Event: the company released its 2018 interim report. In 2018, H1 achieved an operating income of 591 million yuan, an increase of 29.16% over the same period last year, and its net profit was 74 million yuan, an increase of 1.95% compared with the same period last year.
Rapid growth in revenue and decline in order growth: the company's Q1 and Q2 revenue were 200 million yuan and 390 million yuan respectively, an increase of 59.5% and 17.4% over the same period last year, mainly because the current report also shows the revenue of Zhengzhou Water and Zhongwei International. The net profit of the parent company was 16 million yuan and 58 million yuan, up-44.7% and 32.3% over the same period last year, mainly due to the increase in expenses during the ① period, the lower-than-expected performance of ② M & An enterprises, and the provision for impairment of goodwill led to a decrease in net profit. The growth rate of the company's orders declined in the first half of the year, with the newly signed orders worth 860 million yuan, down 33.24% from the same period last year.
During the period, the cost pulled down the profit margin, and Q2 improved significantly: the company's expense rate during the 2018H1 period was 16.5%, a sharp increase of 9.4% over the same period last year, of which the sales expense rate was 1.6%, an increase of 1.2% over the same period last year, because ① increased its marketing efforts, wages and marketing expenses increased, and ② also listed the Zhengzhou water sales expenses. The management expense rate was 12.3%, an increase of 6.5% over the same period last year, mainly due to the increase in consulting fees arising from ① 's acquisition of subsidiaries, the increase in amortization costs resulting from ② 's increase in construction qualifications, and the increase in ③ 's management expenses for Zhengzhou Water and Zhongwei International; the financial expense rate was 2.5%, an increase of 1.7% over the same period last year, mainly due to the increase in capital requirements and the increase in bank borrowing. The company's 2018H1 gross profit margin was 33.7%, an increase of 8.3% over the same period last year, but due to the sharp increase in expenses during the period, the net profit margin was 13.4%, down 2.5% from the same period last year. Q2 gross profit margin, period expense rate and net interest rate were all greatly improved, with a gross profit margin of 36.1%, an increase of 6.9 percentage points from the previous month, a period expense rate of 14.3%, a decrease of 6.3% from the previous month, a net interest rate of 15.1%, and an increase of 7.3% over the previous month.
The marginal improvement of cash flow is in line with the law of the industry: the net operating cash flow of 2018H1 Company is-216 million yuan, an increase of 0.92% over the same period last year, and the margin has improved. The net outflow of operating cash flow is in line with the law of the garden industry, mainly due to the increase in advance payment caused by the large-scale construction of orders on hand. The net cash flow of investment was-147 million, down 200.85% from the same period last year, mainly due to the payment of equity payments for mergers and acquisitions.
M & A performance is not as expected, waiting for synergy to be highlighted: the company acquired Zhengzhou Water and Zhongwei International in the second half of 2017, these two targets have strong synergy with the company's main business, and the company can use Zhengzhou water construction qualification to expand the scope of orders. And use Zhongwei International's strong design capabilities to enhance its competitiveness. In 2018, Zhengzhou Water and Zhongwei International promised net profits of 47 million yuan and 19.5 million yuan respectively, and the actual 2018H1 net profits were 10.81 million yuan and 3.66 million yuan respectively. However, from the point of view of the change of the expense rate during the period, compared with the cost during the Q1 period, Q2 has been greatly improved. It is expected that the running-in between the company and the M & An enterprise is getting better and better, and the synergy is expected to be highlighted.
Profit forecast and rating: the company's operating income and home net profit are expected to grow at a compound growth rate of 24.91% and 18.66% from 2018 to 2020, maintaining a "buy" rating.
Risk hint: business development is not up to expected risk, receivables and cash flow risk, M & A performance or synergy is lower than expected risk.