1H19 performance is lower than we expected.
The company announced 1H19 results: operating income was 39.97 billion yuan, an increase of 3.45% over the same period last year, and net profit was 51 million yuan, down 68.2% from the same period last year. The income per share is 0.01 yuan. Corresponding to 2Q19 income of 19.9 billion yuan, an increase of 1.7% over the same period last year, and net profit of 3.12 million yuan, down 97.1% from the same period last year. The company's performance was lower than we expected, mainly due to a significant decline in the profitability of the color TV business.
Trend of development
1H19 financial analysis: 1) 2Q19's gross profit margin is 11.7%, which is about 0.2ppt higher than the same period last year.
2) 1H19 financial expenses decreased by 56.7% year-on-year, mainly due to exchange losses in the same period last year; 3) 2Q19 sales expenses increased by 19.2% year-on-year, and the corresponding sales expense rate increased by 1ppt to 6.9%; the management expense rate decreased by 41.3% year-on-year, with a double-digit decline for four consecutive quarters, and the corresponding management expense rate decreased by 1.4ppt to 1.9% compared with the same period last year.
3) the net cash flow of the company's operating activities is-1.17 billion yuan, which is lower than that of 1H18-230 million yuan, mainly due to changes in the settlement structure of sales and procurement.
1H19 business analysis: 1) the revenue of 1H19 home appliance business increased by 10.5% compared with the same period last year, contributing to the main revenue increment; of which, color TV revenue decreased by 15.1% compared with the same period last year. 2) the profitability has declined, and the net interest rate of the color TV business has dropped sharply due to the fierce competition in the industry, which has lowered the company's performance; in addition, the refrigerator compressor business has also seen a slight decline in net profit due to the impact of rising raw material prices and fierce competition in terminal prices.
Huawei's entry into the color TV industry may reduce the impact of the Internet model: 1) the color TV industry has been hit by Internet enterprises, and the industry is already at a low ebb. AVC data show that from January to July 2019, the retail sales of the color TV industry are-12% year on year, and the average retail price is-9% year on year. XIAOMI ranks first in the online market share. 2) on August 10, Huawei released a smart TV-Glory "Smart screen" with a higher price and removed the boot ad, which is a sign of the return of the business model to hardware.
3) if Huawei color TV sets can be recognized by consumers in terms of product functions, color TV companies can quickly imitate.
Profit forecast and valuation
Due to the lower-than-expected performance, we downgraded our forecast of 2019 beat 20e EPS by 19% to 0.08 yuan / 0.09 yuan. Maintain its neutral rating and downgrade its target price by 10% to 2.88 yuan, corresponding to 37x/33x2019/20e PUBG E, which has 5.5% upside from the current share price. The current share price corresponds to 35x/31x 2019 Universe 2020e P Universe E.
Risk
Competition in color TV market aggravates risk