1H19 performance is in line with our expectations

The company announced 1H19 results: revenue 20.087 billion yuan, year-on-year + 38%; return to the mother net profit of 565 million yuan, + 10% year-on-year, in line with our expectations.

Trend of development

The decline in lead prices has led to a decline in battery sales, but an increase in net interest rates. 1H19 lead prices fell 12.5 per cent year-on-year and 10.2 per cent month-on-month. Revenue from the company's lead-acid power battery business fell 5.6% from the same period last year, while revenue from the recycling business also fell by 31.7%, but the net interest rate of the battery-related business reached 4.3%, up from 3.5% in the same period last year, mainly driven by increased gross profit margin and proper cost control.

There is a drag on the trade business, but there is no increase in profit. 1H19's trading business revenue reached 6.5 billion yuan, accounting for 31% of the main business revenue, but the net profit loss of 38.99 million yuan, a certain drag on profits.

The expense rate is properly controlled and the operation efficiency is good. The rate of management and sales expenses of 1H19 is only 3.6%, which is lower than that of the same period last year (0.7ppt), R & D expenses (2.5%), 0.6ppt (year-on-year) and total period expenses (1.2ppt). Inventory turnover reached 36 days, an increase, but we believe that mainly due to trade business drag, receivable turnover of only 7 days, a further decline in month-on-month, good operating efficiency.

Profit forecast and valuation

Considering the improvement effect of trade business on revenue segment, the revenue of 19Universe 20e will be increased by 11.9% from 40.087 billion yuan / 44.71 billion yuan to 44.856 billion yuan and 48.989 billion yuan, but considering that it has little impact on profits, we keep the profit forecast of 19amp 20e 1.42 billion yuan unchanged. The current share price corresponds to 19Universe 20e 4.4ax 3.9x P Universe E. Taking into account the downside of the valuation center of the lead-acid battery industry, the target price has been lowered by 20% to 8 yuan, corresponding to 19max 20e 5.6max 4.9x P shock E, which has 29.2% upside space. At present, the company has a low valuation, maintains an excellent level of operating efficiency and cash flow, and maintains an outperforming industry rating.

Risk

Demand for electric bicycles is lower than expected, and there is a risk that demand for lead-acid batteries will fall further when they are replaced by lithium.