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Company dynamic tracking

Guoxin Electronics Opinion: 1) The company has entered a period of performance reversal: We have analyzed the changing trends in the company's business over the past 8 years and the influencing factors behind it. We believe that with the smooth development of new customers, the improvement in internal management efficiency, and the increase in profit margins for metal structural parts, the company has entered a performance reversal cycle.

2) Net profit for 19-20 is estimated to be 0.78/1.35/153 million yuan, corresponding EPS of 0.33/0.56/0.63 yuan, a year-on-year increase of 166%/72%/13%, corresponding to the current stock price PE of 34.7/20.1/17.9 times. For the first time, coverage is given a “increase in holdings” rating.

Comments:

A leading supplier of structural parts in China. Its core customers include high-quality consumer electronics brand companies such as Samsung and Huawei, which were established in 2007, and were completely transformed into a joint-stock company in 2014. The company is positioned as a professional manufacturer of molds and precision structural parts. Its business is mainly aimed at providing mold development for mobile phones, tablets and other products and mobile phone structural parts products for well-known domestic and foreign consumer electronics brand manufacturers.

The company is one of the main suppliers of mobile phone structural parts in China. It has strong mold design and development, precision mobile phone structural parts product manufacturing and comprehensive service capabilities, and can provide development, design and manufacturing services for various mobile phone structural parts products according to customer requirements. Core customers include well-known international and domestic brand manufacturers such as Samsung, Huawei, TCL, and Meizu. According to disclosed data, Huawei's revenue in 2016 was 725 million yuan, accounting for 39.52% of total revenue; customer Samsung's revenue was 237 million yuan, accounting for 12.93% of total revenue. In 2018, Huawei was the company's second largest customer, with revenue of 562 million yuan, accounting for 25.5% of total revenue.

The company's product development is basically in line with industry trends. In the early days, the company's main business was plastic structural parts. Benefiting from rapid growth in smartphone shipments, the company's revenue from 2011 to 2014 grew rapidly from 909 million yuan to 2,686 billion yuan, achieving relatively rapid growth. Beginning in 2015, the penetration rate of smartphone metal structural parts increased rapidly, and the company's business was greatly affected. The company's business revenue continued to decline from 2015-2017. In 2017, the company's revenue was 1,520 billion yuan, down 17.23% from the previous year. In 2018, the company's OPPO business grew significantly, driving the company's total revenue to increase by 45%.

In the process of upgrading mobile phone structural parts products from plastic parts to metal parts, competition in Yuanyou's plastic parts business intensified. At the same time, investment in the new metal structural parts business increased. The company's net profit gradually declined starting in 2014, and the company's net profit in 2018 was 29 million yuan.

The company's performance trend in 2019 will reverse its upward trend

The company's core business went through a full cycle from 2011 to 2018. In 2018, the company reversed the declining revenue trend since 2015 as new customers were brought in. In 2018, the company's revenue was 2,203 million yuan, up 45% year on year, and Q1 revenue in 2019 was 555 million yuan, up 50.60% year on year.

While developing new customers, the company implemented a new system in terms of internal management to improve efficiency. Currently, the company implements targeted line management for core customers, and provides quality services to major core customers such as OPPO, Huawei, and Samsung. Internal management boldly recruits and implements incentive plans. On January 30, 2019, the company completed the grant registration for the restricted stock incentive plan. A total of 11.4779 million shares were granted, and the number of granted persons was 142, mainly for middle management and core technical personnel.

In 2018, Q1-Q4's revenue grew rapidly, but net profit was 108 million, 17 million yuan, 06 million yuan, and -02 billion yuan, respectively. The net profit margin declined. The main reason was that Samsung's domestic factory relocation caused the company's business revenue to decline, and the company also had to face a painful period of increased investment costs in the process of developing new customers.

As the company's overall efficiency improves, favorable factors such as the lessening impact of changes in the Samsung factory, one of its main customers, and the increase in profit margins for metal structural parts are gradually reflected. Looking at the company's net profit margin is expected to return to normal levels. Looking at the year over year, the company will achieve rapid year-on-year growth in net profit from Q3 2019, and the 2019 performance will reverse the previous decline and rise again.

Actively explore the world's top customers and lay out emerging mobile phone cooling businesses. According to the industry chain, the company is currently developing new products for the world's top consumer electronics end customers. The amount of new products is expected to increase the company's profit margin. With the arrival of 5G, the cooling problem caused by the increase in computing power of mobile phone terminals is imminent, and the company is laying out thermal energy management services such as mobile phone cooling.

On July 26, 2019, Huawei released the Mate 20X, the first 5G phone. He Gang, president of the mobile phone product line, proposed that the two core problems that 5G phones need to solve are signal processing (antenna+RF devices) and cooling problems caused by high download rates.

With the arrival of 5G, the demand for data computing and data transmission has greatly increased and decreased, and the requirements for chip computing power have greatly increased. Huawei's latest CPU chip, the Kirin 980, uses a 7nm process and supports the world's fastest LPDDR4x, with a speed of up to 2133 MHz; it is the fastest mobile phone Wi-Fi chipset in the world, and supports 160 MHz of bandwidth. The partnership's theoretical peak download rate is 1.7 Gbit/s. Currently, the power consumption of mainstream chips such as the Qualcomm Snapdragon 845 and Samsung Exynos 9810 has reached the level of 4w-5w.

Consumer terminal cooling requirements have become a key direction for many companies' core business considerations. The company is actively laying out thermal energy management projects for consumer electronics terminals, mainly providing one-stop overall solutions for heat storage and heat dissipation. In the future, the company hopes to integrate the cooling module with the existing structural parts business based on the service advantages of structural parts products to provide comprehensive services to downstream customers.

It is recommended to pay active attention and give a “increase in holdings” rating for the first time

The company's cash flow situation and cash reserves are operating well, and through its own efforts, the development of major downstream customers is progressing smoothly. As operational efficiency increases, the company's profitability will reverse. The company's layout of top international customer business and cooling business is in line with the future development trend of the industry. Net profit for 19-20 is estimated to be 0.78/135/153 million, corresponding EPS of 0.33/0.56/0.63 yuan, a year-on-year increase of 166%/72%/13%, corresponding to the current stock price PE of 34.7/20.1/17.9 times. For the first time, coverage gives a “increase in holdings” rating

Risk Reminder

1). The company's progress in developing new customers is lower than expected;

2). The increase in the company's operating efficiency transmits to the company's performance less than expected, leading to a risk that the performance will not meet our expectations; 3). The risk that profitability will not meet expectations due to increased product competition.