Key points of investment
Matters:
The company announced its financial report for the third quarter of 2018. The company achieved revenue of 1,757 million yuan (10.71% YoY) in the first three quarters, net profit attributable to shareholders of listed companies of 130 million yuan (-24.64% YoY), and earnings of 0.46 yuan per share.
Ping An's opinion:
During the market development period, short-term performance was under pressure: the company announced its financial report for the third quarter of 2018. The company achieved revenue of 1,757 million yuan (10.71% YoY) in the first three quarters, net profit attributable to shareholders of listed companies of 130 million yuan (-24.64% YoY), gross margin and net profit margin of 30.60% and 7.39% respectively from the same period last year. For the third quarter, gross margin and net interest rate decreased by 2.68pct and 3.46pct respectively from the same period last year. As far as the third quarter is concerned, the company achieved revenue of 693 million yuan (9.12% YoY), attributable to listing The company's shareholders' net profit was 36 million yuan (-57.39% YoY), and the gross margin and net interest rate for a single quarter in the third quarter were 29.40% and 5.13% respectively. The company's performance fell short of expectations. On the one hand, in the downward economic trend, the decline in market demand for commercial lighting, professional lighting, and home lighting affected the company's performance growth. Higher upstream costs and product price competition affected the company's profits. On the other hand, home lighting products, especially lighting products, entered a rapid investment stage, and hardware channels were also in the market development period. Advertising expenses and related expenses due to market expansion and increased marketing efforts. The company's share of sales expenses increased by 2.44pct in the first three quarters.
Continuously improve channel construction and increase coverage and density: in the first three quarters, the company's receivables and accounts reached 531 million yuan, a year-on-year growth rate of 40%, and inventories reached 485 million yuan, a year-on-year growth rate of 34%, mainly due to peak season stocking. The company's current sales market is dominated by professional lighting markets such as commercial lighting and tooling lighting, and the channel network is dominated by Tier 1 and 2 cities. In terms of channel construction, the company has stepped up its efforts to sink its physical marketing network channels, further developed distributors in second- and third-tier cities, extended sales channels to third- and fourth-tier cities, vigorously developed hardware channels, increased the coverage and density of the company's sales channels, and continued to improve the establishment of sales terminals. In the first half of the year, the company built more than 500 professional terminals and home terminals, and developed more than 300 new hardware showcase terminals. In addition, the company's various manufacturing bases have continuously improved production efficiency through automated transformation of production lines, procurement of automated production equipment, optimization of production scheduling models, and process improvements.
The share of LED lighting has increased, and the gold mine in the home lighting market is yet to be discovered: the company's LED products already account for more than 90% of the total revenue of lighting products.
In '17, the company vigorously developed the home lighting business and established an independent household products division. Through the design of a new VI brand logo and the signing of Li Chen as the brand image spokesperson, the total number of the company's home lighting product specialty stores or sales areas reached 2,000 in the first half of the year. At the same time, the company has also implemented higher standards and image upgrades for the decoration of some sales terminal specialty stores, etc., to improve the store image of the company's sales terminals and the consumer experience of the majority of consumers. In terms of e-commerce channels, in addition to opening flagship stores on Tmall and Jingdong, Vipshop flagship stores have been added to further develop professional e-commerce channel dealers.
Investment strategy: In terms of profit forecasting, LED lighting is affected by macroeconomics and real estate sales. The decline in the growth rate of the real estate market will affect demand for home decoration lighting. Macroeconomics will affect social and commercial conditions, which in turn will affect the speed of commercial lighting updates. We lowered the company's net profit forecast for 2018-2020 to 1.91/247/320 million (the original value was 281/369/473 million yuan), corresponding to the current PE of 20/15/12 times. As a domestic commercial lighting leader, Sanxiong Aurora is actively developing the home lighting market and is expected to achieve commercial home two-wheel drive. Long-term performance growth is worth looking forward to. Therefore, maintain the “Recommended” rating.
Risk warning: 1) Demand falls short of expectations. LED lighting is affected by macroeconomics and real estate sales. The downturn in the real estate market will affect demand for home decoration lighting. The macroeconomy will affect social and commercial conditions, which in turn will affect the speed of commercial lighting updates. The company's development of the home lighting business may have risks such as low market recognition and rising sales costs; 2) rising raw material costs. The company mainly procures LED chips and hardware for assembly and design. There is a certain time lag in the transfer of industry costs, and rising raw material costs will affect the company's profitability; 3) Industry competition will intensify. LED general lighting is a fully competitive industry. The entry threshold is relatively low, competition in the industry is fierce, and lighting products face risks such as falling prices.