Matters:
The company released its 2018 semi-annual report on August 29. During the reporting period, the company achieved operating income of 1,200 million yuan, an increase of 6.24% over the previous year; it achieved net profit of 41 million yuan, a year-on-year decrease of 59.53%, lower than expected. Our comments on this are as follows:
Comments:
The economy is under pressure and the industry is in recession, and performance in the second quarter was less than ideal. The company achieved revenue of 564 million yuan in 18Q2, down 16.96% year on year and 11.32% month on month; Guimu's net profit loss was 190 million yuan, down 115.35% year on year. The reasons are: 1) Sinko Electronics Technology was influenced by the mobile phone industry and the transformation of new products has not yet yielded benefits; 2) the gross margin of some products in the modified plastics business is lower than the same period last year; 3) the Congo Gold crude cobalt hydroxide smelting project, which produces 3,000 tons of metal tons per year, is still in the investment period, and upfront costs are high, and no profit has been generated. By product, the revenue of modified plastics was 888 million yuan, up 7.67% year on year, but gross margin decreased 3.80% year on year; CNC metal precision structural parts revenue was 225 million yuan, up 11.64% year on year, gross margin fell 0.12 pct year on year, and the company's current profitability declined somewhat.
Competition for modified plastics is fierce, and the company is actively seeking a way out. Affected by increased competition in the downstream industry and rising raw material prices, the company's gross profit of modified plastics fell 3.8%. As a leader in the modified plastics industry, the company has continued to increase investment in R&D in recent years to ensure the continuous improvement of technological innovation capabilities. The company strives to increase the development and promotion of new products and high-margin products, optimize the product structure, and expand market share in other application segments. Furthermore, the company controls costs through fine management. Under the premise of ensuring product quality, the company keeps costs at a lower level to ensure the competitiveness of the company's products. We are optimistic about the future recovery of the company's profitability.
Societe Generale made strategic adjustments, and the transformation experienced pain. In the first half of 2018, domestic brand phones were shipped 176 million units, a year-on-year decrease of 18.6%; smartphones were shipped 185 million units, a year-on-year decrease of 17.8%. Societe Generale Electronics was affected by the downturn in the mobile phone industry, which dragged down profit growth. In response, Sinke Electronic Technology carried out product upgrades and began developing and producing e-cigarettes and other products, but the new products have not yet had an effect. Future product launches are expected to contribute to revenue.
The Congolese cobalt business is progressing smoothly and is expected to bring new growth points in performance. The company has set up a company in Congo Gold to open up channels for international cobalt business. The company's cobalt product trading activities have gradually begun, and many batches of cobalt hydroxide products have been shipped from Congolese Gold in the form of shipping; the 12337 mineral rights were successfully transferred from prospecting rights to mining rights; and the crude cobalt hydroxide smelting project with an annual output of 3,000 tons of metal in the Congo Gold is progressing. It is expected that this business will greatly increase the company's profit level in the long term and become one of the company's important growth points in the future.
Risk factors: 1) Competition in the modified plastics and metal CNC industry intensifies; 2) the construction of crude cobalt hydroxide smelting projects fell short of expectations; 3) Fluctuations in raw material prices.
Maintain a “buy” rating. We expect that the profit levels of the company's various businesses will recover in the second half of 2018, and the cobalt business will be a potential performance flashpoint. Maintain the company's 2018-2020 EPS forecast at $0.43/0.52/0.66, and maintain the target price and “buy” rating of $22.7.
