1. Potential profit recovery in '19: Net profit will return to normal, gross margin will continue to improve, net profit in '19 will return to normal: On the basis of net profit of 190 million dollars in 2018, the increase in net profit in 19 came from lower asset impairment losses (goodwill impairment in 2018 was 180 million, long-term equity investment impairment was 90 million, and bad debt losses were 80 million, totaling 350 million dollars). At the same time, the cost rate of Jintuo and Chuanyang will continue to improve, while Tuochang's performance will also increase due to gambling.
Goodwill forecast for 2019: All major subsidiaries gamble on their performance in 17 and before, and the risk of loss of remaining goodwill is low. As of the 2017 annual report, the remaining goodwill was mainly concentrated in Jintuo, Chuanyang, Yunxiang, Lanmen, and Tuochang. Among them, 180 million goodwill losses in 2018 were mainly concentrated in Lanmen and three other companies (Jintuo, Chuanyang, Yunxiang), while Tuochang was still gambling in '19, so it is unlikely that there will be a major loss of goodwill in '19.
Gross margins are expected to improve in 2019: media agencies and owned media gross margins will rise or offset the decline in digital marketing gross margins. The gross margin of digital marketing in Guangdong Province is expected to stop declining in 2019. Against the backdrop of a revaluation of offline traffic values, the gross margins of media agents and their own media will pick up, and their overall gross margin is expected to improve.
2. It is expected that the performance of the important subsidiaries of the Provincial Guang Group will increase slightly in 2019. The performance of the subsidiary companies that ended the gamble (Jinduo, Chuanyang, Yunxiang, Lanmen) may decline by a certain percentage in 2018 (due to increased cost rates) and return to normal levels in 19 (the cost rate declined).
3. Increase gross margin momentum: replace “investment and acquisition” with “introduction of senior talents”, improve business groups and improve service efficiency
Introduce new service-oriented talents to increase the gross profit margin of the business: Beginning in 2018, the province began to actively introduce outstanding senior talents, thereby improving service efficiency through the formation of new teams, laying the foundation for future gross margin increases. In November 2017, the province announced the “Global Recruitment Plan for High-End Talent” with 30 members: 1. 8 executive directors of the division/subsidiary; 2. 6 deputy general managers for new marketing of the division; 3. 6 deputy general managers/general assistants of the division/subsidiary business; 4. 10 group reserve cadres (general manager level of the division/subsidiary company).
The division number was abolished in 2018, 11 new business groups were formed, and the three-win company was restructured: As can be seen from the composition of the new business groups, when the provincial government selects management talents, the subsidiaries that operate better use the executives of the original division or subsidiary company, and the general management of the subsidiary company will use personnel assigned within the group.
4. Investment suggestions:
As the impairment of the goodwill of Shang Guang Co., Ltd. was gradually completed in '18, the absolute value of its net profit returned to its mother in '19 gradually returned to normal. It is expected that the Guangdong-Hong Kong-Macao Greater Bay Area will have a great driving effect on the South China economy. At the same time, the company will improve service efficiency through the introduction of senior talents and business group restructuring, and the overall gross margin is expected to rise in 2019. We expect the net profit of the Guangdong Group from 2019 to 2020 to be 400 million and 4.8 billion yuan respectively. Corresponding to the current stock price, its PE is 15X and 13X respectively, maintaining the “recommended” rating.
5. Risk warning:
The improvement in gross margin of digital marketing companies fell short of expectations, the improvement in the company's overall gross margin fell short of expectations, the risk of impairment of the company's goodwill and the risk of bad accounts receivable.
