1H19 performance is lower than we expected.
The company announced 1H19 results: revenue 401 million yuan, year-on-year + 8.9%; return to the mother net profit of 67 million yuan, + 5.4% year-on-year. As the company's exchange earnings were lower than expected, the performance was lower than expected. Corresponding to 2Q19 income 196 million yuan, year-on-year + 2.7%; return to the mother net profit of 32 million yuan,-16.9% year-on-year.
Trend of development
Domestic sales revenue slowed down: 1) affected by the domestic macroeconomic situation, 1H19's domestic sales revenue declined slightly,-5% to 131 million yuan compared with the same period last year. 1H19 export revenue maintained a good growth rate, from + 17% to 270 million yuan compared with the same period last year. 2) in terms of products, the company's general-purpose and special drainage pumps are highly competitive, with 1H19 revenue of + 14% and + 9% respectively compared with the same period last year; washing pump revenue of-5% compared with the same period last year. Washing circulating pumps are waiting for the company to develop new customers.
RMB depreciation, export orders profit: 1) Whirlpool is an important customer of the company, the company's exports to the United States have been levied 25% tariff. 2) the exchange rate of 1H19 RMB depreciated significantly compared with 1H18, but the exchange loss during the company was 770000 yuan, and the exchange gain of 1H18 company was 4.61 million yuan. In addition, the company's export gross profit margin is lower than 2H18 2.5ppt, we judge that the main reason is that the company's export orders part of the profit to absorb the impact of tariffs to prevent the loss of customers.
The profitability is stable and the cash flow is improved compared with the same period last year: 1) 1H19's comprehensive gross profit margin slightly increased 0.6ppt compared with the same period last year, but the exchange earnings and government subsidies received decreased (government subsidies decreased by 4.79 million yuan,-62% compared with the same period last year), which had a negative impact on net profit. 2) by improving operational efficiency, the company's sales expense rate and management expense + R & D expense rate are year-on-year-1.0ppt and-1.0ppt, respectively, and the net profit margin (including minority shareholders' profit and loss) is 16% the same as the same period last year. 3) the net cash flow of 1H19's operating activities is 99 million yuan, which is + 71% compared with the same period last year, which matches the net profit.
Profit forecast and valuation
Due to the lower-than-expected performance, we downgraded our forecast of 2019 beat 20e EPS by 19% to 0.27 yuan / 0.30 yuan. To maintain a neutral rating, due to the downgrade of earnings forecast, we lowered our target price by 14.3% to 5.70 yuan corresponding to 21 times 2019 price-to-earnings ratio and 19 times 2020 price-to-earnings ratio, which is 8.0% upside from the current stock price. The current share price corresponds to a price-to-earnings ratio of 19.5 times / 17.5 times earnings in 2019 / 2020.
Risk
RMB exchange rate fluctuation risk, Sino-US trade friction risk, new business development risk.
