3Q18 performance meets expectations

Leo AG announced 1~3Q18 results: operating income was 9.86 billion yuan, up 27.4% over the same period last year; net profit from home was 251 million yuan, down 43.67% from the same period last year, falling into the forecast net profit range of 2.23-312 million yuan, in line with expectations; corresponding to earnings per share of 0.05 yuan.

Trend of development

The scale of the digital marketing business continues to grow, but gross margins are under pressure. The company's 3Q18 achieved revenue of 3.3 billion yuan, an increase of 4.26% over the same period last year, and a net profit of 80.43 million yuan, down 36.34% from the same period last year, deducting 61.27 million yuan from non-parent net profit, down 46.64% from the same period last year. The scale of the company's digital marketing business continues to expand, but due to changes in the competitive landscape of the industry and a further increase in the proportion of media agency business, while the water pump manufacturing sector, due to rising raw material costs and the opening of new plants, led to increased depreciation, which led to pressure on profitability. 3Q18 gross profit margin fell 2.43pct to 11.07% year-on-year.

Sales and management rates have improved, but financial costs have continued to increase. With the expansion of revenue and the strengthening of the company's fine operations, the company's 1~3Q18 sales rate decreased by 0.97pct to 3.03% compared with the same period last year, and the management fee and R & D fee totaled 3.93%, a decrease of 0.63pct compared with the same period last year. However, the increase in bank borrowing led to interest expenses, amortized interest after the interest on convertible bonds was in place, and financial expenses increased by 131% to 128 million yuan compared with the same period last year, dragging down the overall profitability.

The forecast for the whole year is lower than expected, or there may be an impairment of goodwill. The company forecasts a net profit of 211 million to 295 million yuan in 2018, down 50 percent from the same period last year. Mainly because in the fluctuating internal and external environment, the company's interest expenditure increases, the profitability of the manufacturing sector decreases and is affected by exchange rate changes, the gross profit margin of digital marketing business decreases, intelligence or goodwill impairment risk.

Profit forecast

Based on the above reasons, we have lowered our 2018 Universe 19e profit forecast by 44.4% from 0.09 to 0.05 by 20% to 0.08 from 0.10.

Valuation and suggestion

The company's current share price maintains a neutral rating of 20.4 times Ppace E at 35.5 times Ppace E in 1919, but lowered its target price by 23.7% from 1.90 yuan to 1.45 yuan due to a revision in earnings forecasts, corresponding to 16 times Phand E in 19 years, which is 10% lower than the current share price.

Risk

The controlling shareholder has a high pledge, the target of the acquisition is not up to expectations or the goodwill is impaired, the advertising boom is low, and the machinery manufacturing business is losing money.