What happened: the company released its third quarter report on October 29th that the company's operating income in the first three quarters was 2.497 billion yuan, up 29.42% from the same period last year; the net profit belonging to shareholders of listed companies was 89.0269 million yuan, up 13.81% from the same period last year; the net profit belonging to shareholders of listed companies after deducting non-recurrent gains and losses was 74.9002 million yuan, up 15.76% from the same period last year. In the first three quarters of 2019, the company achieved an EPS of 0.14 yuan, and the performance was basically in line with expectations.

Comments:

1. The company's revenue is growing steadily, and the sales of network products and the financial sector are growing rapidly.

In the first three quarters of 2019, the company's operating income and net profit were 2.497 billion yuan and 89.0269 million yuan respectively, up 29.42% and 13.81% respectively over the same period last year. Among them, the operating income and net profit in the third quarter were 904 million yuan and 44.2198 million yuan respectively, up 21.08% and 10.92% respectively over the same period last year. The company's revenue growth is mainly due to revenue from sales of online products (Jinhuawei) and revenue growth in the financial industry. However, due to the low gross profit margin of the network product sales business, it has a certain impact on the company's short-term performance. However, the public security industry usually focuses on settlement in the fourth quarter, and this part of the business has a high gross profit margin, and the company's annual performance is expected to remain sound.

We judge that this year is the first year of 5G construction, operators' capital expenditure is mainly invested in wireless and carrier network sectors, which may have a certain impact on the company's telecom business. However, with the gradual development of 5G construction, the business support network CAPEX will also gradually pick up, driving the company's performance to pick up.

2. The change of product structure leads to the pressure of short-term gross profit margin, and the company continues to strengthen cost control.

In terms of gross profit margin, the company's comprehensive gross profit margin in the third quarter of 2019 was 20.4%, down 3.2 percentage points from the same period last year. The decline in gross profit margin compared with the same period last year was mainly due to the rapid growth in sales of online products and the increase in the proportion of revenue in the third quarter, but the lower gross profit margin of Jinhuawei business led to a decline in the overall profit level of the company.

In terms of expenses, the company has continued to strengthen its control over the cost side since the beginning of this year, and sales and management expenses have declined in the third quarter compared with the same period last year. Specifically, the company's sales expenses in the third quarter fell 15.4% from the same period last year, the sales expense rate was 3.4%, 1.5% lower than the same period last year; management expenses decreased 0.9%, and the management expense rate was 4.3%, 0.9% lower than the same period last year; financial expenses 14.6027 million yuan, an increase of 48.1% year-on-year, and a financial expense rate of 1.6%, 0.3% higher than the same period last year. The increase in financial expenses in the third quarter was mainly due to the increase in interest expenses on corporate financing loans. The company's R & D expenditure in the third quarter was 56.2235 million yuan, up 5.8% from the same period last year, and the R & D expenditure rate was 6.2%, down 0.9% from the same period last year. With the goal of improving efficiency and core competitiveness, the company encourages technical teams to develop reusable software products. Ensure the implementation of pre-research investment, ensure the core version of R & D investment, reduce the proportion of customization in the contract delivery process, and continuously improve the level of lean operation.

In the first three quarters, the company's sales expenses decreased by 6.7% compared with the same period last year, and the sales expense rate decreased by 1.4% compared with the same period last year; management expenses increased by 6.7% compared with the same period last year, and the management expense rate decreased by 1.0% compared with the same period last year; R & D expenses increased by 6.5% compared with the same period last year. The R & D expense rate decreased by 1.4% compared with the same period last year, and the company continued to enhance the reuse of personnel to achieve cost optimization, and achieved remarkable results in cost control.

3. The quarterly cash flow ratio of the company has been greatly improved, and the results of payback management have been shown.

In the third quarter, the operating net cash flow improved significantly, and the company's payback management achieved good results. The company's operating cash flow in the first and second quarters of this year was 127 million yuan and-158 million yuan respectively, and the operating cash flow was negative in the second quarter, partly due to Jinhuawei's increased inventory. From the perspective of the company's historical cash flow, the net cash flow generated by operating activities shows obvious seasonal fluctuations, and the peak demand for cash flow generally occurs in the fourth quarter. The net cash flow in the third quarter of this year was 164 million yuan, a sharp increase of 48.81% over the same period last year, mainly due to the increase in sales rebates of the company. This growth is based on a year-on-year increase of more than 60% in cash for purchasing goods and receiving labor services in the third quarter, reflecting the booming purchase and sales of the company's main business and maintaining a steady development trend.

From the asset side, by the end of the third quarter, the company's inventory balance was 1.235 billion yuan, an increase of 43.1% compared with the beginning of the year, mainly due to the increase in sales reserves. From the perspective of accounts receivable, the balance of accounts receivable at the end of the third quarter was 1.248 billion yuan, which was 129 million yuan less than at the end of the second quarter and 287 million yuan less than at the beginning of the year, reflecting that the company continued to strengthen the management of payback, and the accounts receivable period was good.

