occurrences

On October 28, 2019, Sichuan Changhong released the 2019 Third Quarter Report.

In 2019 Q1-3, the company achieved total operating revenue of 62.210 billion yuan, an increase of 7.56% over the previous year; achieved net profit of 38 million yuan, a decrease of 81.23% over the previous year; and realized net profit of -113 million yuan after deducting non-return to the mother, a year-on-year decrease of 343.62%.

On a quarterly basis, the company achieved revenue of 22.242 billion yuan in the single quarter, an increase of 15.81% over the previous year; realized net profit of -13 million yuan, a year-on-year decrease of 128.51%; and realized net profit of -67 million yuan after deducting non-return to the mother, a year-on-year decrease of 51.14%.

Brief review

1. Domestic sales were still weak in Q3, and the company's revenue returned to double-digit growth

At the industry level, with economic growth slowing again in the third quarter and real estate regulation still not being relaxed, the home appliance market is still under pressure. According to overall data from Zhongyikang's omni-channel promotion, sales of color TVs, air conditioners, refrigerators, and washing machines in 19Q3 changed -3.26%, -13.51%, 0.43%, and -1.31%, respectively, and the growth pressure is still strong.

In terms of export sales, with the exception of color TV, demand for white television is relatively steady. According to data from the General Administration of Customs, domestic exports of air conditioners, refrigerators, washing machines, and color TVs changed 9.41%, 3.80%, 13.54% and -8.08% year-on-year in 19Q3. While overall stability was steady, there was a slight slowdown compared to Q2. The subsequent trade situation tended to ease, and home appliance exports are expected to gradually heat up.

Against the backdrop of industry pressure, Changhong's revenue bucked the trend and rebounded in 19Q3, up 15.81% year-on-year to 22.242 billion yuan. Following 18Q1, it achieved double-digit growth again. The results of the company's adjustments in industrial layout, service transformation, and ToC channel optimization are gradually showing.

2. Profitability is still being tested, and expenses are reasonably controlled during the period

19Q1-3 achieved net profit of 38 million yuan to the mother, a decrease of 81.23% over the previous year; net profit after deducting the return of the mother was 113 million yuan, a decrease of 343.62% over the previous year. Mainly due to businesses such as color television and compressors facing fierce market competition, terminal prices are being dragged down by downward pressure.

The comprehensive gross margin of the 19Q1-3 company was 11.94%, down 0.28pct from the previous year, and the Q3 single-quarter gross margin was 11.91%, down 0.32pct from the previous year.

The company's sales and management expenses increased slightly in the first three quarters, financial expenses dropped a lot, and overall control was good. The sales expense ratio of 19Q1-3 was 6.76%, an increase of 0.13 pct over the previous year, and the Q3 quarterly sales expense ratio was 6.88%, an increase of 0.03 pct over the previous year; the 19Q1-3 management expense ratio (including R&D) was 3.54%, an increase of 0.04 pct over the previous year, and the financial expense ratio was 0.37%; the year-on-year decline was 0.61 pct, mainly due to reduced exchange losses and the recovery of financing costs.

3. Channel transformation and innovation lead, and steadily promote transformation

Faced with the severe market situation and current operating situation, the company carried out changes in business and channels. On the industrial side, the company rearranged the industrial layout, eliminated inefficient industries, emphasized resource gathering and promoted business restructuring; on the channel side, the company took retail as the core, re-optimized and integrated the domestic marketing system to promote ToC marketing transformation and efficiency; on the operational side, the company promoted the improvement of turnover efficiency by various subordinate industrial units and promoted the improvement of cash flow control and receivable inventory efficiency.

In terms of emerging technologies, the 2019H1 color TV business relies on the company's mature and advanced manufacturing system, and uses the “IE+IT+AT” technology architecture to achieve intelligent manufacturing line software and hardware layout, further enhancing intelligent manufacturing capabilities; in terms of white electronics products, the launch of innovative revolutionary products represented by the “Full Thin” series and the “M Xiansheng” series brought a new atmosphere to the industry; in terms of ice compression products, the company continues to build a world-leading compressor R&D platform to maintain the leading edge of refrigerator compressors in core technologies such as efficiency, small size, and frequency conversion.

In terms of capacity expansion, in May 2019, the company announced that it plans to invest 1,903 million yuan to build a smart display terminal project in the Intelligent Manufacturing Industrial Park. After completion, it will further enhance the company's productivity and market competitiveness. It is expected to achieve an annual production capacity of 6 million smart display terminals, 7 million digital TV and IoT terminals, while upgrading the supporting processing capacity of front-end plastic pressing, stamping and precision patches.

4. The scale of inventory and accounts receivable declined slightly. Operating cash flow declined significantly. In terms of inventory, 19Q1-3's inventory volume declined compared to the same period in 2018. At the end of the third quarter, the company's inventory was 14.988 billion yuan, down 5.42% from the same period last year, and the number of inventory turnover days was reduced by 10 to 72 days.

In terms of accounts receivable, the accounts receivable of 19Q1-3 companies decreased 0.63% to 10.115 billion yuan compared to the same period last year. The number of turnaround days was 40 days, a decrease of 2 days from the same period last year.

Operating cash flow declined. 19Q1-3 achieved operating cash flow of -670 million yuan, down 159.59% from the same period last year. Among them, Q3 achieved operating cash flow of 504 million yuan in a single quarter, a year-on-year decrease of 65.09%, mainly due to changes in the sales and procurement settlement structure.

Investment advice: The company is an established state-owned enterprise in the home appliance industry. It has a diverse and extensive business layout, and transformation and upgrading are progressing steadily. We are looking forward to future improvements in the company's profits. We will temporarily give the company a 2019 outlook. The company's net profit returned to the mother in 2019 is estimated to be 58 million yuan, down 82.11% from the previous year, and will not be rated for the time being.

Risk warning: Increased competition in the home appliance industry, the development of the trade war fell short of expectations, and adverse exchange rate fluctuations affected.