occurrences

On April 24, 2020, AUCMA released its 2019 annual report. The company achieved revenue of 6.433 billion yuan in 2019, an increase of 13.96% over the previous year; realized net profit of 193 million yuan, an increase of 176.06% over the previous year; achieved net profit of 74 million yuan after deducting non-return net profit of 74 million yuan, an increase of 108.37% over the previous year.

On a quarterly basis, the company achieved total operating revenue of 1,525 million yuan in a single quarter, an increase of 18.93% over the previous year; realized net profit of 106 million yuan, an increase of 411.47% over the previous year; and achieved net profit of 18 million yuan after deducting non-return net profit of 118 million yuan, an increase of 38.13% over the previous year.

The company plans to distribute a cash dividend of 0.8 yuan (tax included) for every 10 shares to all shareholders. In total, it plans to distribute a cash dividend of 63.347 million yuan (tax included), accounting for 33.13% of net profit for the whole year.

1. Product and marketing go hand in hand. AUCMA's revenue bucked the trend and rose. At the industry level, the domestic home appliance industry carried a heavy burden and moved forward in 2019. Affected by factors such as the slowdown in global economic growth, trade friction between China and the US, and the post-real estate cycle, the growth of various sectors of China's electronics sector continued to be under pressure in 2019. According to overall data from Zhongyi Kang, the retail sales volume of domestic air, ice and laundry in 2019 changed by -7.29%, 4.84%, and -1.26%, respectively. The year-on-year growth rate of sales of small household appliances was only 1.6%, and the slowing trend is obvious.

Facing pressure from the industry, the company accelerated product iterations and upgrades, and launched differentiated high-end products such as air-cooled frost-free series freezers and C-tech fresh clean series refrigerators; increased marketing volume, and carried out more than 11,000 promotions of various types during the year, covering an audience of 2.6 million people. Driven by products and marketing, the company achieved revenue of 6.433 billion yuan in 2019, an increase of 13.96% over the previous year.

By business: 1) The main refrigerator and freezer business achieved revenue of 3.619 billion yuan, an increase of 15.63%; 2) The small appliances, air conditioning, and washing machine businesses achieved revenue of 466, 323, and 289 million yuan respectively, with year-on-year increases of 89.03%, 31.37%, and 18.51%, respectively, and achieved relatively rapid growth in the context of the industry's downturn. Mainly, the company targets user pain points, launches differentiated high-end new products, conforms to the trend of product upgrades in the industry, and combines marketing activities to drive effective results.

3) The electric vehicle business achieved revenue of 99 million yuan in 2019, a year-on-year decline of 50.61%. This was mainly due to the company's adjustment strategy back to the home appliance business and divesting and slimming down the original complicated business.

By region: In 2019, the company's domestic market achieved revenue of 4.620 billion yuan, up 7.47% year on year, accounting for 77.96% of main revenue, and overseas market revenue of 1,306 billion yuan, up 57.75% year on year, accounting for 22.04% of main revenue, an increase of 5.89 pct over the previous year. The rapid increase in exports is due to the company's vigorous expansion of overseas channels and active participation in industry exhibitions and overseas market promotion. The company regards Japan and Indonesia as core markets, maintains its own brands and OEMs in parallel, and at the same time increases the expansion of its own brands, so that the share of private brand products has increased steadily.

2. Land collection and storage compensation increased profits, and profitability increased significantly. In terms of profit, AUCMA achieved net profit of 193 million yuan in 2019, an increase of 176.06% over the previous year; of these, Q4 reached 106 million yuan in a single quarter, an increase of 411.47% over the previous year, mainly due to asset disposal income contributions. In January 2019, the company signed the “Agreement on Withdrawal of State-owned Construction Land Use Rights”, and the Natural Resources Bureau of Huangdao District of Qingdao City took back land at the northwest corner of the AUCMA Industrial Park and the north side of South Xin'an. The total value of compensation for asset disposal this time was 191 million yuan, including 102 million yuan in pre-tax revenue in 2019. In terms of the main business, the company's gross profit margin and net profit margin in 2019 were 21.14% and 3.12%, up 1.20 and 1.79 pct respectively from the previous year. Mainly, with the combined help of factors such as raw materials, value-added tax, product upgrades, and cost control, the gross margin of the company's core products increased significantly.

Subsequent subsidiary storage will still be implemented, forming a new round of growth on the company's profit side. On March 27, 2019, the company's holding subsidiary, Qingdao AUCMA Information Industrial Park Co., Ltd. and the Qingdao Laoshan District Natural Resources Bureau agreed to recover 38,848 square meters of land. Land acquisition compensation and financial aid totaled 484 million yuan. AUCMA held 55% of the subsidiary's shares, and the corresponding compensation and subsidy amount was about 266 million yuan. Up to now, the land has not yet completed government bidding procedures, and the company has not obtained relevant compensation or financial aid.

In terms of expenses, due to increased promotional activities during the year, the company's sales expenses rate in 2019 increased by 1.27 pct to 13.75%; the management expenses rate was 2.52%, down 0.07 pct from the previous year, and the R&D expenses rate was 2.09%, up 0.10 pct from the previous year, and remained stable. The financial expense ratio decreased by 0.15 pct to -0.03% year-on-year, due to an increase in interest income. Looking at a single quarter, the 19Q4 sales expense ratio increased by 4.83 pct to 17.97% year on year, as reflected in the 2019 Double Eleven industry promotion campaign. The management fee rate decreased by 0.36 pct to 2.74% year on year, R&D expenses decreased by 0.09 pct to 2.50% year on year, down slightly; the financial expense ratio decreased by 0.58 pct to -0.40% year on year.

