Investment suggestion

As the internal governance of Xinlun technology still needs to be improved and faces regulatory risks, at the same time, we expect the growth rate of the first phase of electronic functional materials in Changzhou to slow down, and the short-term profits of the second and third phases of Changzhou business are under pressure. Downgrade the new fiber technology rating to neutral, and lower the target price to 6 yuan. The reasons are as follows:

Corporate governance needs to be improved and faced with regulatory risks. The company and its wholly-owned subsidiaries Jin Yaohui Technology and Tianjin Xinlun used their time deposits to guarantee the bank loans of Honghui Electronics, Bessman and billion Core Intelligence Control in May 2017 to June 2018. The matter was not submitted to the board of directors and shareholders' meeting for consideration and was not disclosed in a timely manner. The guarantee liability was relieved on January 31 this year and did not cause losses to the company, but we believe that corporate governance still needs to be improved. On June 25, the company announced that the CSRC decided to file a case against the company for illegal and illegal information disclosure. We expect corporate governance issues and this regulatory investigation to continue to suppress corporate valuations.

We expect the profit growth rate of electronic functional materials to slow down. In 2018, more than 60% of the company's revenue from electronic functional materials came from the Apple Inc industrial chain. in 2019, the company's introduction of Apple Inc industrial chain material number continued to increase, but Apple Inc mobile phone shipments decreased significantly. 4Q18/1Q19 Apple Inc mobile phone shipments decreased by 11.8% and 17.6% respectively compared with the same period last year. We expect the profit growth of electronic functional materials to slow down.

We expect the short-term profits of the second and third phases of Changzhou business to be under pressure. Changzhou Phase II aluminum-plastic film power products customers are still in the certification period and have not yet been shipped in large quantities. Changzhou aluminum-plastic film shipped 510000 square meters in April 2019, with a significant increase in depreciation and management costs. at the same time, the installed capacity of Funeng Technology, the company's largest customer of aluminum and plastic film, fell by 63% in April and 82% in May. We expect the short-term profit of the second phase of business to be under pressure. The company's Changzhou Phase III photoelectric display material production line was put into production in November 2018, and it is still in the stage of trial production, and there are no large-scale orders yet, so we expect it will be difficult to contribute to the performance in the short term.

What is the biggest difference between us and the market? The profit growth rate of electronic materials has slowed down, and the profits of Changzhou Phase II and Phase III projects are under short-term pressure.

Potential catalyst: the profitability of new materials projects has declined further.

Profit forecast and valuation

Due to the decline in Apple Inc's mobile phone shipments and the lack of obvious volume of the company's second and third phases of business, we have lowered our profit forecast for 2019 by 31% to 0.26Universe 0.32 yuan per share. The current share price is downgraded to neutral, corresponding to the target price of RMB 6 per cent and 2.7 per cent of the upside for 1920 PE, which corresponds to 22.8ax 18.4x PE in 2020.

Risk

Uplink risk: the second and third phase of the project rapid volume, Apple Inc industrial chain orders exceed expectations; downside risk: equity pledge risk.