Performance review
1Q20 performance is in line with our expectations
Citic Haizhi announced its results for the first quarter of 2020: operating income was 318 million yuan, down 4.4% from the same period last year; net profit attributed to the parent company was 22.797 million yuan, up 5.4% from the same period last year, corresponding to 0.04 yuan per share; net profit from non-parent was 22.698 million yuan, an increase of 39.2% over the same period last year, deducting the effect of subsidy stagnation, which is in line with our expectations.
Excluding the effects of staggered subsidies and one-off earnings in 2019, the company's first-quarter net profit fell by about 60% year-on-year. The company received a special fund subsidy of 25.08 million yuan for general aviation development on March 30, 2020 (21.463 million yuan in May 2019). After deducting this subsidy and an one-time income of 7 million yuan from the disposal of commercial housing in the first quarter of 2019, we estimate that the company's first-quarter net profit is about 6.8 million yuan, down about 60 percent from the same period last year.
The core business was solid, with the parent company's gross profit margin rising 3.6 percentage points year-on-year to 22.1%. The revenue of 1Q20's parent company (mainly offshore oil business and port pilotage) rose 3.2 per cent year-on-year (4Q19 rose 1 per cent year-on-year), which we estimate is mainly due to year-on-year increases in freight rates for offshore oil business. Operating costs fell slightly by 1.4% year-on-year, or the volume of work declined as a result of the epidemic.
Trend of development
We expect the company's profit to decline in the second quarter compared with the same period last year. Operating income except the parent company fell 30% in the first quarter compared with the same period last year, but the corresponding costs did not fall at the same time, making the company's profit margin rose only 0.7 percentage points year-on-year in the first quarter consolidated statement. We expect the epidemic to continue to affect the operating performance of the subsidiaries in the second quarter. In terms of subsidies, Haizhong Airlines, the company's holding subsidiary, received 21.33 million yuan in subsidies in April 2020, equivalent to the 21.463 million yuan confirmed in the second quarter of 2019.
Profit forecast and valuation
Keep profit forecasts for 2020 and 2021 unchanged. The current share price corresponds to 28.1 / 25.5 times earnings in 2020 / 2021. Maintain a neutral rating and a target price of 6.60 yuan, corresponding to 27.6 times 2020 price-to-earnings ratio and 25.0 times 2021 price-to-earnings ratio, which is 1.9% lower than the current stock price.
Risk
Demand in the offshore oil market was lower than expected; the renminbi depreciated sharply against the dollar; subsidies declined.