Incidents:

On April 24, 2019, the company released its annual report, achieving operating income of 16.904 billion yuan, up 11.87% year on year, operating profit of 1,501 billion yuan, up 19.64% year on year, and net profit attributable to shareholders of listed companies of 1,358 million yuan, up 15.17% year on year. According to the quarterly report data released on the same day, the current period achieved operating income of 3,279 million yuan and net profit of 234 million.

Investment points:

The damage of “scale” under the constraints of the general environment for industry development. Once upon a time, the smart terminal supply chain was the most popular investment sector in A-share electronics, and touch display was also the area with the highest single product value in this sector. After 2013, as mainstream smartphone touch display methods changed, various new functions were introduced, and industry competition intensified, domestic TP manufacturers began to expand their horizontal industrial chain one after another, expanding from a single touch display module to module fields such as cameras, fingerprint recognition, case covers, FPCs, antennas (connectors), and even batteries and wireless charging, with a view to optimizing overall costs under the scale effect and seeking more downstream customer orders.

The pursuit of “scale” became the starting point for the success and failure of these enterprises and for Xiao He. After 2016, under the combined effects of many factors such as financial “deleveraging,” the continuous decline in the stock market, and the slowdown in the growth of the smart terminal industry, the capital chain of the horizontally expanding TP module factory became very weak, and the model was unsustainable. The phenomenon of majority shareholders transferring control rights to state-owned assets like Helitai is not an exception. Over the past year or so, Star Technology, Changxin Technology, and recently Ophelia have all had no choice but to use the term “trend” to describe it. Perhaps it is inappropriate to use the term “trend,” but this is indeed a special phenomenon in the development of this industry to this period.

The integration of Fujian Electronic Information Group is bold and strong. Since the company and Fujian Electronic Information Group completed the share agreement transfer in the fourth quarter of last year, the financial situation improvement and non-profit business slimming down with the help and support of the Electronic Information Group have been progressing in an orderly manner: the Group's advance payments to listed companies have been made in a very timely manner, improved the financial situation of listed companies, solved shareholder pledge problems, and solved the capital needs of some businesses (for example, the rapid landing of the Indian factory); sold some shares of Guangyu Battery to obtain return to cash; transferred control of Lanpei to reduce the outflow of listed capital, and focus on core business . Compared with the equity transfers of other companies in the same industry, Fujian Electronic Information's support and integration for Helitai is obviously more courageous and strong. Considering that the Electronic Information Group also has related business segments such as Huajiacai (panel display) and Zhongnuo (mobile ODM), etc., there is still a lot of room for cooperation that can be linked with Helitai as a whole and complementary industries in the future, which is beneficial to further enhancing the company's industrial location

Helitai 2.0 era, the restructuring period before the launch of 5G: As mentioned in the previous section, 2018Q2-2019Q1 seems to be a watershed moment where control of domestic Tier 1 and 2 TP module factories rose and expanded rapidly in 2013-2014 and collectively transferred control to state-owned assets. It is also an important stage for domestic module manufacturers to calmly think about future development models from rapid expansion to stagnation. Although “scale” damage is the root cause of this round of “power transfer,” only in this way can we continue to move forward on the basis of safeguarding “scale,” transformation, or restructuring. Comparing horizontally with other companies in the industry, in the past six months of cooperation between Fujian Electronics Information Group and Helitai, they have provided not only “financial aid”, but the greatest possible full support:

The overall layout of Helitai's three major modules, FPC, and 5G materials has not been interrupted, and the overseas layout is progressing rapidly as scheduled. Although the company's performance declined to a certain extent in 2018Q4 and 2019Q1, the main reason for this is more due to fluctuations in the industry, and it has fulfilled its promised performance as scheduled, which is not easy compared to peers.

2019-2020 is the year of growth for 5G. The smart terminal supply chain's attitude and preparation to face the launch gun will be decisive for the initial market share and enterprise growth. Helitai's reserves and production expansion in recent years are in line with the 5G direction. After introducing Fujian electronic information as the majority shareholder, financial support for related projects will be more abundant. Compared to many peers still in the “mud bodhisattva crossing the river,” Helitai, which discovered problems in the third quarter of last year, is now in a much more relaxed state, and is now in a better position to prepare for 5G.

Profit forecasts and investment ratings: 2018-2019 can be described as a wild year for the smart terminal supply chain, and the “scale” problem has become a reality that all companies have to face and make trade-offs. But instead of lamenting the reality, it is better to better analyze future growth possibilities. Comparing with peers from various perspectives, such as the financial strength of the new majority shareholders, the compatibility between the existing layout of the industry and the main business of the listed company, integration time, compatibility and results after integration, and the operating status and industry pattern of the listed company's existing business, Helitai clearly has an advantage in all dimensions, laying a relatively good foundation for development in the next few years. The company's net profit for 2019-2021 is estimated to be 1,535 million, 16.40 million yuan, and 2,364 billion yuan respectively (the 2021 increase assumes that 5G terminals will mature in 2021), and the current stock price corresponds to PE 11.02, 10.32, and 7.16 times, respectively. Obviously, the current market value has a clear margin of safety, maintaining the company's purchase rating.

Risk Reminder: 1) Downstream brand customers in the smart terminal supply chain are once again at risk of payment; 2) 5G smartphone evolution has fallen short of expectations; 3) Domestic supply chain migration due to trade wars; 4) The integration between management of listed companies and Fujian Electronic Information Group, the former majority shareholder, has fallen short of expectations.