Incidents:
The company released its report for the third quarter of 2018, achieving revenue of 1,552 million yuan and net profit of 142 million yuan. The year-on-year rate was 16.16% and 11.49% respectively, and earnings per share were 0.11 yuan.
Commentary:
1. Benefiting from structural adjustments, revenue growth has increased steadily.
The company's revenue for the 2018 Q3 quarter increased 16.16% year on year, a steady increase from the previous growth rate (18Q2 growth rate was 14.56%, 18Q1 was 12.73%). In addition to increased sales, the reason for the increase was mainly due to price increases. The average price of 18H1 pianos increased by about 10% compared to 2017, which is also a positive result of the company's product restructuring. The company's high-end product Caeserburg series continues to gain strength, and the Schimmel brand is gradually on the right track (Schimmel sold 952 units in the first half of the year, revenue was 64.8 million yuan, average price 681,000). The company began relocation work in the second half of 2017. The 18Q3 gross margin fell to 28.07% due to relocation and rising labor wages. The relocation was completed in the 3rd quarter. We expect a steady recovery in Q4 gross margin.
2. The music and art training business is still being incubated
The company has set up direct-run education stores in Beijing, Guangzhou, Foshan, etc., and has launched art education products including Pearl River Hainuo's Fall in Love with Keyboards series, Pearl River Piano Art Classroom, Pearl River Piano Smart Piano IN series, Geek smart musical instruments by Quilo Technology, and colorful personalized smart acoustic pianos. “Ukulele” and “Piano Functions and Technical Specifications for Primary and Secondary School Teaching”, which participated in the preparation of the 2018 Mid-Year Report
It has entered the approval stage and participated in the revision of two industry standards, “Keyboard Instrument Key Width Size Series” and “Piano Strings”.
3. Continuously invest in R&D to improve product quality
The company continues to promote the two-way drive of independent innovation and strategic cooperation, strengthen technical exchanges with Schimmel, and enhance the Group's high-end technology product development level by introducing international high-end technical talents. In the first half of the year, the Group carried out 183 improvement tests on new materials and processes for piano products, and completed 56 tests. Eight projects have already been implemented, and 4 are used as technical reserves. In terms of digital musical instruments, independent technological innovation has been strengthened to gradually achieve the development and long-term layout of various tasks to master core technology.
4. Maintain the “Cautious Recommendation - A” rating. The company's active product structure adjustment strategy has gradually yielded results, and revenue has entered an accelerated growth channel. At the same time, the company has used its brand, channel advantages, financial strength, and listing platform to develop music and art training, and actively lay out a huge market for consumption upgrading in the art training segment. We maintain our “Prudential Recommendation - A” rating. The company's EPS for 18-19 is estimated to be 0.13 and 0.15 yuan, respectively, and the corresponding PE and PB in '18 will be 42 and 2.3 respectively.
5. Risk warning: The music art training business fell short of expectations.