The 2019 interim results were in line with expectations. Weishijiajie announced results for the first half of 2019. Revenue increased 7.5% year-on-year to HK$30.03 billion, of which mobile terminal/cloud computing and big data analysis/network and information security/accessories revenue accounted for 40%/24%/14%/22% respectively. Gross margin increased 0.3 percentage points year over year to 4.8%, gross profit increased 14.1% year over year to HK$1.43 billion; operating profit increased 8.9% year over year to HK$595 million, and operating profit margin remained around 2%. The above led to an 8.3% year-on-year increase in net profit to HK$392 million, while the net profit margin remained around 1.3%. The overall performance was in line with our and market expectations.
The cloud computing business has become a new growth engine. The company's 1H19 cloud computing and big data analytics revenue increased 11.1% year over year to HK$7.36 billion. The company's current layout in the cloud computing field is beginning to bear fruit. It actively promoted strategic cooperation with Alibaba Cloud during the period. Relying on Alibaba Cloud's products and technology, the company unleashed Alibaba Cloud's leading capabilities and technology through its deep understanding of the industry and strong coverage of online and offline channels to help Alibaba Cloud export, expand the cloud ecosystem, and empower industry upgrading. On the other hand, the company has signed a contract to become a first-level agent for Zhongke Cloud's facial recognition products and solutions; at the same time, it has also become the national general agent of Coolstack Technology. The two parties have established a strategic cooperative relationship with complementary resources to jointly promote the application, promotion and development of cloud computing and related businesses. Furthermore, they will also jointly explore new business models, sales of new products, and construction of new channels.
Actively lay out diverse businesses with new technologies such as AI. In 1H19, the company continued to deepen its distribution business, comprehensively developed and extended to industry and enterprise-level IT services, and further developed a number of innovative technology-related diversified businesses. The company signed a channel strategy agreement with iFLYTEK's smart voice recorder, becoming the general agent of iFLYTEK's smart voice recorder in mainland China, continuing to cultivate offline distribution channels, and continue to develop the AI market with iFLYTEK's technology and products. On the other hand, the company and HP have carried out further business cooperation and exchanges to promote deepening cooperation in 3D printing in China, laying a good foundation for cooperation for subsequent project implementation, seeking to jointly create a healthy 3D printing ecosystem in China, and developing more comprehensive strategic cooperation in product application development, project incubation, and special talent training.
Reiterating the “buy” rating, target price is HK$5.28. The company's current 2019E/20E dynamic price-earnings ratio is only 7.2/6.2 times, respectively. We believe that i) the acceleration of demand for software and hardware services in the era of big data; ii) the further development of overseas business; and iii) the gradual release of cloud computing-related performance will catalyze rising stock prices. We conservatively priced the 2020E dynamic price-earnings ratio of 8 times, gave a target price of HK$5.28, and reiterated the “buy” rating.
Risk warning: ICT integrated service business competition intensifies; mobile terminal business growth continues to be under pressure; cloud computing-related business growth is slower than expected.