The company issued a performance forecast for 2019, and the change range of net profit during the reporting period is expected to be 1.22-132 million yuan, an increase of 10.08% and 19.14% over the same period last year.
Core ideas:
The return net profit is slightly lower than expected, which is mainly due to three major factors: increased investment in research and development, increased initial cost of wireless headphones and investment in factory construction in Vietnam. According to the median forecast estimate, the company's return net profit in 2019 is about 127 million yuan, an increase of 15.45% over the same period last year, slightly lower than our previous estimate of 139 million.
From the perspective of deducting non-return net profit, in 2019, the company deducted non-return net profit of about 128 million yuan (taking the median of performance forecast), an increase of 31.96% over the same period last year, maintaining a high growth. We believe that the revenue-end companies still maintain a high growth trend, while the lower expectations of homing net profit are mainly due to:
1) increase investment in research and development. The company spent 59 million yuan on R & D in the first three quarters of 2019, which is close to 64 million yuan in 2018. It is expected that the company's 2019Q4 R & D investment will further increase, but the increase in R & D investment is a necessary condition for industrial evolution. In our in-depth report, "Jiahe Intelligence: industry high beta and company strong alpha enter the resonance period", we believe that the experience of TWS headphones has begun to enter the hard core stage. Noise reduction, sound quality and intelligence will become the three major directions of product experience optimization. 2) the first year of the company's order for ODM wireless headphones in 2019 will lead to an increase in costs. The revenue of 2019Q1-Q3 is 1.629 billion yuan, which has exceeded 1.347 billion yuan in 2018, and the revenue of wireless headphones in 2019 (542 million yuan) is close to that of 2018 (594 million yuan). The initial release of wireless headphones has brought a substantial increase in cost, but we believe that as the order scale continues to expand, the company's economies of scale will appear, and profitability is expected to pick up. 3) Construction and investment of production base in Vietnam.
In 2019, the company set up Jiahe Vietnam subsidiary, and is expected to invest about 69.5 million yuan in cash to build Jiahe Vietnam. According to the data of the prospectus, the company will invest in six production lines in the first phase, with an income of 150 million yuan, and the second phase investment will expand the production lines to 16, with an income of 400 million yuan. The first phase of investment is expected to be put into production in the second half of 2019, and the second phase of investment is expected to be put into production in 2020.
We believe that with the completion of the construction and commissioning of the company's Vietnam plant, the economic benefits of the factory will be shown.
In addition, the production base is the company's overseas production base, while increasing the company's production capacity, it will help the company to better serve international customers and strengthen the stickiness of international customers. Looking to the future, the industry high beta and corporate strength alpha enter the resonance period, and the company is expected to start the profitability upward cycle in 2020:
1) Industry: the TWS headphone industry is prosperous, and the order demand is more full. at the same time, we think that the non-Airpods headphone market starts at an accelerated pace, and as the product experience begins to enter the hard core stage, the "middle small" pattern is expected to improve, which will benefit the company's downstream mobile phone brands and top audio manufacturers. 2) the company: we believe that the company has the advantages of customers, R & D and scale, and will continue to benefit from the evolution of the competitive pattern of the industry.
The prosperity of the TWS headphone industry is high, the non-Airpods headphone market is accelerated, the "middle small" pattern is expected to improve, and the product experience enters the hard core stage at the same time. From 2016 to 2018, global shipments of TWS headphones increased from 9.18 million to 46 million, with a compound annual growth rate of 124%. Total shipments of 77.5 million headphones in the first three quarters of 2019 have far exceeded that of 2018. The current prosperity of the TWS headphone industry is high. We divide the TWS headphone market into two markets: Airpods and non-Airpods headphones, looking at the future growth space. Let's assume that 98m iPhone phones are sold this year and 62 million Airpods phones are sold this year, with a penetration rate of 32 per cent. On the Android side, Android assumes that 1.192 billion phones will be sold this year, with only 55 million TWS headphones sold, with a penetration rate of just 5 per cent. Based on expected penetration and ex-factory prices, we expect sales of non-Airpods headphones to accelerate and the market size in 2023 is expected to grow eightfold compared to 2019, while the Airpods market is nearly two times larger by analogy. Further analysis, the overall market structure of TWS headphones shows the characteristics of "big at both ends and small in the middle", that is, high-end models sell the most in Airpods, followed by low-end models (the price is less than 200yuan), and finally non-Airpods middle and high-end models. Through the comparative analysis of the historical evolution of smart phones, combined with our judgment that TWS headphones have entered the hard core stage, we believe that shipments of high-end brands of non-Airpods headphones will increase significantly, and the "small in the middle" pattern will be improved, which will benefit mobile phone brand manufacturers and top audio manufacturers.
