Incident: The company announced that revenue for the first half of 2018 was 1,429 billion yuan, an increase of 216.5% over the previous year; net profit attributable to shareholders of listed companies was 69.33 million yuan, an increase of 307.75% over the previous year. At the same time, the company expects net profit changes of 130 million to 170 million yuan in the first three quarters, with a growth range of 517%-706%.
Tencent's social advertising and WeChat self-media businesses are growing rapidly, and continued high growth can be expected in the future
Looking at the revenue side, the company's revenue in the first half of 2018 was 1,429 billion yuan, an increase of 216.5% over the previous year, of which the Internet information service business revenue was 1,026 million yuan (of which the advertising business was 912 million, and WeChat's self-media business revenue was 94.77 million, which is close to the full year of last year's self-media business revenue), accounting for 71.82% of the company's total revenue, mainly due to the rapid development of the Internet advertising business. The company continues to increase its investment in the advertising business of Tencent's social products represented by WeChat, ranking among Tencent's SMB service providers; communication equipment manufacturing (which mainly operates NetStar) Revenue was 375 million yuan, down 14.64% from the previous year. Under the tough competitive environment collected by operators, the company enhanced the competitiveness of excellent communication network services by actively adjusting the product structure, developing high-margin products, and expanding overseas sales. Overall, the company initially implemented a business development strategy of “combining communication network optimization business and Internet advertising business”.
Looking at the profit side, net profit for the first half of the year was 69.33 million yuan, which is close to the upper limit of the company's previous forecast range (500-70 million yuan). In fact, in the first half of the year, Juwang Technology achieved net profit of 77.1647 million yuan attributable to the parent company, which is higher than the company's overall profit, and is developing rapidly. At the same time, the company's third-quarter performance forecast range was 130 million to 170 million yuan, achieving a sharp increase over the previous year. This is mainly due to the fact that the Internet advertising business of Juwang Technology is estimated to develop rapidly compared to the previous period, with significant consolidation effects. At the same time, in the 3rd quarter, part of the proposed real estate transfer was completed (if all transactions are completed, it is expected to contribute 65 million yuan in disposal revenue).
Looking at gross margin and expense ratio, the overall gross margin for the first half of the year was 14.35%, down 11.35 percentage points from the previous year, mainly due to the increase in the share of advertising business with a low gross profit margin (5%); the net premium business gross profit margin continued to decline from last year (24.31%), reflecting intense competition in the industry; it is worth noting that the rapidly developing self-media business maintained a high gross profit margin of 67.21%. The fee rate for the three items in the first half of the year was 9.93%, down 15.04 percentage points from the previous year, mainly due to the sharp increase in the share of Internet information services. We believe that as the lightweight WeChat Internet business continues to grow at a high rate, the cost rate is expected to continue to decline in the future.
The Nuggets WeChat Traffic Accelerated Monetization Dividend+5G is still waiting to bloom, and the dual main business strategy is worth looking forward to
In terms of emerging business, the company has closely cooperated with Tencent based on long-tail traffic and extensive customer resources accumulated over many years, and high growth in social advertising orders can be expected; the WeChat public account matrix has developed huge fans, and the potential to incubate self-media traffic is huge. In terms of traditional network advantages, the company has always maintained the lead in the industry from products to solutions and services; as well as continuous major breakthroughs in expanding overseas markets, actively adjusting the business structure, and developing and deploying small base stations to prepare for 5G, the 5G era is still worth actively looking forward to.
Investment advice and profit forecast: The company's net profit for 2018-2020 is expected to be 210 million, 320 million yuan and 470 million yuan. It corresponds to PE 24x and 16x from 18-19, reaffirming the “increase in holdings” rating.
Risk warning: WeChat traffic monetization falls short of expectations, competition in the mobile advertising industry is fierce, etc.