Performance review
Taiji Industries reported higher-than-expected 2Q revenue of 4.56 billion yuan, 20% month-on-month growth (vs. The closed testing industry grew by 5% month-on-month, 10% year-on-year growth, and operating profit margin rebounded to 5.6% in the second quarter from 3.5-4.0% in the first quarter of this year and the same period last year. Because second-quarter revenue and profit margins were higher than expected, second-quarter diluted earnings per share reached CNY$0.09, up 99 per cent from a month earlier and 52 per cent year-on-year, and diluted earnings per share reached CNY$0.14 in the first half of the year, accounting for 57 per cent of our full-year diluted earnings per share forecast before we updated our forecast.
Business analysis
The total contract of the project is better than expected: the revenue of the total contract of the project reached 6.14 billion yuan in the first half of the year, an increase of 18% over the same period last year, which is much higher than the 11% decline we predicted before the revenue revision. At present, the order of Taiji is still as high as 20.1 billion yuan. Recently, Ziguang announced that Mr. Gao Qiquan would set up a new DRAM factory. Therefore, we think that the general contract business of Taiji Industrial Clean Room Project in the past year or two is not easy.
Haitai Semiconductor, Taiji Semiconductor and memory modules are all better than expected: Taiji Industries announced that its revenue from memory packaging, testing and module business reached 2.15 billion yuan in the first half of 2019, an increase of 11% over the same period last year. This is much better than our forecast of a 5-10% decline in these businesses before the revenue revision.
Profit adjustment
We revised the total contract of the project to 5-10% year-on-year growth, Haitai and Taiji semiconductor revenue to zero year-on-year growth, total revenue growth to 5% and operating profit margin to 5.4%. Increase 2019 diluted earnings per share by 23% to CNY$0.29 (12% higher than the average forecast of Wind's overall analysts).
Investment suggestion
We believe that as far as A shares are concerned, 10-15 per cent ROE should be kept at 3.0 per cent of net worth per share. Based on our target price CNY$11.7 (there is still 71% room to rise), the stock price is 3.2 times the net worth per share in 2021, and we estimate that ROE will rise from 8.9% in 2018 to 12% in 2021.
Risk hint
Customers focus on the high operating risk, the risk of memory downcycle to cash cost price, the risk of inflexible management mechanism of state-owned enterprises, and the performance risk caused by the lack of follow-up orders in clean room engineering and design business.