Investment suggestion
Downgrade the company to neutral and lower the target price to 9.50 yuan. We think there is pressure on the overall performance of the company. The reasons are as follows:
China Mobile Limited recently invited tenders for ordinary optical cables with a scale of 105 million core kilometers in 2019, down 5% from the same period last year, but the maximum price excluding tax is about 97 yuan, and the price drop is between 10% and 20%. The bid-winning share is more concentrated on the leading manufacturers, and we expect that a certain degree of competition will be formed in the bidding stage; the gross profit of the company's optical fiber and cable plate accounts for 2017 of the company's overall 45%, which is expected to have a certain impact on the company as a whole. The demand for optical fiber and cable is likely to be more prosperous in 2020, leading to an improvement in the company's performance.
We believe that the company's Internet security, traffic operation, cable and other businesses have room for growth in 2019. With the recent acquisition of UTStarcom, the production capacity of equipment design has been further improved. However, at present, the gross profit of equipment business is relatively low and is still in the stage of development. And the competition of communication equipment products of some subsidiaries is becoming increasingly fierce.
Company performance KuaiBao pointed out that 2018 homed net profit fell 3.57% year-on-year, slightly lower than the previous performance forecast guidance range.
What is the biggest difference between us and the market? We believe that the market has a vague understanding of the growth of the company's business sector in 2019; we are optimistic about the company's horizontal business exploration, but remind investors to be on guard against the performance pressure of the optical fiber sector.
Potential catalyst: China Mobile Limited bid opening optical fiber and cable bidding; Unicom and telecom bidding.
Profit forecast and valuation
The company continues to expand its business scope, and the layout in the areas of communication equipment, network security, traffic management and so on deserves long-term attention; but in the short term, there may be pressure on the company's optical fiber and cable plate business. We lowered the company's 2018 profit forecast by 51%, and expected the company's 2018E/2019E/2020E net profit to be RMB 574 million, corresponding to 25.9x2019 Pink E. We downgraded the company to neutral and lowered the company's target price by 52% to 9.50 yuan, corresponding to 25.0x 2019 PCME, with 4% downward space for the current share price.
We believe that the demand for optical fiber is likely to increase in 2020, while the company's equipment business is likely to start in 2020, and performance is expected to accelerate growth.
Risk
The result of China Mobile Limited's bidding did not fall to the ground, and the final company share and the winning price were uncertain. Results that are higher or lower than our expectations may occur.
The goodwill of the company is about 950 million yuan, which needs long-term attention.