Events:
On August 28, 2019, the company released its 19-year mid-year report that the revenue of H1 in 19 years was 1.023 billion yuan, an increase of 5.1% over the same period last year; the net profit attributable to shareholders was 51.5 million yuan, down 74% from the same period last year; and the dividend per share was HK $0.0342.
Comments:
Performance has been expected to decline significantly, although the average price has risen, but the cost of expenses has a significant impact on gross profit margin and profit
In June, the company issued a profit warning that the net profit attributable to shareholders is expected to decline by 70%. 19H1 performance is within the expected range, mainly affected by the following factors: 1) car accessories sales increased by 0.3% year-on-year to 183.2 million pieces, and the average price increased by about 4.7% to 5.58 yuan over the same period last year, mainly due to an increase in overseas income. 2) income in China fell for the first time, down 8.1% from the same period last year to 418 million yuan, and the number of accessories sold dropped 7.7%. 3) Gross profit margin fell 31.7% year-on-year, gross profit margin dropped 13.6 points to 25.3% year-on-year, mainly due to the continuous operating loss caused by production interruption and suspension in Wuxi base, the increase in daily expenses costs, affecting the gross profit margin of about 3.1 points. 4) employee costs increased by 31.8% over the same period last year and affected the gross profit margin by 6.5 points, mainly due to the increase in the number of employees and wages in the new factory, while other factors affected the gross profit margin by about 4.1 points. it includes an increase of 87% in depreciation expenses caused by investment in new plants and equipment, a 26% increase in utilities costs, and a 36% increase in logistics costs due to increased sales in the United States. 5) the increase in staff costs, the increase in R & D expenses and exchange losses led to the increase of sales and administrative expenses by 0.4 points to 3.1% and 3.3 points to 17.6% respectively compared with the same period last year. 6) the R & D rate increased by 1 point to 4.2% compared with the same period last year. Mainly due to the reserve of a large number of R & D personnel, the company expects to continue to invest in the research and development of new technology applications.
The growth of overseas business is satisfactory, driving up the average price, and the commissioning of Mexican factories will help drive up sales in North America, but the impact of the trade war on tariffs is still uncertain.
Although the company's revenue declined for the first time in China in 1919, overseas sales performed well, especially in North America, where revenue increased by 29% to 332 million yuan, accounting for 6 points to 32% of revenue. In Europe / Japan and other regions, revenue increased by 0.8% to 232 million yuan and 29% to 40 million yuan respectively, and the share of overall overseas revenue increased to 59%. As overseas customers have higher requirements for product craftsmanship and technology, the increase in sales share will help drive up the average price and improve the product profit level. The company's first overseas factory in Mexico began pilot operation at the end of August 19, with an annual production capacity of about 700,000 square meters. The company points out that 80% of orders in North America are already required to be produced in the factory. It is expected that most of the orders will be delivered in bulk in 21 years and will begin to contribute profits in 21 years. After formal investment, it is expected to help further increase sales in North America. However, North America will be affected by the tariff policy, especially when Trump recently announced that tariffs on Chinese exports will be gradually implemented, which will lead to an increase in costs. The company responded mainly by shipping products to North America in advance, increasing sales from Mexico to North America, and continuing negotiations with customers.
The impact of the Wuxi plant is an one-off factor, and the related costs will decline, and gross profit is expected to improve. Coupled with the completion of the Changzhou plant, it is expected to recover next year after the low performance this year.
The company's plant in Changzhou started operation in July 19, with an annual production capacity of 700,000 square meters. It is expected that 20 years of mass production and 21 years of contribution to profits, the increase in production capacity will be able to meet customer demand and gradually reduce transportation costs. The impact of the Wuxi plant on the company is one-off, and sewage treatment has been resumed in July this year, and normal operation has resumed in August. The loss and cost increase caused to the company will gradually reduce, which will help drive the gross profit margin back up.
Profit forecast and valuation
In view of the fact that the company is affected by the decline of the domestic automobile industry and the Wuxi plant, as well as the rising cost, the gross profit margin and net profit will decline significantly this year, we downgrade the company's EPS to HK $0.16,0.21,0.29 in 2019-2021, corresponding to 7.7,5.8,4.2 times of Phand E, respectively. According to our 20-year forecast, the company is valued at 6.5 times Pamp E, corresponding to a target price of HK $1.36, downgraded to "cautious recommendation".
Risk tips: overseas business is affected by policies, regulations and trade agreements, industry competition intensifies, product price reduction pressure, capacity expansion falls short of expectations, costs rise due to factory restructuring, capacity climbing is later than expected, costs rise sharply, and downward pressure on the automobile industry and the economy leads to a decline in customer demand.
