Main points of investment:

The company's interim performance fell slightly.

The company recently released its 2019 semi-annual report, with operating income of about 2.368 billion yuan, an increase of 29.51% over the same period last year; net profit belonging to shareholders of listed companies was about 43.194 million yuan, down 12.11% from the same period last year; net profit belonging to shareholders of listed companies after deducting non-recurring profits and losses was about 34.7203 million yuan, down 18.82% from the same period last year; and basic earnings per share was 0.1384 yuan. The company's profit in the first half of the year is in line with market expectations.

The adjustment of the company's business structure has been completed, and the Internet of things business has grown significantly.

In the first half of this year, thanks to the rapid growth of the Internet of things business, the company's main revenue and costs grew synchronously by about 30%, and the overall gross profit margin was 16.8%, down 1.4 percentage points from the same period last year. In terms of expenses, the sales expenses increased by 27%, the management expenses were the same as the previous period, and the R & D expenses were 64.53 million, an increase of 44% over the same period last year. This was mainly due to the company's increased investment in R & D of AI intelligent products and module new products, and a substantial increase in financial expenses by 133%, mainly due to the increase in interest on bank loans. Due to the seasonal impact of industry settlement, the company's current operating cash flow is-59.18 million. In terms of the company's specific business, the company's main business mainly includes Internet of things business and communication service business. The main products and services of the Internet of things business include Internet of things large and medium-sized stations, intelligent communication equipment, intelligent terminals and Internet of things solutions, mainly used in public utilities, smart cities, transportation and logistics, car networking, smart home and other fields. In the first half of the year, the revenue of the Internet of things business of the company was 1.356 billion yuan, an increase of 137% over the same period last year. This business accounted for 57% of revenue, a relative increase of 25%. The gross profit margin of the industry reached 14.8%, an increase of nearly 3 percentage points over the same period last year. The main products and services of communication services include cable broadband, data centers, wireless stations, small base stations and communication engineering services. it mainly provides a full range of communication network physical connection, wiring, protection and integrated cabling solutions for the three major domestic telecom operators, communication equipment manufacturers and end users. In the first half of the year, the company's communications business revenue was 1.012 billion yuan, down 18% from the same period last year. The business accounted for 43% of revenue, a relative drop of 15%, and the industry gross profit margin was 19%, down 1.8% from the same period last year. The change in the proportion of the company's business is mainly based on the tilt of the company's business strategy to the field of the Internet of things, and the transformation to the Internet of things through mergers and acquisitions has led to a substantial increase in revenue from the Internet of things. the decline in the product business of communication network equipment is that the company has streamlined its product line and adjusted its product strategy in order to cope with the decline in investment by operators and the fierce price competition in bidding mode. Therefore, the Internet of things business will become the main development direction of the company in the next two years.

Seize the development opportunity of the Internet of things industry and lay out the Internet of things industry chain in an all-round way

Mobile communication network is expanding from the communication between people to the data exchange between people and things, things and things. According to the planning of the Ministry of Industry and Information Technology, the industrial scale of the Internet of things in China will exceed 1.5 trillion yuan by 2020. According to the forecast data of GSMA, the number of terminals connected to the Internet of things worldwide will reach 10 billion by 2025. At the same time, the commercial application of 5G technology promotes the rapid development of personal and industry mobile applications. 5G network provides users with flexible, reliable and efficient connections, which provides a broader application prospect for the Internet of things (IoT). Promote the rapid development of consumer Internet of things, smart city Internet of things and productive Internet of things and other application fields. According to the forecast of the Institute of Information and Communication, the investment of telecom operators in 5G network equipment will exceed 220 billion yuan in 2020, and the expenditure of various industries and fields on 5G equipment will exceed 520 billion yuan in 2030. Seeing the broad prospect of the application market of the Internet of things in the 5G era, the company positioned itself as a new intelligent Internet of things (AIoT) enterprise, with the goal of becoming a leader in the artificial intelligent Internet of things in China. First of all, it acquired Xuntong and Longshang Technology, which are the leading domestic communication module manufacturers, and began to enter the field of the Internet of things in an all-round way with modules as the fulcrum. Then by investing in the world's leading Internet of things cloud platform company Ella of the United States and establishing a joint venture with it in China, we quickly have the leading Internet of things cloud platform technology and operational capabilities. On the basis of the "cloud + end" technical architecture, the layout of large and medium Taiwan, AIOT intelligent devices and intelligent terminals three major product lines, have launched 5G modules, AI nerve center platform and various kinds of intelligent terminals, intelligent devices and other innovative products, and in the smart city, intelligent suite, intelligent logistics and other applications.

In terms of product innovation, the company launched the 5G module at this year's MWC conference and released the 5G module for real network testing in June. It has worked deeply with a number of industry application companies to jointly launch 5G CPE (home gateway), 5G industrial routing, 5G gateway, 5G small base station and other related 5G products. In terms of software technology, the company released the first AI urban nerve center-AI perception platform, which supports the integration of equipment, data and applications with new technologies of large and medium-sized stations, and integrates all kinds of intelligent terminals, connecting systems and shared applications downstream, providing unified and strong support through AI smart box. Play a core supporting role in smart cities, parks, communities, buildings and other multi-level scenarios. At the same time, on the one hand, the company continues to make use of the Internet of things to realize the intelligent upgrading of traditional industries. Through the intelligent transformation of traditional communication equipment products, the company has successively launched intelligent products such as intelligent ETC cabinets, intelligent street lamps, intelligent optical interlocks and other intelligent products, which has greatly improved the market competitiveness of the company's communication products. On the other hand, continuously expanding the application scene of intelligent terminal equipment, the company independently or jointly developed a number of intelligent terminal products directly facing consumers, such as intelligent smoke sense, intelligent manhole cover, intelligent door lock, intelligent water meter, intelligent management equipment of electric vehicle, 5G UAV, 5G robot, etc., which complement the industrial chain. With the introduction of the concept of AIOT at the beginning of the year, the company continued to make efforts in the field of AIOT, successively developed AI smart box, AI video edge computing terminal and AI vehicle edge computing terminal, based on AI smart box, collected and processed a large amount of data information, and uploaded it to the cloud platform database combined with AI machine learning to improve the behavior feature database. In terms of industry application, the intelligent smoke sense SaaS platform, which the company cooperated with China Telecom Corporation Tianyi Internet of things, has been put into operation, providing Guangdong Unicom with a series of Internet of things services such as smart buildings, intelligent smoke sense, intelligent transportation and so on.

Profit forecast

Considering the overall and good layout of the company's business in the Internet of things, the business structure has basically completed the transformation to the Internet of things, and the company is expected to take advantage of the rapid development of the Internet of things industry in the next two years based on achieving rapid business growth. we expect the company's revenue to reach 6.409 billion, 8.652 billion and 11.248 billion yuan from 2019 to 2021, with a corresponding homing net profit of 101 million, 201 million and 317 million yuan. Give the company an "overweight" rating.

Risk hint: the development of the Internet of things industry is not as expected, and the gross margin of the company's communications products continues to decline.