Incidents: The company achieved revenue of 1,037 million yuan in 2017, an increase of 102.94% over the previous year; Guimu's net profit was 171 million yuan, an increase of 137.23% over the previous year; EPS was 0.51 yuan/share, an increase of 96.15% over the previous year. The company plans to distribute a cash dividend of 0.52 yuan (tax included) for every 10 shares to all shareholders based on the total share capital of 333.375 million shares at the end of 2017.
Key points:
High performance and significant improvement in cost rates
Benefiting from the steady advancement of the ecological engineering business and the combined performance of Zhengzhou Water and Zhongwei International, the company's revenue increased sharply in 2017, reaching 102.94%. By business, the revenue of the ecotourism landscape/municipal road greening/municipal garden business, which accounted for a relatively large share, was 287/283/269 million yuan respectively, an increase of 51.96%/30%/217% over the previous year. In 2017, the company recorded a gross profit margin of 31.98%, a year-on-year decrease of 0.32pct. By business, the gross margin of the ecotourism landscape/municipal road greening/municipal garden business fluctuated somewhat due to the revenue from individual large-scale projects; the gross margin of the real estate landscape business fell 64.23 pct to -6.30% year-on-year, and the company will continue to shrink the scale of this business in the future. In 2017, the company's expenses rate fell sharply by 5.98 pct to 8.92% year on year. Among them, management expenses accounted for 1.79 pct to 7.12% of revenue compared to the same period last year, mainly benefiting from a sharp increase in revenue; financial expenses accounted for 2.44 pct to 1.09% of revenue compared to the same period last year, mainly due to the company's capital raised to replace bank loans and interest expenses decreased during the reporting period. Benefiting from higher performance and significant improvement in cost rates, the company's net profit returned to the parent company increased 137.23% year-on-year to 171 million in 2017.
Entering aquatic ecology and accelerating transformation through mergers and acquisitions
While the traditional garden business is expanding to the whole country, the company is currently also actively entering the field of aquatic ecology. The relationship between the aquatic ecology business and the garden business is strong, and the company's performance growth is expected to be driven by multiple factors. During the reporting period, the company completed the acquisition of 60% of the shares of Zhengzhou Water and 80% of the shares of Zhongwei International Engineering Design. We believe that mergers and acquisitions can effectively supplement the company's qualifications and strength in new business fields and help accelerate the company's transformation. Furthermore, according to the promise in the acquisition agreement, the net profit achieved by Zhengzhou Water/Zhongwei International, the subject of the merger and acquisition, in 2018 and 2019 was no less than RMB 4,700/19.5 million and RMB 5540/25.35 million, respectively. We estimate that the contribution ratio of Zhengzhou Water/Zhongwei International to the company's net profit in 2018 and 2019 will be 15%/6% and 11%/5% of the company's net profit value deducted from the parent, respectively, adding a guarantee to the company's net profit growth.
Equity incentives add motivation, and performance appraisals show confidence
The company recently released an equity incentive plan that deeply bundles employees' interests with the company's performance. The high-starting stock unlocking conditions fully demonstrate the company's confidence in future performance growth. In February, the company announced an equity incentive plan. It plans to grant 10 million shares to 101 people, including directors, executives, middle management, and core personnel, accounting for 3.00% of the company's share capital. The unlocking period is three years. The incentive plan deeply bundles the company's employees with the company's future development, contributing to the steady growth of the company's performance over the next three years. According to the unlocking conditions in the company's equity incentive plan, in 2018-2020, the company's net profit after deducting non-return income needs to reach 304 million, 507 million and 776 million yuan respectively, with growth rates of 80%, 70% and 50% respectively. The unlocking conditions from a high starting point fully demonstrate the company's confidence in future development.
Order acceptance capacity has been improved across the board, and performance is flexible
During the reporting period, the company's new orders ushered in an overall increase in quantity and quality. The characteristics of high flexibility in performance were outstanding, and the order/revenue ratio was superior in the industry. The company signed new contracts of 2,644 billion yuan in 2017, and announced orders of 1,194 million yuan since 2018. The number of newly signed PPP projects in Danbei, Bayannaoer, Inner Mongolia and Shaoshan has reached 700 million, 1 billion, and 800 million yuan respectively. Order quality has reached a new level. The company's order/revenue ratio from 2017 to 17 is 3.7 times, and the order/revenue ratio is the highest among listed garden companies, providing a lot of room for future performance growth.
Profit forecasting and valuation
As an established garden enterprise in Jiangsu Province, the company has complete engineering qualifications and rich project experience. After listing in 2016, the debt structure improved, financing channels were upgraded, and order acceptance capacity was significantly enhanced. The company is currently actively entering the aquatic ecology field and is actively engaged in mergers and acquisitions. With the acquisition of Zhengzhou Water and Zhongwei International, new business expansion continues to accelerate, which is expected to diversify its profitability. We believe that in a situation where orders/revenue are relatively high and key projects are progressing smoothly, the company's high revenue growth in 2018 is highly certain, and future performance growth is flexible. We predict that the company's 2018-2020 EPS will be 0.89 yuan/share, 1.47 yuan/share, and 2.12 yuan/share, respectively. The corresponding PE will be 15 times, 9 times, and 6 times, giving it a “buy” rating.