At the same time, we analyze from the Bragi headphones and the Airpods process that the TWS headphones will enter the hard core stage. 2017-2018 Bluetooth technology transmission program is not mature, the major manufacturers are focused on solving TWS headset Bluetooth disconnection, delay and other Bluetooth technology transmission problems, after solving the basic wireless Bluetooth transmission problems, the product will focus on the consumer product experience itself, noise reduction, sound quality and intelligence will become the product experience optimization of the three major directions of development, downstream mobile phone brands and top audio manufacturers have advantages in these three aspects.
The company's three major advantages to build competitive advantages, the benefit is relatively clear. The company takes headphone manufacturing as its core business and mainly operates in ODM mode. 2019 half-year revenue of wireless headphones (542 million yuan) is close to 2018 annual revenue (594 million yuan), and wireless headphones have become the main contribution to headphone revenue. We believe that the company has the advantages of customers, R & D and scale, and will continue to benefit from the evolution of TWS headphones and competitive landscape. In terms of customers, the company began to promote the strategy of large customers and large orders in 2017, and the customer concentration has been increasing. Harman has always been the company's largest customer, accounting for 49.18% of 2019H1 revenue. In 2019, the company successfully cooperated with Huawei and Skullcandy, and 2019H1 Huawei and Skullcandy immediately became the company's top five customers. In terms of mobile phone brands, the company also passed Samsung certification in 2019. Harman for the top audio manufacturers, Huawei, Samsung for the global market share of the top three mobile phone brands, the company into its supply system, in line with the competitive pattern of the industry. In terms of R & D, the company has a deep accumulation of technology and continues to make efforts to wireless intelligence. Raising investment in R & D centers will also promote technological innovation and upgrade, and further enhance the potential for future development. In terms of scale, the company already has manufacturing and quality advantages, and the company raises investment in smart factory construction projects, which will help to improve production efficiency. In terms of production capacity, the company's Vietnam plant is about to start production, boosting the company's production capacity. The company also uses outsourcing processing to increase production capacity and reduce production costs. We compare and analyze the revenue and profit of the main ODM and OEM enterprises of TWS headphones in the market, and we believe that the company has relative size and profit advantages.
Profit Forecast: we estimate that the company's revenue in 2019, 2020, and 2021 will be 2.237, 30.05, 3.911 billion yuan, respectively, and its net profit will be 1.29, 1.99, and 1.89 million, respectively. The corresponding EPS will be 0.77, 1.19 and 1.73, and the current share price will be 50.63, 32.70 and 22.53 times, respectively. We believe that the current TWS headphone industry is booming, the non-Airpods headphone market is accelerating, and as the product experience begins to enter the hard core stage, the "middle small" pattern is expected to improve, which will benefit the company's downstream mobile phone brands and top audio manufacturers. At the same time, we believe that the company has the advantages of customers, R & D and scale. Harman continues to be the company's largest customer, and the company has entered the supply chain of Huawei and Samsung. Huawei has become the top five customers in the first half of the year and has high order flexibility in the future. in addition, the production capacity of the Vietnamese factory will also be released next year, and the company's future performance is highly uncertain. Therefore, we believe that the high β of the industry and the strong alpha of the company entering the resonance period will continue to benefit from the evolution of the competition pattern of the industry. We give the company 50 times PE in 2020, combined with an EPS of 1.19 yuan in 2020, the target price is 59.50 yuan, and the reasonable valuation room for increase is 52.41%, maintaining the "highly recommended" rating.
Risk tips: the risk of TWS headphone sales falling short of expectations; the risk of order loss from the company's major customers; the risk that the company's capacity expansion is not as expected; the risk of large exchange rate fluctuations.