Key points of investment:
Incident: The company released its 2018 annual report. It achieved annual revenue of 342 million, an increase of 36.76%, a net profit of 84 million to the mother, an increase of 34.31%, a deduction of 76 million, an increase of 27.41%;
Performance orders have been swift: in the past 3 years, the revenue/return CAGR has reached 32%/36%, and the number of on-hand orders increased by 41% at the end of the period. It is expected that the “30% +” chapter will continue to be written in 2019. The company's revenue growth rate in 2016-2018 was 23.3%/36.5%/36.8%, and the return mother's growth rate was 23.4%/52.5%/34.3%, which remained at a high level for many years in a row. The number of new Q2-Q4 contracts signed was 165 million (+41%) /141 million (+42%) /132 million (+48%), 519 million new contracts signed for the full year/1,187 million uncompleted orders signed at the end of the period (+41%), corresponding 1.5 times/3.5 times the revenue of the corresponding period respectively. Based on the fact that the company's design business is at the forefront of the project cycle, we judge that the company's performance growth rate in 2019 will remain 30% +;
Orderly operation, Xu Rulin: We believe that the company's self-developed ERP system is a key part of helping the company develop steadily and in an orderly manner. It has greatly improved project management and repayment efficiency, expanded management boundaries, and stimulated employee vitality. Its profound impact on the company has been underestimated by the market. The role of the company's ERP system includes at least (1) significantly improving project management efficiency (fully online digital operation of projects), (2) directly targeting small enterprise repayment pain points (repayment is closely linked to project promotion and performance rewards), (3) expanding management boundaries and enabling timely application to ensure subsequent healthy and orderly expansion (promoted at the beginning of rapid growth in the company's scale), and (4) the project system fully unleashes the business vitality of a highly qualified workforce (advanced concepts can be benchmarked against top strategic consulting firms such as MBB), etc. Operating cash inflows of $282 million during the reporting period increased 28% year-on-year thanks to ERP optimization of company operations. We have noticed that the ERP system has impressed many enterprises in the company's external cooperation and exchanges, and has achieved sales output and obtained good feedback from many design companies during the reporting period;
Commercial and rail transit interior design leaders, and their main business segments all grew strongly and maintained high profit levels. The company's business covers all forms of commercial complex/railway/medical care, full-process design, and has well-known brands such as JATO/J&A/BPS. In 2019, it ranked 25/3/8 in the world in the field of integral/commercial/rail transit design in the authoritative magazine Interior Design, and occupied a leading position in the domestic commercial/rail transit design market. It was named “China's Most Influential Design Team” by different agencies 13 times in a row; during the reporting period, the company's main business grew strongly and maintained a high profit level: commercial/office/hotel/railway/medical The revenue from the five types of design business was 168 million/68 million/051 million/0.3 million/004 million, with a growth rate of 35%/38%/25%/30%/-36%, accounting for 49%/20%/15%/9%/1%, gross margin of 56.5%/49.1%/50.2%/49.1%/51.1%, which is at a high level in the industry. Judgment is that the company has maintained a certain brand premium in the field of personalized differentiated design;
There was a slight increase in gross margin and a slight decline in net interest rates. Cash flow continues to improve, and debt ratios have risen but are still at a very low level. The gross margin during the reporting period was 52.16% (+0.2pp); the sales/management/finance/period rate was 5.41% (-0.5pp)/15.97% (+1.9 pp)/0.06% (-0.1pp)/21.45% (+1.4pp). The increase in management expenses was mostly due to increased employee incentives and R&D efforts during the reporting period. Management fees/R&D expenses increased 56%/55% respectively; impairment of 0.14 million increased 95%, accounting for a net profit ratio of 16.47%; tax rate 13.26% (-2.9pp); net interest rate of 13.26% (-2.9pp); net interest rate 24.47% (-0.5pp); current payout ratio is 81.25% (-5.6 pp)/35.33% (-2.9 pp), operating cash flow of 27 million (+16.7%); debt ratio 14.78% (+3.9 pp) ranked second to last among the 58 companies that have disclosed annual reports in the SW construction sector, and the Q3 debt ratio is third to last in the entire sector;
South China accounts for a relatively high share of business, taking the lead in benefiting from the construction of the Greater Bay Area. The company has been deeply involved in the Shenzhen market for many years and has built various major local projects such as the Ping An Financial Center, the Galaxy Era, and Shenzhen Line 1/5/7/11. During the reporting period, South China's revenue was 132 million (+13%), accounting for 39%, 17 pp higher than the second-ranked East China region (22%). Nearly half of the newly signed contracts are located in Guangdong. In the future, as the construction of the Greater Bay Area progresses, it will obtain more business opportunities in infrastructure, culture, hotels, medical markets, etc.;
The rail transit business is growing rapidly and is expected to further strengthen its leading position. The company is a leader in rail transit interior decoration design. It has constructed a series of representative projects such as Shenzhen Line 1/5/7/11, Suzhou Line 2/4/Qingdao Line 2, etc. Seventeen new projects were signed during the reporting period, with a sharp increase of 89% over the previous year. Since 2018H2, the NDRC has approved rail transit plans for 7 cities including Shanghai and Suzhou, totaling about 773.6 billion dollars; the investment and positioning of rail transit projects is higher than that of ordinary projects, and the company is expected to further expand its market share through differentiated brand advantages, existing performance advantages, and higher customer recognition;
It is expected to fully benefit from inventory refurbishment combined with consumption/aesthetic upgrades. The interior renovation cycle for high-end hotel/office buildings covered by the company's business is generally 5-7 years/10-15 years. In 2017, the total output value of the national decoration industry was 3.94 trillion yuan (+7.6%), of which the growth rate of the stock market for public building renovation reached 11.8% higher than the overall level. Combined consumption/aesthetic upgrades are expected to drive stronger demand for interior design in the stock renovation market;
Shareholding incentives unleash vitality. The company launched an equity incentive plan in 2017. According to mid-2018 adjustments, the incentive targets covered 61 company employees. The exercise price was 28.96 yuan/share. The first exercise conditions were reached in 2019.4;
Profit forecast and investment rating: The company is expected to achieve revenue of 461 million yuan, 607 million yuan and 794 million yuan respectively from 2019 to 2021; the net profit of the mother is 111 million yuan, 145 million yuan and 187 million yuan respectively; EPS is 106 yuan, 1.38 yuan and 1.78 yuan respectively, and the corresponding PE is 21.8X, 16.7X and 12.9X respectively. Upgraded to “Highly Recommended” rating.
Risk warning: 1. Real estate regulation risk; 2. Market competition risk; 3. Repayment risk.