3. Strengthen channel construction and expand overseas channels

In terms of domestic channels, in 2019, the company focused on three major battles: marketing volume, channel network enhancement, and quality engineering. Throughout the year, 4 marketing summits and 16 new product launches were held, more than 11,000 promotions of all kinds were held, and more than 500 live events were held, covering an audience of 2.6 million people. 89 O2O experience stores were added throughout the year, and the core terminal image was enhanced by 2,899. We have strengthened the sampling of high-end products, further promoted the Winshanghui distribution system, and initially realized digital marketing. Commercial channels have further integrated channel resources and done a good job in channel coordination. The company's “View Bing at a Glance” system has been widely praised by customers such as Yili, Mengniu, and Sinian; 243 smart cold chain channel development networks have won bids for benchmark projects such as Hubei Disease Control and Jiangsu Disease Control, solidifying the company's superior position in the field of disease control.

Overseas market development has accelerated. The company has established a new Indonesian trading company, actively participated in industry exhibitions and overseas market promotion, vigorously expanded export categories, and ensured the steady growth of traditional major markets. At the same time, the company places equal emphasis on its own brands and OEMs, concentrates on core markets such as Japan and Indonesia, increases the expansion of its own brands, and maintains steady growth in the share of its own brand products. Channel construction has driven the company's export revenue and profit to achieve outstanding performance. In 2019, overseas revenue increased 57.75% year on year to 1,306 billion yuan, and gross margin increased 2.85 pct to 13.89% year on year.

4. Ultra-low temperature subsidiaries have grown significantly. The pandemic has spawned demand for low-temperature storage, and the COVID-19 pandemic is dangerous and organic, and has spawned demand for low-temperature medical storage. Health and intelligence became one of the most popular concepts during the pandemic. Standardization of health and smart modules and functions may become a trend in industrial evolution and consumption upgrading. On February 14, 2020, the 12th meeting of the Central Committee on Comprehensive and Deepening Reform made it clear that biosafety should be integrated into the national security system to comprehensively improve the country's biosafety management capabilities. It is necessary to push for the introduction of biosafety laws as soon as possible, speed up the establishment of a national biosafety law, regulation system, and system guarantee system, which may further catalyze medical cold chain demand.

The company has accumulated a deep accumulation of low-temperature storage, and its performance improved significantly in 2019. In 2011, AUCMA established an ultra-low temperature refrigeration equipment company to undertake the development and sale of ultra-low temperature equipment, medical cold chain equipment, etc. Relying on hard work and overseas cooperation, AUCMA's medical cold chain is developing rapidly. In 2019, the ultra-low temperature refrigeration equipment subsidiary grew rapidly, achieving revenue of 168 million yuan, an increase of 87.55% over the previous year; net profit of 159.14,000 yuan, an increase of 146.89% over the previous year. The high revenue increase benefited from the company's complete range of products, strong competitiveness in segmented fields, and full coverage of consumer needs. At the same time, the medical cold chain demand spawned by the epidemic may further benefit the company's development.

The company has high expectations for mixed reform, and rationalizing governance is expected to increase business vitality. In July 2019, Qingdao added a number of municipal state-owned enterprises, including AUCMA, Hisense Group, and Qingdao Double Star, to the list of mixed reform enterprises to attract various types of capital and accelerate the mixed development process of state-owned enterprises in Qingdao. AUCMA has already carried out some promotion and mixed reform target collection work. In the future, it will cooperate with enterprises that have strong market expansion capabilities and are related to the online and downstream of the company's industry through various methods such as capital increase and stock expansion, share transfers, and introduction of strategic investors. As of 2019, the Qingdao Municipal State-owned Assets Administration Commission, as the actual controller, held a total of 47.30% of the shares, with a large weight of state-owned assets. Based on the shareholding situation in 2019, the total number of direct shares held by the company's eight company executives was 4.33 million shares, accounting for only 0.54% of the company's total share capital. Affected by the nature of the company's ownership, there is plenty of room for improvement in corporate governance and operational efficiency. If the mixed reform of AUCMA is carried out smoothly, incentives for key employees and management are expected to be strengthened, and the company's management is expected to be revitalized after the governance structure is rationalized.

Investment advice:

As an established leader in the domestic refrigeration sector, AUCMA's operations have boosted significantly in recent years by focusing on its main business. A breakthrough has been made in the cold chain upgrade, and marketing and promotion have reaped results. The COVID-19 pandemic in 2020 revealed shortcomings in global epidemic prevention. The company has a clear first-mover advantage in the domestic low-temperature storage field. The pandemic may have catalytic benefits for related businesses.

We expect the company's operating income in 2020-2021 to be 6.755 billion yuan and 7.832 billion yuan respectively, up 5.02% and 15.95% year on year, respectively; return net profit will be 2.55 million yuan and 294 million yuan respectively, up 32.23% and 15.13% year on year respectively. The corresponding P/E will be 18.7x and 16.2x respectively, maintaining the “increase in holdings” rating.

Risk Factors:

The outbreak of the epidemic has dragged down sales of home appliances; competition in the industry has intensified dramatically; and the cost of raw materials has risen sharply.