2019Q3 performance is in line with our expectations
Citic Haizhi released its results for the first three quarters of 2019: operating income was 1.145 billion yuan, an increase of 15.8% over the same period last year, and net profit was 157 million yuan, an increase of 78.2% over the same period last year. Non-parent net profit was 151 million yuan, an increase of 71.7% over the same period last year. In the third quarter, operating income increased by 9.4% compared with the same period last year, and net profit increased by 46% over the same period last year, falling in the middle of the performance forecast and in line with expectations.
Excluding the effect of subsidy stagnation, the growth rate of earnings in the third quarter fell 1% from the same period last year. According to the company announcement, the special fund subsidy for the navigation development of the subsidiary Haizhong Airlines in 2019 (27.698 million yuan) was confirmed in the third quarter, while it was confirmed in the fourth quarter in 2018 (23.7096 million yuan). After deducting the impact of the subsidy, the profit in the third quarter fell 1% from the same period last year.
Core business growth was solid, with the parent company's gross profit margin rising 7 percentage points year-on-year to 37% in the third quarter. In the third quarter, the parent company's operating income (mainly offshore oil business and port pilotage) rose 24.4% from the same period last year, which is basically the same as the year-on-year growth rate in the first half of the year. We estimate that in the third quarter, we still benefit from the increase in flight volume and contract prices in the offshore oil business; the parent company's operating costs rose slightly by 2.7% compared with the same period last year, and we estimate that labor and depreciation and other costs may decline compared with the same period last year.
Operating revenue in the third quarter rose 9.4% from a year earlier, a significant slowdown from the first half, mainly dragged down by subsidiaries. We estimate that the operating income of subsidiaries declined in the third quarter compared with the same period last year.
We estimate that due to the expiration of the helicopter contract, the revenue of the land navigation business has declined compared with the same period last year.
Trend of development
Under the influence of many factors, we expect fourth-quarter earnings to decline by 80% compared with the same period last year. 1) it was confirmed that the navigation subsidy income was 23.71 million yuan in the fourth quarter of last year, and this year it was confirmed in the third quarter; 2) in the fourth quarter of last year, it was confirmed that the compensation income for the suspension of air direct H225 was about 57.51 million yuan. After deducting the effects of two one-time gains, the net profit of 2018Q4 decreased by about 43% compared with the same period last year. We expect the company's 2019Q4 profit to fall 80 per cent year-on-year.
Profit forecast and valuation
Considering the company's operating profit margin continued to improve compared with the same period last year, the performance of the main business was better than expected, raising the company's 2020 net profit by 17.4% to 169,177 million yuan. The current share price corresponds to a price-to-earnings ratio of 28.2 times / 26.9 times earnings in 2019. Maintain a neutral rating, taking into account the reduced market risk appetite, maintain a target price of 7.70 yuan, corresponding to 27.6 times 2019 price-to-earnings ratio and 26.3 times 2020 price-to-earnings ratio, which is 2.0% lower than the current stock price.
Risk
Demand in the offshore oil market was lower than expected; the renminbi depreciated sharply against the dollar; subsidies declined.