The chemical sector was affected by the industry cycle. The military industry's performance was +37% to 54% year-on-year. On December 16, the company released its 2019 performance forecast. It is estimated that net profit for the whole year was 290 to 330 million yuan, down 34% to 42% year on year, and net profit after deducting non-net profit fell 21% to 31% year on year. According to the company's business sector:
(1) Chemical sector: Net profit is expected to be achieved of 130 to 150 million yuan, a year-on-year decrease of 51% to 57%. The reason is that the average price of chemical products has declined cyclically and the sales prices of the company's main chemical products have declined.
In response to the cyclical price fluctuation characteristics of basic chemical products, the company invested in hydrogen filling stations and waste reuse projects in 2019, which is conducive to mitigating the adverse effects of future cyclical fluctuations in chemical products on performance.
(2) Integrated circuit sector: Net profit is expected to reach 160 to 180 million yuan, an increase of 37% to 54% over the previous year. There are two reasons: first, sales of FPGA chips, graphics processing chips (GPUs) and other chips supplied to customers by the subsidiary Changsha Shaoguang increased significantly year-on-year, second, the subsidiary Waco Electronics' electronic modules for new energy vehicles, electronic modules for 5G communication, and a military module. Third, Changsha Shaoguang and Waco Electronics broadened the civilian chip market to open up more space for the company to develop.
(3) Non-recurring profit and loss: In the same period last year, non-operating profit after tax was obtained due to the disposal of financial assets available for sale. There were no relevant matters in 2019.
The controlling shareholder, Xinyu Haoyue, plans to implement debt restructuring. Wuhan Credit will hold 20% of the shares as the controlling shareholder. On July 10, the company disclosed the “Proposed Changes in Controlling Shareholders and Actual Controllers and Resumption of Important Matters”. The controlling shareholder Xinyu Haoyue and Wuhan Credit Investment Group (hereinafter referred to as Wuhan Credit) plan to implement debt restructuring and sign a “Debt Restructuring Intent Agreement”. On May 25, 2016, the two parties signed an “Entrusted Loan Agreement”. Wuhan Credit provided Xinyu Haoyue with a loan of 1,383 million yuan, with an annual interest rate of 19% for a period of 3 years; the loan expired on July 4, 2019, and Xinyu Haoyue still owes Wuhan Credit 2,182 billion yuan (principal amount of 1,383 million yuan, interest of 799 million yuan). In this debt restructuring, Xinyu Haoyue paid off part of the debt with shares of listed companies out of RMB 2,182 billion and transferred it to Wuhan Credit. After the transfer was completed, Wuhan Credit's shareholding ratio was not less than 20% of the total share capital, and actual control of the listed company was obtained. The remaining debt will be extended for a period of 3 years. Xinyu Haoyue pledged all remaining shares of the listed company to Wuhan Credit as a guarantee.
On October 22, the company revealed in its third quarterly report that the debt restructuring plan must be reviewed and approved by the Wuhan Municipal State-owned Assets Administration Commission, and that the formal “Debt Restructuring Agreement” must wait for approval by the Wuhan Municipal State-owned Assets Administration Commission before it is signed.
Profit forecasts and ratings: The chemical business is affected by the cyclical effects of the industry. Short-term performance may decline. The medium to long term is expected to meet the opportunities for a rebound in the chemical industry, and the military sector is expected to continue to grow. The company's revenue growth rate was lowered from 21.5%/18.2%/15% to -7.72%/13.53%/15.44%, and the gross margin was lowered from 33%/32%/31% to 22.35%/23.77%/24.10%. Under this assumption, the company's revenue for 19-21 was 35.3/40.07/4626 million yuan, the return net profit was 301/4.00/481 million yuan, EPS was 0.44/0.58/0.70 yuan, PE was 28.93/21.71/ 31% 18.08x, maintaining the “buy” rating.
Risk warning: There is a risk that the chemical business will continue to decline, there is a risk that the company's debt restructuring plan will fail, and the performance of the military sector falls short of expectations.
