Incident: The company released its three-quarter report for 2017. In the first three quarters of 2017, it achieved revenue of 237 million yuan, a year-on-year decrease of 7.28%, and realized net profit of 3.50471 million yuan, an increase of 2.49% over the previous year; of this, net profit of non-post-return net profit was 32.9232 million yuan, an increase of 4.68% over the previous year. Q3 achieved revenue of 79.119 million yuan, a year-on-year decrease of 12.11%; realized net profit of 18.5904 million yuan, an increase of 30.84% over the previous year; of this, net profit of non-return net profit was 178.334 million yuan, an increase of 41.10% year-on-year. The performance was in line with expectations.
Comment: Performance growth is steady, and traditional business has been improving for a long time
The company's gross margin level of product sales in the first three quarters was 39.16%, which is basically the same as the same period last year. In the first three quarters, sales expenses fell 8.5% year on year, management expenses fell 7.67% year on year, and financial expenses increased 26.58 year on year. The overall period expenses rate was 18.62%, which was basically the same as the same period last year. The company strengthened its receivables management during the reporting period, and the company's asset impairment losses decreased by 61.30% compared to the same period last year. The company's subway and tunnel ventilation equipment business currently has the highest market share in the domestic market. There is still a certain gap between China's current infrastructure construction and infrastructure development goals in the “13th Five-Year Plan”. At the same time, considering environmental factors such as the rise of many emerging cities in recent years, the demand market for subway tunnel ventilation systems is very impressive. In this context, the profit level of the company's main business is expected to rise steadily.
Asset restructuring is imminent, and a new military equipment platform is poised to launch
The company previously announced that it intends to acquire 100% of the shares of Hongxiang Technology and Zhongqiang Technology for 2.21 billion yuan. At present, the asset transfers of the two target companies have been completed. The two target companies are expected to be included in the scope of the consolidated statement starting in November 2017. The company's 2017 results will combine the total net profit of Hongxiang Technology and Zhongqiang Technology from 11-12 in 2017. In 2017, the company expects a profit of about 119 million yuan to 136 million yuan, an increase of 180%-220% over the same period last year. If we consider the full-year uniform profit situation of mergers and acquisitions, it is estimated that exam preparation profits are expected to reach more than 200 million yuan.
Hongxiang Technology is one of the few domestic enterprises that also has R&D and industrialization capabilities in infrared imaging, ultraviolet imaging, and gas imaging technologies. It has continued to focus on research on these three technologies for 11 years. Zhongqiang Technology's products are mainly used for stealth camouflage of military equipment, military targets, and military engineering. They are scarce marketing targets in the field of military camouflage, and entry barriers are high. Both target enterprises have certain technological leadership advantages and will benefit for a long time in the context of civil-military integration. Hongxiang Technology promised net profit of not less than 50 million yuan, 75 million yuan, 93.75 million yuan, and 11.7.2 million yuan respectively in 2016-2020; Zhongqiang Technology promised net profit of no less than 35 million yuan, 70 million yuan, 94.5 million yuan, 127.755 million yuan, and 172,22263 million yuan, respectively. The two target companies will be an important support for the rapid growth of the company's performance in the future.
Investment advice: We believe that after this restructuring is completed, the company's future profitability will increase significantly. Regardless of the impact of this merger and acquisition, the company is expected to achieve net profit of 52.15 million yuan, 58.37 million yuan and 68.7 million yuan in 2017-2019. If considering this merger and acquisition, the company's net profit for 2017-2019 is expected to be 135 million yuan (202 million yuan for annual exam preparation), 355 million yuan, and 472 million yuan. Assuming that the share capital will be diluted to 266 million shares, corresponding to EPS of 0.51 million yuan and 133 million yuan respectively and 1.77 yuan. The dynamic PE corresponding to the current stock price is 72 times, 28 times, and 21 times, respectively, maintaining the “buy” rating.
Risk warning: The progress of subway and tunnel construction is slowing down, and the performance of the target merger and acquisition falls short of expectations.