Benefiting from the increase in dealers' consolidated tables, the company's operating income in 2018 was + 42% compared with the same period last year, but its gross profit margin declined year-on-year due to factors such as rising prices of crude drugs. With the steady development of the company's traditional business, the acquisition of Jinsui Group and the layout of industrial marijuana plans are expected to add momentum to long-term growth. It is predicted that the EPS of the company in 2019-21 will be 0.38, 0.47 and 0.57 yuan respectively, raising the target price to 12 yuan and maintaining the "buy" rating.
Dealers and table-driven revenue growth, gross profit margin fell year-on-year. In 2018, the company realized operating income of 4.005 billion yuan, + 42% year-on-year, and net profit of 329 million yuan, + 6.7% compared with the same period last year. 19Q1 realized operating income of 1.1 billion yuan, + 6.2% of the same period last year, and net profit of 137 million yuan,-14.3% of the same period last year. Benefiting from the increase in the number of consolidated tables among controlling dealers (from 14 in 2017 to 43 in 2018), the company's revenue increased significantly; however, due to the rise in the price of pesticide raw drugs in 2018 and the low gross profit margin of combined dealers, the gross profit margin fell to 29.2% for the whole year, and the growth rate of net profit was relatively low.
Plan to control Jinsui Group to enrich the planting industry chain. The company announced that it plans to buy 55% of the shares of Jinsui Group for 550 million yuan. The target company is a leading enterprise in domestic agricultural cultivation and bio-organic fertilizer production, and has promised a performance of 1.34 pounds in 2019-22. This acquisition is expected to help the company further enrich the planting industry chain, enter the fruit cash crop market, and is expected to form coordination with the existing business and enhance the company's profitability.
Lay out the industrial hemp industry chain and seize the market opportunity. The company announced that it plans to buy 53% of Yunnan Huayun Jinxin for 90 million yuan to lay out the planting and processing business of industrial marijuana. At present, the target company has obtained "Industrial marijuana planting license" and "Industrial marijuana processing license" in Eryuan County, Yunnan Province. Industrial marijuana has a wide range of uses, and the company plans to improve its revenue through the layout of the whole industry chain. We are optimistic that the company will make use of the resources and capacity advantages of traditional business, and is expected to seize the market opportunity in the development of industrial marijuana.
Risk factors: the prosperity of the agricultural materials industry is declining; the progress of acquisition is not as expected; the performance of the underlying assets is not as expected.
Investment advice: the company's traditional business is developing steadily, and the acquisition of Jinsui Group and the layout of industrial marijuana plans are expected to add momentum to long-term growth. Due to the short-term rise in crude drug prices more than expected, the company's net return profit in 2019-20 is estimated to be 343.0433 million yuan (the original forecast is 385.0499 million yuan), and the new forecast is 522 million yuan in 2021, corresponding to 0.38 EPS 0.47 billion yuan respectively. Taking into account the increased performance brought about by the acquisition of Jinsui Group, the company is expected to have an EPS of 0.48ppm 0.60max in 2019-21, and the expected performance growth brought about by the superimposed layout of industrial marijuana will give the company 25 times PE in 2019, raising the target price to 12 yuan (the original target price is 10 yuan) and maintaining the "buy" rating.
