Performance review

Maintain neutrality

3Q19 performance is in line with our expectations

The company announced 1-3Q19 results: revenue 1.38 billion yuan, down 0.2% year-on-year, return to the mother net profit-110 million yuan, corresponding to earnings per share-0.12 yuan, down 5.1x from the same period last year. 3Q19's revenue was 530 million yuan, up 18.5% from the same period last year and 30% from the previous year. The net profit returned to its mother was-84 million yuan, down 9.1x from the same period last year and 47 million yuan from the previous year.

Comments: 1) 3Q19 comprehensive gross profit margin fell. The average price of 3Q19 domestic tungsten concentrate fell 26% from the same period last year, 18% from the previous year, the company's comprehensive gross profit margin dropped 15.5ppt from the same period last year, 10.5ppt dropped to 1.5% from the previous month to 1.5%, 1-3Q19 domestic tungsten concentrate price dropped 19% from the same period last year, and the company's comprehensive gross profit margin dropped 8.3ppt to 8% from the same period last year. 2) 3Q19 assets + credit impairment loss increased by 24 million yuan month-on-month, 1-3Q19 increased by 45 million yuan compared with the same period last year, mainly due to the increase in provision for inventory decline. 3) other income of 3Q19 increased by 12 million yuan compared with the same period last year, and 1-3Q19 increased by 34 million yuan compared with the same period last year, mainly due to the increase in government subsidies; 4) the cash flow of 1-3Q19 operating activities was 160 million yuan, an increase of 190 million yuan over the same period last year.

Trend of development

Tungsten prices are expected to stabilize. Since the beginning of September, domestic tungsten concentrate prices have rebounded 21% to 90000 yuan / ton. mainly due to cost support factors, we believe that tungsten prices are expected to stabilize at the current level.

2019 profit guidance: the company expects 2019 net profit to range from-303 million yuan to-279 million yuan, mainly due to: 1) the decline in gross profit margin caused by the decline in tungsten prices and high-cost inventory; 2) the wholly-owned subsidiary Ganzhou Aoketai continuous losses, provision for asset impairment is more; 3) Ganzhou Aoketai holding subsidiary UF1 operating profit loss, is expected to provision for goodwill impairment.

Profit forecast and valuation

Based on the company's profit guidelines, we have lowered our 2019 profit forecast by 260 million yuan to-290 million yuan, and reduced our 2020 profit forecast by 372% to-100 million yuan.

The current share price corresponds to 3.2 times / 3.4 times price-to-book ratio in 2019 / 2020. Maintain a neutral rating, but lower the target price by 14.3% to 6.00 yuan, corresponding to 3.3 times 2019 market-to-book ratio and 3.5 times 2020 market-to-book ratio, with 3.8% upside compared to the current stock price.

Risk.

Tungsten price fell more than expected.