Incidents:
Tefat Information released its 18-year report: 2018 achieved revenue of 5.71 billion yuan (YoY +4.26%), achieved net profit of 275 million yuan (YoY +3.78%); achieved revenue of 1,247 million yuan (YoY +2.55%) in the first quarter of 2019, and achieved net profit of 36.52 million yuan (YoY -28.06%).
Comment:
2018 results increased 4% year over year, in line with market expectations; 2019Q1 profitability fluctuated in the short term.
In 2018, TEFA achieved revenue of 5.71 billion yuan (YoY +4.26%), net profit of 275 million yuan (YoY + 3.78%), EPS of 0.44, net profit of 249 million yuan (YoY +1.19%), net cash flow from operating activities of -81.13 million yuan (YoY -132.08%), in line with market expectations. The company's overall gross profit margin in 2018 was 16.3% (-0.34pcts), sales expenses ratio 2.0% (-0.4pct), management expenses ratio 5.89% (-0.48pct), and net interest rate 5.49% (+0.05pct). The company successfully issued convertible corporate bonds for the first time, raising capital of RMB 419.4 million.
The first quarter of 2019 achieved revenue of 1,247 billion yuan (YoY +2.55%), net profit of 36.52 million yuan (YoY -28.06%), and net profit of 27.0103 million yuan (YoY -38.99%) after deducting net profit of non-return to the mother.
The company's profitability fluctuated mainly due to the year-on-year increase in the company's financial expenses (YoY +57.63%), Tefa Dongzhi's inventory price reduction preparations for the current period, and the newly merged Shenzhou Airlines premium amortization for the current period.
At present, TEF has formed the layout of three major industries: optical fiber cable+intelligent access+military informatization.
Looking at business lines in 2018: (1) the fiber-optic cable business achieved revenue of 1,858 billion yuan (YoY -7.31%), gross profit margin of 20.40% (+1.75pct), accounting for 32.57% of revenue; (2) communication equipment business of 3.440 billion yuan (YoY +8.79%), gross profit margin of 10.67% (-1.87pct), revenue accounted for 60.28%; (3) electronic equipment business was 280 million yuan (YoY +53.09%), gross profit margin of 40.08% (-0.39pct), revenue accounted for 40.08% (-0.39pct) Compared to 4.92%.
Communication equipment business: Operated by Optical Network Technology and Tefat Dongzhi.
The smart access industry builds optical network intelligent access systems for customers to provide customers with a full set of integrated products and service solutions for ODN and user-end optical and electrical equipment. Implementers of the intelligent access industry mainly include optical network technology and Tefa Dongzhi.
(1) Optical network technology provides passive access equipment. It is mainly engaged in R&D, production and service of optical communication devices, providing customers with equipment, access cables, optical devices, engineering plan consulting, construction and “one-stop” optical network wiring solutions.
(2) Tefa Dongzhi, which provides active access equipment, is mainly engaged in R&D, production and sales of products such as passive optical fiber network terminals, wireless routers, IPTV set-top boxes, splitters, and smart routers. It mainly uses the ODM model to provide design and production outsourcing services to many leading enterprises in the field of communication equipment in China. In 2018, Tefat Dongzhi won a bid of 500 million yuan for China Mobile's own brand smart home gateway H2 product manufacturing service project, marking an important step for Tefa Dongzhi to independently develop the market and participate in operator tenders. Tefat Dongzhi achieved revenue of 2.90 billion yuan and net profit of 86.56 million yuan in 2018. The founder of Tefat Dongzhi promised that the net profit for 2019 and 2020 would not be lower than the promised net profit of 2017, that is, no less than 58.6 million yuan.
Military information technology business: It owns 100% of Chengdu Fourier and 70% of Beijing Shenzhou Aviation's shares.
After TDC acquired 70% of Beijing Shenzhou Aviation's shares in 2018, the implementing entity of the military information technology industry added Beijing Shenzhou Aviation to the original Chengdu Fourier.
(1) Chengdu Fourier is a high-tech enterprise that develops and manufactures military information technology equipment. It is mainly engaged in R&D, production and sales of military aviation communication equipment, measurement and control integration and satellite communication technology, data recorders and ballistic computers, and has formed a technology application system including military aviation communication equipment, ballistic computers, video processors, data recorders, measurement and control integration, satellite mobile terminals, etc. Chengdu Fourier achieved revenue and net profit of 187 million yuan and 33.78 million yuan respectively in 2018. It promised net profit for 19 and 20 would not be less than the promised net profit for 17 years, that is, no less than 35 million yuan.
(2) Beijing Shenzhou Aviation is a high-tech enterprise specializing in the development, sales and service of military computers, military bus testing and simulation equipment, signal processing and navigation, and industrial automation data acquisition and test platforms. It has a rich product line in the fields of industrial computers and platforms, communication interfaces, data acquisition, embedded systems, signal processing, flight control, and reinforced computers. The founder of Shenzhou Airlines promised that net profit in 2018, 2019, and 2020 would not be less than 30 million yuan, 40 million yuan, and 50 million yuan. In 2018, Shenzhou Airlines achieved net profit of about 34.68 million yuan after deduction, fulfilling its performance promise.
The equipment products of Beijing Shenzhou Aviation and the supporting products of Chengdu Fourier military products have a high degree of consistency and complementarity in terms of product form, product function, and R&D implementation. Through mutual support of products and services, technological development results and technical advantages and resources can be shared in various fields to achieve collaboration between the company's military industry platform resources. While maintaining its original market advantage, Chengdu's Fourier military products supporting business has expanded cooperation with major research institutes in China's aviation and shipbuilding departments; the integrated measurement and control business has opened up channels of cooperation with major mainframe companies. Beijing Shenzhou Aviation's R&D and design capabilities for military industrial computers, embedded computers, and military buses have been recognized by many military users. The products have been used and installed on many military equipment, resulting in a variety of mass-purchased products. The combination of products and services of Beijing Shenzhou Aviation and Chengdu Fourier can be used on the same military product platform to jointly address customer system requirements and form mutual market support.
Performance forecasts and valuation metrics. At present, TEF has formed the layout of the three major industries of fiber optic cable+intelligent access+military informatization. Looking ahead to 2019, the military informatization business is on an upward cycle, and the intelligent access business will benefit from the increase in orders from Huasan. The company's profitability fluctuated in the short term in 19Q1 due to increased financial expenses, preparation for inventory price drops, etc., but it is expected that Shenzhou Air's consolidation will increase the company's performance throughout the year. Therefore, we maintain the 2019 to 2020 net profit forecast of 348 million yuan/421 million yuan, the additional net profit for 2021 was 496 million yuan, the corresponding EPS for 2019 to 2021 was 0.56/0.67/0.79 yuan, and the current market capitalization of about 9 billion yuan corresponds to the 2019-2021 P/E of 26X/21X/18X respectively, maintaining the “increase in holdings” rating.
Risk warning: 5G construction falls short of expected risks, and military business expansion falls short of expectations.