Investment advice
The company completed the divestment of EdConsell, and the quality of profits improved but the total amount declined. After the adjustment, the corresponding valuation had reached a reasonable level. The stock price had also risen 26% since the beginning of the year. We downgraded the company's rating to neutral. The reasons are as follows:
Revenue grew steadily in line with expectations, but gross margin declined. The company achieved operating income of 5.283 billion yuan in 2018, an increase of 26.2%, in line with expectations; the net profit of the mother was 31.52 million yuan, a decrease of 86.4% from the same period, mainly accounting for bad debt provisions of 205 million yuan. By business, revenue from marketing services and film and television content businesses increased by 20.75%/66.09%% to 4,171 million yuan/991 million yuan respectively, but gross margin fell by 3.02 pct/3.91pct to 8.70%/16.25% respectively; digital copyright operations and services (zhangwei technology) were affected by the free reading model, and revenue fell 11.43% to 1,205 million yuan, and gross margin fell 0.96pct to 60.07%. Overall gross margin fell 3.23pct to 11.29%, reflecting the impact of industry competition on business profitability.
The divestment of EdConsell was completed, and a large amount of equity transfer money was charged into bad debt. Due to the sluggish SEM business, Edconn's profitability continued to be under pressure, and the company completed the 100% equity transfer procedure of Edconn. The transfer optimizes the overall quality of earnings and avoids the risk of potential impairment of goodwill. However, the transferee did not pay the equity transfer amount after the due date, and the relevant receivables have already been accrued at 205 million yuan, which affected net profit in 2018.
The content industrialization operation platform has been gradually optimized. After completing the divestment of EdConsell, the company perfected the “IP source+content production+marketing promotion” content industrialization operation platform layout. The business focused on the planning and distribution of highly profitable TV series, variety shows, movies and TV series promotion, integrated marketing and content production. 1Q19 achieved revenue of 1,029 million yuan, with a year-on-year decrease of 26.55% mainly due to the divestment of EdConsell. After deducting non-net profit of 122 million yuan, an increase of 33.14% over the previous year, net operating cash flow was corrected year on year, and profit quality and cash conditions improved.
What's the biggest difference between us and the market? The company's organizational structure has been adjusted quite well, but business development is still facing challenges due to industry competition. The current valuation is relatively reasonable.
Potential catalysts: Upstream — content marketing industrialization platforms have been integrated smoothly, and increased profitability has exceeded expectations; downside — the integration of subsidiary acquisitions has been slow, and industry competition has intensified.
Profit forecasting and valuation
Based on the above analysis, we lowered the 2019e return net profit forecast by 28.5% to 233 million yuan, and introduced the 2020e forecast of 275 million yuan for the first time. The current stock price corresponds to the price-earnings ratio of 18.8 times/15.9 times in 2019/20. We lowered our target price by 14.3% to 7.2 yuan. The corresponding price-earnings ratio for 2019 is 18 times, with a potential downside of 4.3%.
risks
The popularity of the advertising industry is low, there is a risk of acquisition and integration. The performance of Zhanwei Technology has been impacted by the free reading model, and the actual controller's pledge ratio is high.