Weisheng Holdings' 2019 interim results were solid. Turnover growth was recorded, and profit margins improved. The company also announced interim dividends for the first time.
With China's power grid investment falling about 20% year over year in the first half of 2019, Weisheng's solid performance reflects that the company has found an opportunity to drive business growth.
We still believe that grid investment is expected to accelerate in 2019 as National Grid continues to drive ubiquitous power IoT.
Victory's latest on-hand order is around RMB 2 billion, which will support the company's revenue and net profit growth in 2019. Management said that Weisheng Information's spin-off on the Science and Technology Innovation Board is proceeding as planned, and the latest financial data has been provided.
Maintaining the stock's “buy” rating, the new target price is HK$5.05, based on 13 times the 2019 price-earnings ratio. The target price reduction mainly takes into account recent exchange rate trends.
2019 Interim Results Summary
VIA announced solid 2018 interim results yesterday. Turnover increased 16% year-on-year from HK$1,655.9 billion in the first half of 2018 to RMB 1,924 million in the first half of 2019. All three businesses recorded year-over-year growth in the first half of 2019:
Electric power AMI business revenue increased 10% year over year, communication fluid AMI revenue increased 16%, and ADO revenue increased 37% year over year.
During the period, Weisheng recorded a net profit of 170.3 million yuan (about 48% of our forecast of 356.8 million yuan for the full year of 2019), an increase of 24% over the previous year of 137.4 million yuan in the first half of 2018. The company announced an interim dividend of HK$0.06 per share (first announcement). The company's gross margin improved slightly from 30.0% in the first half of 2018 to 30.2% in the first half of 2019. Considering that China's power grid investment fell about 20% year over year in the first half of 2019, Weisheng's interim results reflect the company's success in seizing the company's own growth opportunities. We expect VIA's year-over-year earnings growth to accelerate in the second half of 2019.
National grid investment may pick up in 2019
Despite the slow growth in grid investment in the first half of 2019, we still believe grid investment may accelerate in 2019 due to grid upgrades in rural areas and the country driving the development of ubiquitous power IoT. The new round of grid development is expected to generate demand for high-end measuring equipment. As an infrastructure investment, grid construction will drive economic growth. We also believe that, under the energy Internet architecture, VIA will benefit from the development of data and operation layers by providing measurement devices and communication ICs and systems with communication and sensor functions. The upgrading of power transmission standards should drive Weisheng to record a new round of growth. The company's latest on-hand order of around RMB 2 billion will support the company's revenue and net profit growth in 2019.
The spin-off process is still going well
During the performance conference call, Weisheng management stated that the spin-off of Weisheng Information on the Science and Technology Innovation Board was proceeding as planned, and the latest financial data was provided. It is expected that after the spin-off, Viosheng's shareholding in Viosheng Information will drop from 65% to about 59%. Victory Information plans to raise RMB 605 million by issuing no more than 150 million new shares (10% of the currently issued share capital).
However, the exact size of the shares to be offered depends on market conditions after the proposed spin-off is completed. Victory Information fits the IoE theme because the company's business involves three areas: 1) data collection terminals; 2) water, gas, and heat meters; and 3) solution-based IoT architectures. We maintain our share “increase” rating with a target price of HK$5.05 based on a price-earnings ratio of 13 times 2019. The target price reduction is mainly due to recent exchange rate trends.