year. The company's first-half net profit was 170 million yuan, down 46.57% from the same period last year, falling into the lower range of the forecast. In addition to the decline in gross profit margin, the increase in interest expenses is also the main reason for the decline in net profit. Due to the expansion of the business scale, the company's bank short-term loans at the end of the reporting period increased by 97% compared with the same period last year, while the interest on convertible bonds in the first half of the year was amortized about 27.76 million yuan, resulting in financial expenses reaching 93.37 million yuan, an increase of 222% over the same period last year.

Planned to acquire Suzhou Mengjia, the digital marketing layout looks forward to the next city, but the rising costs lead to a decline in profits compared with the same period last year. The company recently signed a letter of intent with Wechat flow leader Suzhou Mengjia. Previously, the company has basically covered the complete digital marketing industry chain through mergers and acquisitions. Through this acquisition of Mengjia, the company has gained access to Wechat traffic covering 280 million fans, consolidating the integrated marketing business advantage. In the short term, despite the rapid growth of digital marketing revenue, the long-term profit improvement remains to be tested due to the relocation of office buildings, the rise in personnel costs and financial costs, and the decline in business profits compared with the same period last year.

What is the biggest difference between us and the market? We are optimistic about the company's digital marketing layout and long-term development potential, but increased competition in the short-term industry and high financial costs may continue to affect performance.

Potential catalyst: digital marketing business integration is not as expected, interest payments continue to be too high.

Profit forecast and valuation

Based on the above analysis, without taking into account the impairment of goodwill, the net profit of 1812.19 will be reduced by 19% to 543 million yuan, YoY 19.3% to 8.0%, corresponding to 22.7X/21.0X. At the same time, the rating was downgraded to neutral and, taking into account the downward shift in the valuation hub, the target price was lowered by 32 per cent to 1.90 yuan, corresponding to the 18gamble 19-year 20.9X/19.3X E, with 7.3 per cent room for decline.

Risk

The acquisition company's performance falls short of expectations, goodwill impairment risk, increased competition in the digital marketing industry, and losses in machinery manufacturing business.