Key points of investment:
The company publishes a semi-annual report. Sunsea Intelligence released its report for the third quarter of 2019. It achieved revenue of 1,056 million yuan in the third quarter, an increase of 23.75% over the previous year, and achieved net profit of 37 million yuan, a year-on-year decrease of 30.95%. The company achieved revenue of 3.424 billion yuan in the first three quarters, an increase of 27.68% over the previous year, and the net profit of the mother was 80 million yuan, a year-on-year decrease of 21.98%, mainly due to a 1.8 pct year-on-year decline in gross margin and a decrease in non-recurring profit and loss such as government subsidies.
Business performance improved month-on-month in the third quarter, and an upward inflection point began to appear. The company's net profit after deducting non-returns to the mother in the third quarter fell 13.69% year on year, narrower than the decline in the second quarter. On a month-on-month basis, it increased 38.33%, and the company's performance improved. With the gradual release of on-hand orders, the gradual execution of engineering contracts, and the gradual acceptance of uninspected products, the company's revenue rose steadily and gross margin continued to improve month-on-month. Since the fourth quarter is usually the peak season for confirming industry revenue, combined with factors such as inventory and impairment of goodwill at the end of last year, an increase in annual performance can be expected.
Adjust the strategy of the module division, and the module leader sets sail again. Longshang Technology's revenue fell 63.35% year-on-year in the first half of the year, mainly due to a sharp drop in the average sales price of 4G modules, the decline in smart module sales for smart POS machines, and the cancellation of orders for customized modules for Xiaomi 4G tablets. The company explored 4G module and NB module ODM business with manufacturers such as Gemalto and U-blox in the second half of the year, and successfully passed Xiaopeng Motor certification. Performance is expected to improve in the second half of the year. On the part of Xinxuntong, revenue increased 47% year on year in the first half of the year, and operating conditions were good. Among them, the newly expanded module ODM business brought in 81 million incremental revenue. In terms of new products, as one of the first companies to launch 5G sub-6 band 5G modules, Xinxuntong has already participated in the tenders of the three major operators.
Adhere to the IoT empowerment strategy and increase the added value of products and services. At present, the consumption habits of consumers in China for the Internet of Things are still being cultivated. The main strategy of major manufacturers is to race the ground, increase the number of connections, and obtain shares to open up the market. In the future, the industry will gradually shift from “product integration” and “equipment provision” to “comprehensive solution services”, and there is plenty of room for gross margin to rise. The company adheres to the AIoT empowerment strategy, using the Internet of Things to transform traditional communication equipment, provide customers with cloud modules to achieve rapid access to the cloud, and built a large platform to provide application entry for various industries. The gross profit margin for the third quarter was 23.29%, an increase of 3.98 pct over the previous month, and profitability is expected to continue to improve.
Investment advice. We maintain our profit forecast for the company. The company's net profit for 2019-2021 is estimated to be 1.58, 198, and 235 million yuan respectively. The price-earnings ratio corresponding to the current stock price is 36.5/29.1/24.8, respectively. The company comprehensively lays out the AIoT industry “on the cloud”. The future market space is broad. Referring to the price-earnings ratio of comparable companies, the company gave a reasonable valuation level of 30-35 times for 2020, corresponding to a target price of 19.2-22.4 yuan, and maintained an “increase in holdings” rating.
Risk warning. Higher balance ratios bring hidden risks of resilience, IoT platform value-added business development falls short of expectations, and IoT solution orders fall short of expectations
