Event

The company released the 2019 interim report, during the reporting period, the company achieved operating income of 2.104 billion yuan, an increase of 25.1% over the same period last year, and a net profit of 234 million yuan, an increase of 40.5% over the same period last year. The net inflow of operating cash was 156 million yuan, a substantial increase over the same period last year.

Our comments are as follows:

The main business income goes hand in hand, 4G expansion construction continues, 5G demand gradually falls to the ground, the company as a leading domestic transmission cable manufacturer continues to benefit. During the reporting period, the company won the bid for Huawei 5G optoelectronic hybrid cable (for 5G Massive MIMO antenna), which further established the company's competitiveness in 5G era, and is expected to benefit from the increase in volume and price of 5G products for a long time.

In the first half of 1919, the company's main products achieved good growth, specifically:

1) the income of the feeder series reached 896 million yuan, an increase of 3.1% over the same period last year, and the gross profit margin remained 20.7%. The demand for 4G expansion and indoor deep coverage continued to promote the steady growth of feeder products; 2) the revenue of optical cable series reached 637 million yuan, an increase of 23.1% over the same period last year. Gross profit margin is 18.6%, basically stable over the same period last year. The company's shipments of optoelectronic composite cables and other products increased significantly, and won the bid for Huawei 5G optoelectronic hybrid cable during the reporting period, laying a solid foundation for the development of the 5G era. The power consumption of 5G antennas has increased, and the volume and price of optoelectronic hybrid cables are expected to rise (see the previous in-depth report for detailed calculations), promoting the sustained and rapid growth of the company's fiber optic cable products.

3) the revenue of the flame retardant flexible cable series reached 460 million yuan, an increase of 75.4% over the same period last year, and the gross profit margin was 17.0%, which was basically stable over the same period last year. In September 18, the company won the bid for the mobile base station power project for the first time, with a total bid amount of 580 million yuan, and related orders continued to be delivered, promoting the rapid growth of flame retardant flexible cable revenue. 4) the revenue of the new electronic components reached 111 million yuan, an increase of 341.5% over the same period last year. In the second half of 18 years, the company acquired Junzhi Sensor, laid out all kinds of sensors in 5G Internet of things application scenarios, and the table effect led to a substantial increase in plate revenue in the first half of the year. Sensor subsidiary works closely with China Telecom Corporation and other customers, and the relevant demonstration projects and cooperative business are expected to continue to land.

The overall gross profit margin is basically stable, cash flow has improved significantly, and profitability is expected to continue to be optimized.

The company adopted the cost-plus model to effectively control the risk of raw material price fluctuations, with a gross profit margin of 19.3% during the reporting period, a slight drop of 0.2 percentage points compared with the same period last year. In the first half of the year, the company's net operating cash flow is 156 million yuan, which is significantly higher than the same period last year. The company's cash flow is expected to continue to optimize and enhance the company's endogenous development power.

As the company's new product shipments continued to increase, the scale effect continued to appear, with the three expense rates of 5.8%, down 0.68 percentage points from the same period last year. The company's net profit margin in the first half of the year was 11.1%, up 1.25 percentage points from the same period last year. With the gradual start of 5G scale construction, the company's scale effect is expected to further appear, sales, R & D and other expense rates are expected to continue to dilute, profitability is expected to continue to optimize.

Reiterate the core logic of the company: after the landing of the 5G license plate, the domestic construction of 5G is expected to accelerate. The power consumption of 5G base station is increased, and the value of transmission cable system is expected to increase. At the same time, the deployment frequency band of 5G is higher, and the number of base stations is expected to be further increased compared with 4G. As the leading company with the first share of domestic transmission cables, the company is expected to usher in a new opportunity to improve the volume and price of 5G products, and is expected to benefit from 5G construction in the first wave. At the same time, under the pressure of sustained and rapid growth of 4G network traffic, the demand for capacity expansion and low-frequency re-cultivation is expected to continue for a long time.

Profit forecast and investment advice:

The company's main product lines go hand in hand, and 5G orders begin to land, which is expected to benefit from 5G construction and 4G network expansion for a long time, driving the company's performance from 19 years to an accelerated growth period. Due to the higher-than-expected arrival progress of the company's orders, the company's net profit for 19-21 was raised from 4.3,5.9 and 840 million yuan to 4.6,6.8 and 1 billion yuan respectively, corresponding to 5 times, 3 times and 2 times of price-to-earnings ratio and 0.7 times of price-to-book ratio in 19-21 years, which is significantly lower than the industry average. We conservatively estimate that the company will increase its price-to-earnings ratio to 10 times 2019 and raise its target price to Rmb2.58 (HK $2.82).

Risk hint: operators have low expectations of capital expenditure and major customers rely on risk.