2019H1 achieved revenue/operating profit/net profit attributable to the mother of 557.49/20.01/17.73 million yuan respectively, compared with -13.3%/-29.2%/-47.4%, and operating cash flow of 168.75 million yuan, which continued to improve. The company has basically achieved business transformation. IDC and cloud computing have become the largest businesses. Entering a harvest period, it is expected to stop the downward trend in revenue in the future and drive an increase in overall gross margin. At the same time, the company strengthens cost control and increases investment in R&D, and its profitability is expected to increase.
The decline in the company's traditional business was higher than expected. We lowered its 2019/2020/2021 EPS forecast to 0.20/0.30/0.44 yuan and EBITDA forecast to 301 million/390,000/50,000,000 yuan. We are optimistic that the company's IDC business will grow rapidly and improve profitability in the next three years to maintain the “buy” rating.
The company has basically been transformed, and IDC's business has entered a harvest period. 2019H1's traditional business revenue continued to shrink, but gross margin increased: financial electronics revenue was 155 million (-12.35%), gross profit margin 25.55% (+1.50 pcts); lighting electronics revenue was 123 million (-44.66%), and gross profit margin was 34.05% (+2.14 pcts). IDC was gradually put into operation, and the cabinet rental rate, listing rate and value-added service revenue increased steadily, achieving revenue of 194 million (+17.92%), gross profit margin of 28.5% (+0.86 pct), and revenue share increased by 920 pcts to 34.77%, making it the company's largest business. Furthermore, the company's operating cash flow increased from -280 million in 2018H1 to 169 million in 2019H1, and continued to improve. We believe that IDC has entered a harvest period, the company has basically achieved business transformation. The future decline in revenue is expected to be stopped, and gross margin is expected to continue to rise.
Internal control has been very effective, increasing research and development to promote the “IDC+ Ecology” strategy. 2019H1 increased cost control, with management expenses of 47 million yuan (-14.77%), sales expenses of 45 million yuan (-26.87%), and financial expenses of 38 million yuan (-8.08%). The cost rate for the period decreased by 2 pcts to 21.34%, and profitability increased. At the same time, the company innovated R&D mechanisms, standardized R&D management, increased R&D investment, and accelerated cloud computing, smart city, and smart park business with higher technology content and higher gross margin. 2019H1 invested 51 million yuan in R&D, a sharp increase of 21.66% over the previous year. The “IDC+ Ecology” strategy progressed steadily, and future growth space continued to expand.
Add Changsha Yungu 2000 cabinet construction to expand IDC's business growth space. 2019H1 is steadily advancing the construction of IDC projects in the Guangdong-Hong Kong-Macao Greater Bay Area and is gradually putting them into operation. In July 2019, the company announced that it would add no more than 316 million own/self-funded funds to Changsha Yungu IDC to build 2,000 additional cabinets on top of the original 2,850 cabinets. The construction period is 2 years. The main customers are Hunan Telecom and Changsha Mobile. IDC in Changsha Yungu was designed and positioned as a large-scale data center with an upper limit of 20,000 cabinets. In January 2019, the Hunan Provincial Department of Industry and Information Technology issued the “Three-Year Action Plan for the Development of the Big Data Industry in Hunan Province (2019-2021)”, which requires further improvement of IDC infrastructure construction. The company seizes opportunities for the rapid development of Hunan's big data industry and actively positions it outside the Guangdong-Hong Kong-Macao Greater Bay Area to greatly enhance IDC's business growth space.
Risk factors: IDC cabinet expansion and increase in listing rate fell short of expectations, and business transformation fell short of expectations.
Investment advice: The decline in the company's traditional business was higher than expected. The 2019/2020/2021 EPS forecast was lowered to 0.20/0.30/0.44 yuan (the original value was 0.32/0.47/0.58 yuan), and the 2019/2020/2021 EBITDA forecast was lowered to 301 million/390 million yuan/501 million yuan (the original value was 390,000/501 million/580 million yuan). It is optimistic that the company's IDC business will grow rapidly and profitability will continue to improve in the next three years to maintain the “buy” rating.
