Incident: The company released its 2019 semi-annual report. 2018H1's revenue was 2,368 million yuan, an increase of 29.51% over the previous year, and Guimu's net profit was 43 million yuan, a year-on-year decrease of 12.11%.
Comment: 1. The rapid increase in revenue in the IoT sector+the recovery in gross margin became a highlight.
In 19H1, by business segment, IoT product and service revenue was 1,356 million yuan (YoY +127.41%), communication engineering service revenue was 633 million yuan (YoY -8.97%), and communication product sales revenue was 379 million yuan (YoY -29.37%). Among them, the rapid growth in revenue from IoT products and services has mainly benefited from the company's continuous deepening of the three major product lines and focusing on the layout of the four major tracks in line with the “cloud plus terminal” IoT development strategy.
In terms of gross margin, IoT products and services have a gross profit margin of 14.80% (YoY +2.94pp), communication engineering services 14.96% (YoY -1.42pp), and communication product sales 26.95% (YoY -0.45pp). Among them, the gross margin of IoT products and services increased year-on-year. The main reason is expected to be the company's launch of high-end products with higher gross margins, compounded by the company's continuous promotion of R&D sharing between Longshang Technology and Xinxuntong, and enhancing supply chain synergies. We expect the sector's gross margin to continue to rise in the future.
2. Profit is hampered by financial expenses and short-term growth is not obvious. It is expected that as targeted increases are completed, the pressure on financial expenses will be released, and profits are expected to grow at the same time as revenue. Although the company's revenue continues to grow, since the company mainly uses debt financing to supplement operating capital, the expansion of the business also led to an increase in interest expenses on bank loans and a sharp increase in financial expenses (2019H1 financial expenses of 69 million yuan, a sharp increase of 132.63% over the previous year). We expect that with the completion of the new targeted increase (through the shareholders' meeting on May 6, 2019), it is expected that the financial pressure brought about by interest expenses will be greatly alleviated. It is expected that 2020 will achieve simultaneous growth in net profit and revenue.
3. With three major product lines and four major tracks, it is worth looking forward to the continued deepening of the IoT sector layout. The company continues to strategically position itself as a leader in the domestic artificial intelligence Internet of Things (AIoT), on the “cloud plus side”
On the basis of its advantages, it lays out the three major product lines of smart terminals with extensive cooperation between Dazhong Taiwan and AIOT smart devices, and extends the company's four major tracks on this basis, including the 5G IoT module application ecosystem, the enabling ecosystem based on the IoT cloud platform, the smart IoT solution application ecosystem, and the smart IoT device application ecosystem. Clear direction and rapid implementation. By introducing a large number of AIoT software development and sales talents, the company has successively launched 5G modules, AI neural central platforms, and innovative products such as various smart terminals and smart devices, and has been applied in many cities such as smart cities, smart packages, and smart logistics. In the upcoming era of the Internet of Everything, the IoT market has broad prospects, and the implementation of the company's series of layouts is worth looking forward to.
Profit forecasts and investment suggestions: After recent deployment, the company's IoT segment is “cloud-based”
On the basis, the “three major product lines+four major tracks” layout has been further clarified. The revenue and gross margin of 19H1 have begun to show results to return to a channel of rapid growth. It is worth looking forward to in the upcoming Internet of Everything trend. We continue to be optimistic about the company's business model and long-term development. Considering that it will still be subject to financial pressure from business expansion in 2019, we lowered the company's net profit for 19-20 from 303 and 431 million yuan to 0.9 and 190 million yuan, maintaining the increase in holdings rating.
Risk warning: operator Capex declines, new business expansion falls short of expectations, risk of unsuccessful merger and acquisition asset integration, and continued high risk of financial cost pressure
