Key points of investment:
The company announced its 2019 annual report, which is in line with expectations, and the leading position in the piano industry continues to be stable. The company achieved revenue of 2,053 million yuan, an increase of 4.0% over the previous year; Guimu's net profit of 190 million yuan, an increase of 7.7% over the previous year, in line with the expectations in our annual report; in line with EPS of 0.14 yuan; after deducting non-net profit of 160 million yuan, an increase of 13.5% over the previous year; among them, 2019Q4 achieved revenue of 454 million yuan, an increase of 7.4% over the previous year, and Guimu's net profit of 379.712 million yuan, an increase of 13.8% over the previous year. It is proposed to pay $0.35 (tax included) for every 10 shares. Net operating cash flow increased 65.52% year over year to $204 million ($123 million in 2018). The company insists on cultivating its own brand and continuous innovation. At the same time, it actively promotes international operation and development, expands high-end upgrading of the piano industry, explores Internet integration models and art education fields, and maintains steady growth in sales revenue and performance. According to data from the China Musical Instrument Association, the Chinese market share of the company's piano products reached 42.20%, the global market share reached 30.15%, and the scale of production and sales steadily ranked among the highest in the world. In 2019, the company's domestic business revenue accounted for 90.8%, and foreign business revenue accounted for 9.2%.
The main business promotes management innovation and builds an international industrial integration model. On the industry side, the global piano market continued to be sluggish in 2019, and domestic competition became increasingly fierce. In recent years, global piano production and sales have basically stabilized at around 400,000 to 500,000 units, with demand for high-end pianos showing an increasing trend. By cultivating its own brands (Kaiserburg, Pearl River, Rittmüller, Jingzhu, etc.) and acquiring internationally renowned high-end piano brands (Schimmel, Germany), the company formed a brand matrix with strong international competitiveness in high, medium and popular grades.
1) Promote the Schimmel project and increase brand influence. The company invested in the establishment of Schimmel China, which is beneficial to the operation management and marketing of the Schimmel brand in China, strengthen technical exchanges with German companies, further enhance the company's high-end technology product research and development level, expand sales scale and market share in China, and increase brand influence. In 2019, sales of various series of Schimmel's piano products were 8,053 units, an increase of 382 units over the previous year.
2) The business model continues to innovate to promote sales growth. The company actively expands online sales channels, strongly supports the operation of Tmall, Taobao enterprise stores and Jingdong flagship stores, integrates and optimizes online operation, distribution and after-sales resources, and actively participates in online marketing activities.
In 2019, the company's total piano sales reached 156,144 units, an increase of 151 units over the previous year, including 3,807 pianos sold online, an increase of 7.45% over the previous year.
3) Sales of digital musical instruments have been growing steadily, and we are continuing to explore the field of “traditional digital musical instruments+Internet education”. In 2019, Emerson sold 42,736 digital pianos, up 4.86% year on year, consolidating the company's leading position in the domestic digital piano industry.
At the same time, many new music enlightenment products developed independently by Emerson have received good market feedback.
4) Support various brand cultural activities and successfully implement the Zengcheng base project. The company's products have been showcased at many important international and national cultural and public welfare events. At the same time, the base's art museum and Kaiserburg concert hall were built and officially opened for use, laying the foundation for the company to increase its positive exposure and reputation and build a brand image.
5) Investment in art education continues to grow rapidly to achieve an integrated ecosystem. Through industrial operation and capital operation, the company accelerated the development of the art education industry and promoted network construction. By the end of 2019, there were 692 Pearl River Piano Art Education franchisees, including 377 art classrooms and 315 course series partners, covering 30 provinces. The cultural education business continues to expand, becoming a good window for serving high-end cultural and artistic activities, displaying the brand's artistic and cultural image, and achieving an integrated ecosystem.
Cash management was further strengthened, the cost rate was significantly reduced during the period, and the net interest rate increased. 1) Strengthening cash and fee control management led to increased profits: The company's financial situation continued to improve in 2019, mainly due to the company's further strengthening of cash management. Net operating cash flow increased 65.52% year-on-year to 204 million yuan (123 million yuan in 2018). As a result, the company's financial expenses fell 0.57 percentage points to 0.09%. 2) Year-on-year decline in sales expenses ratio: The company's sales expense ratio in 2019 decreased by 1.38 percentage points year-on-year to 6.91%. 3) Increased net interest rate: Affected by environmental protection, safety and other policies and changes in foreign raw material export factors, the purchase cost of timber required for piano manufacturing increased, and manufacturing costs increased due to increased manufacturing process requirements. As a result, the company's gross margin fell slightly by 0.97 percentage points to 30.35% in 2019. By increasing R&D efforts, improving the technical level of manufacturing processes, and at the same time strengthening cash management and cost control, the company increased net interest rate by 0.32 percentage points to 9.24% instead of decreasing.
The product structure continues to be optimized, high-end piano brands are increasing their brand influence, independent brands are growing and growing, and there is broad room for digital piano growth. Focus on the Internet+ art education and value service system to connect with differentiated and integrated consumption matrices.
The company's current market capitalization is 9.55 billion yuan. Considering the impact of the COVID-19 pandemic in 2020, the slowdown in domestic consumption growth, the pressure on export business, and the uncertainty of the subsequent situation, we lowered the company's net profit forecast for 2020 and 2021 to 190 and 210 million yuan (originally 210 million yuan and 310 million yuan), adding 235 million yuan to the net profit forecast for 2022. The current stock price (7.03 yuan) corresponds to PE in 2022 by 50, 47, and 41 times, respectively. We are optimistic that the company is in China The leading position in the piano industry, the long-term development direction of the comprehensive industrial layout of high-end instrument manufacturing, music education, cultural finance and media industries, and the reform expectations of state-owned enterprises have maintained growth in holdings.
