Investment suggestion
1H19 performance is lower than expected: in the first quarterly report, the company expects the first-half net profit to decline by 60-85% year-on-year, actually by 82%, close to the lower edge of the forecast. Specifically, 1H19 revenue fell 17%, net profit fell 82%, operating cash flow fell 30%, and semi-annual ROE fell 4.6ppt to 1.0%. In a single quarter, 2Q19 revenue grew by-21% and net profit by-86%. The main reason for the decline in performance is that the scale of deep business shrinks and financing interest rates remain high, 2Q19 effective interest rates rise 1.3ppt from the previous month, we have not yet observed a decline in financing costs after deep investment control has acquired a controlling stake.
In terms of sub-business: deep business (380 distribution platform, 54% revenue, 68% gross profit) 1H19 revenue fell 21%, gross profit fell 16%, breadth business (33% revenue, 23% gross profit) revenue and gross profit increased slightly 12%, 4%, respectively, global procurement platform revenue fell 47%.
We downgraded to the outperforming industry and lowered the target price by 38% to 3.4 yuan. The reasons are as follows:
Business scale continues to shrink, and the development of uncertainty: since 3Q18, the company has been four quarters of negative revenue growth, single-quarter net profit from 2016-2Q18 of about 150 million yuan to less than 50 million yuan, of which 4Q18 even lost 190 million yuan. The decline of the original main business 380 distribution platform is particularly obvious, and it is expected that it will still be in a long period of adjustment in the future, and there is great uncertainty.
Financing costs are still high, and a significant decline in effective interest rates has not been observed after the holding position of Shenzhen Investment Control: during the period of rapid development in 2013-17, the company was able to obtain bank loans at a lower interest rate (about 4 per cent), while bank credit tightened since 2018, and financial expenses for that year increased by 56 per cent to 1.8 billion yuan, while 2Q19 financial expenses still reached 498 million yuan, an increase of 28 per cent from the previous month, unchanged from the same period last year, and the average interest rate also rose to about 7 per cent.
What is the biggest difference between us and the market? We believe that the company's business development is uncertain, the financing cost is still high, the performance pressure is high over a period of time, and the company's valuation is too high, or there is still a downside risk.
Potential catalyst: performance continues to be lower than expected and financing costs continue to be high.
Profit forecast and valuation
We cut the 20-year net profit of 2019 Universe by 27% to 160 million yuan. The current share price corresponds to the 20-year price-to-earnings ratio of 59.2x/46.5x 2019, which is downgraded to the outperform industry rating, and the target price is lowered by 38% to 3.40 yuan, corresponding to 45.7 times 2019 price-to-earnings ratio and 23% downward space.
Risk
Deep investment control introduced low-interest bank loans, credit is looser than expected.
