The first half of 2019 performance was slightly better than we expected.
The company announced its results for the first half of 2019: operating income was 920 million yuan, down 11.4% from the same period last year; net profit returned to its mother was 93.193 million yuan, down 3.6% from the same period last year; of which the income in the second quarter was 510 million yuan, down 23.3% from the same period last year, and its net profit was 73.49 million yuan, up 21.1% from the same period last year. The performance in the second quarter was slightly better than we expected, mainly due to the increase in government subsidies and the reduction in income tax expenses.
In the first half of the year, the company's gross profit margin increased by 3.0ppt to 34.4% compared with the same period last year, which was a record high, mainly due to a sharp increase in the gross profit margin of the construction business by 10.9 ppt; the sales expense rate increased by 4.3ppt to 13.9%; and the financial expense rate increased by 2.7ppt to 3.2% compared with the same period last year (due to the increase in bank loan interest and the cessation of capitalization due to project completion). As a result of the increase in government subsidies, other income increased by 169.3% to 29.776 million yuan compared with the same period last year; the effective tax rate was reduced to 3.1% by 15.4ppt compared with the same period last year, mainly due to the adjustment of income tax in the previous period.
In the first half of 2019, the company had a net operating cash inflow of 20.6 million yuan, a substantial improvement from the net outflow of 410 million yuan in the same period last year, mainly due to the strengthening of collection efforts and the decline in the cash paid for purchases; the net cash inflow of investment was 42.096 million yuan, compared with a net outflow of 270 million yuan in the same period last year, mainly due to the increase in financing factoring principal recovered by subsidiary Dashi Lease.
Trend of development
The medical business has picked up. In the first half of the year, the company's smart health business revenue increased by 15.9% compared with the same period last year, a significant improvement over the whole of 2018 (2.4% year-on-year growth). In January and June 2019, the company announced the signing of the PPP project of Shannan New area General Hospital in Huainan City and the relocation project of Lianshui County traditional Chinese Medicine Hospital at a contract price of 1.08 billion yuan and 90 million yuan respectively. We expect that the revenue recognition of the new project is expected to continue to provide support for medical business income in the second half of the year.
The equity incentive plan stimulates the momentum of development. On July 8, the company announced the third phase of the draft restricted stock incentive plan, which intends to issue 36.83 million restricted shares to 150 incentive targets at a price of 1.90 yuan per share (50% of the average price in the 20 trading days prior to the draft announcement). The stock unlocking conditions include that the company's 2019-21 net profit growth rate is not less than 10%, 32%, 72%, compared with 2018, and we believe that the plan will help stimulate the company's development momentum.
Profit forecast and valuation
As the improvement in the medical business is not enough to offset the decline in the construction business, we cut our net profit by 4.8% in 2019 / 2020 to 246,295 million yuan. The current share price corresponds to the 2020 price-to-earnings ratio of 26.8x/22.4x 2019. To maintain its neutral rating, the target price was lowered by 23.8 per cent to 3.10 yuan due to the downgrade of earnings forecasts and the downward shift of the industry valuation center, corresponding to the annual price-to-earnings ratio of 24.0x/20.0x2019/2020, which is lower than the current share price of 10.7 per cent.
Risk
The growth of newly signed orders was less than expected, and the progress of project implementation further slowed down.