4. At the initial stage of 5G construction, CAPEX focuses on the upstream, and the investment in the support network gradually picks up.

2019 is the first year of 5G, and according to the operator's capital expenditure plan, network construction investment will be the first to recover. Looking back to the law of historical capital expenditure of the three major operators in China, with the gradual completion of network construction, the investment in telecom support network will also be gradually increased. In the 5G era, with the double growth of traffic and the innovation of business model, it is necessary to comprehensively upgrade the existing BOSS system. Tianyuan Dike is mainly engaged in B-domain business, in which the billing system and CRM system will change greatly. From the point of view of the billing model, the multi-dimensional billing model based on usage, connection volume, service volume, application content, delay level, speed level, customer level and network slice will be introduced; in terms of computing power, the implementation of the Internet of things will bring more traffic, and telecom operators need software platforms with larger scale and more powerful computing power. From the perspective of customer relationship management, the target customer group in the 5G era has shifted from C to B, and the richness of product types has been further improved. At present, the company occupies about 20% of China Telecom Corporation's market share in the BOSS field, and has established deep cooperation with China Unicom. Through big data's business, the company has entered China Mobile Limited's market. The company's business in China Mobile Limited and Telecom has maintained steady and sustained growth.

The competition pattern of BOSS industry has been initially established, and cloud computing is expected to become the catalyst for the change of industry pattern. Tianyuan Dike was one of the first manufacturers to cloud the BOSS system for China Unicom. In 2016, together with BABA, he won China Unicom's first card centralized cloud project and got the first opportunity to cloud the BOSS system. In addition, the company in China Telecom Corporation has undertaken Anhui Telecom BSS3.0 cloud, Shaanxi Telecom CRM cloud, Shanghai Telecom OCS cloud and other major projects. In the future, the company is expected to take advantage of the first-mover advantage and leading experience of BOSS system cloud to achieve corner overtaking.

5. the demand for bank credit management is growing at a high speed, and the financial sector of the company is developing well.

The financial sector of the company is mainly dominated by Deco Digital Gold and Wiembert. In the first three quarters of 2019, under the background of the total household credit continues to rise and the demand for bank credit management is strong, Deco's performance shows a rapid growth trend, which is expected to be maintained throughout the year. Wiembert mainly provides bank core system consulting, development and IT services to large banks. under the background of downward pressure on the overall economy, banks have strengthened cost control, the scale of investment has declined, and the current cloud demand for core systems has not yet formed a scale. On the whole, the company's annual financial sector revenue is expected to maintain rapid growth, credit management platform, new marketing system is expected to become the main driving force to boost plate income.

6. Product components help the company's public security business to sink, and it is expected to improve month-on-month in the fourth quarter.

Under the background of the information age, big data's value is gradually emerging, and the establishment of a public security data system connected by different types of police is the primary task of public security information reform. The company has deeply ploughed the field of public security information construction. Projects in developed cities such as the Pearl River Delta, Yangtze River Delta and Central China have all landed. After the company has componentized and fragmented the public security products, the company has successfully sunk to the public security business needs of third-tier cities and district and county cities. In the first three quarters of this year, the company made rapid breakthroughs in the market of the public security industry, successfully expanding new markets such as Foshan, Xiejiang, Chongqing, Guozhou, Jurong, Suqian, Shaoyang, Linhe, and Chifeng, and the contract volume of the public security industry increased significantly over the same period last year. According to the historical settlement law of the public security industry, it is expected that the project will gradually recognize revenue in four fists, and the public security business sector is developing well throughout the year.

7pr 5G IT cloud opens the future growth space of the company and maintains the "highly recommended-A" rating.

5G+IT cloud is the company's two main growth drivers in the future. The burst of traffic in the 5G era and the comprehensive innovation of application scenarios have brought about the demand for iterative upgrading of telecom software systems. The company has been deeply cultivated in the field of BOSS of the three major operators for many years, occupies a high share in the leading city of operators, and maintains close cooperation with BABA, Tencent, Huawei and other manufacturers to expand their business capabilities in big data and cloud computing. The company deeply serves the customers of the government (public security) and financial industry, and expands to multi-industries, and has accumulated a wealth of industry application scenario support capabilities. The demand for cloud computing is warming one after another, and the IT cloud trend in the industry is expected to bring sustained growth opportunities for the company. 5G + cloud computing two-wheel drive, optimistic about the company's long-term growth value in the 5G period, the company's 2019-2021 net profit is expected to be 249 million yuan, 335 million yuan, 444 million yuan, corresponding to the PE is 21.2,15.7 times, 11.9 times, maintain the "highly recommended-A" rating.

Risk tips: operators' capital expenditure falls short of expectations, market expansion falls short of expectations, and industry investment declines.