The company's performance is in line with our expectations

Keyuan Wisdom announced 2019&1Q20 results: operating income in 2019 was 750 million yuan, an increase of 23.2% over the same period last year; net profit belonging to the parent company was 127 million yuan, an increase of 13.4% over the same period last year, corresponding to earnings per share of 0.53 yuan. 1Q20, the company's operating income / return net profit was 128 million yuan / 10.71 million yuan respectively, an increase of 3.7% over the same period last year / a decline of 6.0%. The company's revenue growth slowed down and profits declined in the first quarter, which we think is mainly due to the negative impact of the epidemic.

The growth rate of the industrial Internet is still higher than that of the whole, and the gross profit margin remains stable. In 2019, the company's industrial automation and industrial Internet business revenue increased by 14.01% to 4.97 / 241 million yuan, respectively, and the industrial Internet still maintained a higher growth rate. From the perspective of gross profit margin, the gross profit margin of industrial automation and industrial Internet in 2019 was 42.4% and 42.9% respectively, slightly lower than the same period last year. 0.8/0.8ppt. In addition, the company's smart energy revenue contributed 9.88 million yuan for the first time. The company's comprehensive gross profit margin was 42.5% in 2019, down 0.9ppt from the same period last year.

The operating cash flow improved and the expense rate decreased slightly during the period. In 2019, the company's sales / management / finance / R & D expense rates were-0.3/-1.3/-0.5/+0.2ppt, the company's net profit margin decreased by 1.5ppt to 17.0% compared with the same period last year, and the asset impairment loss increased by about 26 million yuan compared with the previous period. In 2019, the company had a net inflow of operating cash of 123 million yuan, which was 48 million yuan more than the same period last year, mainly due to an increase in accounts payable and advance receipts.

Trend of development

Continuing to implement the transformation wisdom strategy is in line with the policy direction of the "new infrastructure". The company further defines the 3i strategy of building the "three networks" of Industrial Internet (IoI), Urban Internet (IoC) and Energy Internet (IoE). For example, in the industrial Internet business, the smart power sector has successively signed a number of gas turbine power generation control systems, ranking first in China in total performance; the energy Internet business officially contributes income and is tracking more than 10 smart energy investment projects. According to the definition of the NDRC, the new infrastructure mainly includes three aspects: information infrastructure, fusion infrastructure and innovation infrastructure; the industrial Internet with the intelligent layout of Keyuan belongs to information infrastructure, while urban Internet and energy Internet belong to converged infrastructure. We believe that the company's transformation is in line with the direction of industry development and policy support.

Profit forecast and valuation

Taking into account the impact on the delivery pace of the company, we lowered our 2020 profit forecast by 17.7% to 140 million yuan, and introduced a net profit forecast of 170 million yuan in 2021, corresponding to a year-on-year increase of 23.2%. The current share price of the company corresponds to 24.1max 19.6 times 2020max 2021e Pdebase E. Taking into account the downward adjustment in profit forecast and the increase in the valuation of the industrial Internet industry, we maintain the company's target of 17.86 yuan unchanged, corresponding to the 2020max 21e 30max 25x Pmax E, which has 26% room to rise compared with the current stock price, and maintain an outperforming industry rating.

Risk

The demand of industrial automation industry is declining.