1H19 performance is slightly lower than we expected.
The company announced 1H19 results: revenue was 1.65 billion yuan, down 28.06% from the same period last year; net profit from home was 218 million yuan, down 38.11% from the same period last year, corresponding to 0.20 yuan per share, slightly lower than expected. The company's weighted average return on equity during the reporting period was 4.58%, a decrease of 3.42ppt compared with the same period last year.
The decline in the company's performance is mainly due to the gradual slowdown of demand in the traditional thermal power super-net emission market and the intensification of competition in the industry. From the perspective of business caliber, the company's 1H19 traditional atmosphere control business achieved revenue of 1.159 billion yuan, a decrease of 34.8% over the same period last year. Due to the intensification of market competition, the gross profit margin of the company's atmospheric governance business decreased by 4ppt to 29.1%.
During the period, the expense rate was well controlled, and the company's 1H19 management expense / sales expense / financial expense rate increased by 0.09/-0.34/-1.57ppt to 2.07% 3.69% 4.46% respectively. Investment in R & D fell slightly by 4 per cent to 51.39 million yuan.
Trend of development
The major shareholder will be changed to Sichuan SASAC to enhance the company's financing capacity and contribute to the company's future performance. In July 2019, the company transferred 25.31% of its shares to Guorun Environment to complete the transfer of ownership, and Sichuan SASAC became the controlling shareholder of the company. And the company promises that the annual net profit deducted from 2019 to 2021 will not be less than 450 million yuan. We believe that after the arrival of Sichuan SASAC, it is expected to ease the company's financing pressure, which is conducive to the steady progress of the company's project. At the same time, the demand of the company's original thermal power ultra-net emission business is slowing down, and the company is expected to better develop air emission management business in steel, non-ferrous metals, petrochemical and other non-electric fields, relying on the platform of state-owned enterprises.
Profit forecast and valuation
Due to the slowdown in industry demand and increased competition, we have reduced our net profit by 44% to 555 million yuan in 2019, and the profit is expected to be 576 million yuan in 2020. The current share price corresponds to 13.3 times 2019 earnings and 12.8 times 2020 earnings. Maintain the "outperform industry" rating, but due to the lower earnings forecast, we cut our target price by 38% to 8.8 yuan, corresponding to 17.3 times 2019 price-to-earnings ratio and 16.6 times 2020 price-to-earnings ratio, which is 29% upside from the current share price.
Risk
In-hand project promotion risk; market demand downside risk; new business downside risk.