Event

On October 25, the company released its three-quarter report of 2018, with operating income of 996 million yuan in the first three quarters, an increase of 2.77% over the same period last year, and net profit of 84.13 million yuan, an increase of 0.04% over the same period last year.

Main points of investment

The results in the first three quarters are in line with expectations, and the performance in the fourth quarter is worth looking forward to.

The company is a leading provider of software and hardware for radio and television digital television. due to factors such as the decline in the prosperity of the industry and the reduction of goodwill in 2017, the net profit of 36.5 million decreased by 84% compared with the same period last year. It has entered a new growth period since 2018, with a net profit of 84.13 million yuan in the first three quarters, 2.3 times that of 2017.

Fourth-quarter performance is something to look forward to. Looking back at the 2015-2017 data, Q4 accounted for 44 per cent, 32 per cent and 28 per cent of revenue, respectively, and more than 35 per cent of profits (Q4 losses were reduced due to goodwill in 2017).

The gross profit margin is basically stable and the expense rate is properly controlled.

In terms of profitability, the overall gross profit margin in the first three quarters of 2018 was 40.26%, compared with 40.69% in the same period last year, which remained basically stable. The company's expenses were properly controlled, and the expense rate fell to 33.79% in the first three quarters, down 4.26 percentage points from the same period last year.

Smart terminal business is expected to achieve significant growth throughout the year.

Operator IPTV business continues to grow rapidly, and the company's smart terminal product shipments increased by more than 60% in the first half of the year compared with the same period last year, and continued to ship in the operator markets of 13 provinces. The three-quarter report shows that the company's inventory increased by 30.38%, accounts payable increased by 56.69%, and cash paid for goods and services increased by 59.29%, all due to the obvious growth of smart terminal business, and is expected to further achieve significant growth for the whole year.

CA is still the main driving force of the company's medium-term growth.

Driven by the high-definition intelligent replacement of set-top box and the upgrade of Guomi, the number of CAS smart cards issued in 2018-20 is expected to increase by 26%, 39% and 48% respectively compared with the same period last year, entering the business cycle. The company's CAS smart card has the first market share in China, and the first provincial state secret CAS project in the first half of the year will fully benefit the development of the industry. At the same time, DRM copyright protection is expected to open a new space for development.

Profit forecast and valuation

We maintain the previous forecast that the company's net profit from 2018 to 2020 is expected to be 99 million yuan, 143 million yuan and 206 million yuan respectively, the EPS is 0.07,0.10 yuan and 0.14 yuan respectively, and the corresponding dynamic price-to-earnings ratio is 45,31,22 respectively.

Risk Tips:

The investment in the radio and television industry is not as strong as expected, and the number of CAS smart cards issued is not as expected.