3Q19 performance is lower than we expected.
The company announced 3Q19 results: revenue 222 million yuan, year-on-year-0.1%; return to the mother net profit of 44 million yuan, year-on-year-30.2%. Corresponding to 1Q~3Q19 income 623 million yuan, year-on-year + 5.5%; return to the mother net profit of 111 million yuan,-12.4% year-on-year. As the company's gross profit margin and exchange earnings are lower than we expected, the performance is lower than we expected.
Trend of development
Did not benefit from the devaluation of the RMB: 1) 3Q19's gross profit margin dropped sharply to 36.3% from the same period last year, deviating from the depreciation trend of the RMB, and the 3Q19 RMB depreciated by 2.8% against the US dollar. 2) the exchange gain of 3Q19 Company was 6.53 million yuan, down 58% from the same period last year. The exchange gain of 3Q18 was 15.73 million yuan. 3) historically, during the devaluation of the RMB, the company's export orders will benefit greatly and the gross profit margin will increase significantly. For example, 1H17 RMB depreciation, corporate gross profit margin year-on-year + 1.8 ppt exchange 1H18 RMB appreciation, corporate gross profit margin year-on-year-6.8ppt.
The main reason is that the export products are subject to customs duties and the orders yield profits: 1) the company's exports to the United States are subject to tariffs. In order to prevent the loss of customers, the company's export orders take the initiative to yield profits that do not benefit from the devaluation of the RMB. Whirlpool is an important customer of the company, and its exports to the United States have been subject to a 25% tariff. 2) this trend has been reflected by 1H19. 1H19 RMB depreciated significantly against the US dollar compared with 1H18, but the company's export gross profit margin decreased 2.5ppt compared with 2H18, resulting in an exchange loss of 770000 yuan during the period.
Financial analysis: 1) 3Q19 sales expenses increased more, + 20% compared with the same period last year, and the proportion of revenue increased 1.2ppt. Management expenses and R & D expenses are-26% and-6.1% respectively compared with the same period last year, and the expense rate (excluding financial expenses) decreased by 0.9ppt as a whole. 2) 3Q18 brought non-operating income of 7.5 million yuan due to equity investment bet agreement. Excluding this effect, 3Q19 deducted non-return net interest rate decreased 4.8ppt compared with the same period last year, mainly due to the decline of gross profit margin. 3) the operating net cash flow of 1Q~3Q19 is 153 million yuan, which is in line with the scale of net profit, up 63% from the same period last year.
Profit forecast and valuation
Due to the lower-than-expected performance, we lowered our 2019/20eEPS forecast by 8% to 0.24 yuan / 0.28 yuan. Maintain a neutral rating and a target price of 5.70 yuan, corresponding to 23.3 times 2019 price-to-earnings ratio and 20.6 times 2020 price-to-earnings ratio, which is 6.9% upside from the current stock price. The current stock price corresponds to 21.8 times / 19.2 times earnings in 2019 / 2020.
Risk.
RMB exchange rate fluctuation risk, Sino-US trade friction risk, new business development risk.
