Event: Hande Information released 2019 annual report, the company achieved operating income of 2.723 billion yuan (yoy-4.95%) in 2019; net profit of 86.1142 million yuan (yoy-77.74%); deduction of non-return net profit of 51.6488 million yuan (yoy-80.93%); EPS 0.1 yuan per share. Among them, 2019Q4 realized revenue of 487 million yuan (yoy-35.53%) and net profit of 2.2775 million yuan (yoy-98.37%).

The demand for traditional ERP slows down, and there are both opportunities and challenges for new business transformation: in 2019, the company's revenue is 1.68% lower than that of KuaiBao, and its net profit is reduced by 15.90%. The performance is slightly lower than expected, but it is normal to refer to the experience of overseas intelligent manufacturing (Autodesk) + cloud transformation (Adobe Inc) companies. Since 2016, the company has gradually transformed from traditional ERP-related services to intelligent manufacturing and cloud application solutions, and the revenue structure has also changed. In 2019, the revenue share of the company's sub-sectors remained basically stable, of which the software implementation business was still the main support (accounting for 65.99% of the total revenue). The realized revenue was 1.797 billion yuan, down 7.08% from the same period last year, and the gross profit margin was 25.16%, which was lower than that of the previous period (9.91pct). Based on the follow-up information operation and maintenance needs of stock customers, the company's operation and maintenance market continues to open up. The revenue of customer support services is 533 million yuan, an increase of 7.7% over the same period last year, and the gross profit margin is 45.58%, which is a high level in recent years. The revenue of software outsourcing business reached 257 million yuan, an increase of 32.59% over the same period last year. Due to the termination of the agency cooperation with SAP, the sales revenue decreased by 52.28% to 71.3003 million yuan compared with the same period last year, but the gross profit margin was 49.41%, an increase of 24.81pct over the previous period. In addition, the scale of the company's factoring business remained stable, put forward the concept of "financial supermarket", and continued to build the Hande ecosystem with banks, JD.com and other customers to achieve an income of 23.0197 million yuan (yoy-4.49%). Overall, the company's gross profit margin in 2019 was 30.59%, the lowest in nearly a decade, but its value (Accenture PLC) and trend (Autodesk) compared with overseas related enterprises, is still at a reasonable level. In 2019, the company launched competitive intelligent manufacturing solutions based on HCM, MES and other software platforms in the field of intelligent manufacturing, and cloud business has also made great accumulation and development. With the general trend of "intelligent use in cloud", 2020 will be a key year for the company's transformation.

The expense rate is stable in the low range, the cash flow is abundant, and the overall operation of the company is good: in 2019, the expense rate is 13.95%, of which the sales expense rate is 6.82%, and the management expense rate is 7.15%, which is basically the same as the previous period. specifically, the sales expense was 186 million yuan, up 5.08% from the same period last year; and the management cost was 195 million yuan, down 5.94% from the same period last year. And the financial expenses were-503200 yuan, an increase of 97.41% over the same period last year, mainly due to the increase in interest on bank loans. On the whole, the company has better ability to control fees. In terms of R & D, the company has continued to increase its R & D efforts since the transformation. In 2019, the R & D investment was 485 million yuan, of which the capitalization rate was 43.69%, a decrease of 0.41pct over the previous period, and R & D expenditure was 273 million yuan, an increase of 21.32% over the same period last year. In addition, according to the change of accounting policy, the company's credit impairment loss-117 million yuan, investment income-27.1478 million yuan (72.2994 million yuan in the same period last year) caused a drag on profits.

At the same time, at the end of 2019, the company's accounts receivable totaled 1.803 billion yuan, an increase of 3.32 percent over the same period last year. Although it was at a high level, the growth rate gradually narrowed; the net cash flow of operating activities was 66.2586 million yuan, down 67.20 percent from the same period last year, mainly for the payment of 1.361 billion yuan in other cash related to business activities, an increase of 68.54 percent over the same period last year.

With the steady progress of traditional business and the accelerated expansion of overseas markets, the potential of cloud applications is about to be released: compared with last year, under the influence of the external economic environment and changes in the enterprise IT service market, the demand from the domestic ERP field showed signs of slowing down, and the business opportunities for ERP business decreased, but the company seized the opportunity to strengthen the joint implementation of independent products and multi-systems. The implementation business of enterprise information package software has maintained steady development, and the overall solution capability of the industry has been further improved. at the same time, overseas markets have been expanded, especially the trend of providing services to Japanese customers locally has increased significantly. In the field of intelligent manufacturing, the company actively integrates various professional resources, takes fine manufacturing as the core, launches complete industry solutions that are competitive in the fields of research and development, supply chain, warehousing and logistics, and upgrades the overall structure of its own product system. the interconnection and interworking ability of machinery and equipment has been further strengthened, and it has the ability to implement on a large scale. In the future, the company will continue to strengthen order mining in key industries and create a benchmark for intelligent manufacturing projects. In terms of cloud business, the company gradually improves the company's cloud application product matrix based on its own micro-service architecture, HAP Cloud cloud platform, HCMP cloud management platform-hand fusion cloud governance platform and other cloud applications. At the same time, the company has established cloud cooperative relations with big companies such as Baidu, Inc., Amazon.Com Inc, Microsoft Corp, BABA, Huawei and Tencent (the company achieved more than 20 million revenue from related businesses and products with Baidu, Inc. in 2019, and currently has more than 40 million business opportunities on hand). And plans to continue to deepen cooperation with Baidu, Inc. in product development and business opportunities in 2020, focusing on the integration of enterprises in the fields of China and Taiwan, basic computing resources, industrial quality inspection, intelligent customer service, data platform, etc. The potential of the company's cloud business may be further released.

Conforming to the tide of "endowing intelligence with numbers in Shangyun", Hande's own three major businesses of "cloud + intelligent manufacturing + supply chain finance" are expected to have a linkage effect and can be expected in the future.

The regular customer group formed a certain support for the operation in the first quarter: the company's revenue in the first quarter of 2020 was 589 million yuan, down 16.03% from the same period last year; the net profit returned to its mother was 12.1307 million yuan, down 81.57% from the same period last year.

Although the performance declined in the first quarter affected by travel control, the company's main income over the years came from high-quality, sticky old customers, thus forming a certain support for the normal operation of the business during the epidemic. During the 20Q1 period, the expense rate was 18.33%, down 3.55pct from the same period last year, of which the sales expense rate was 4.53%, down 3.37pct from the same period last year; the management expense rate was 7.31%, an increase of 0.78pct over the same period last year; and the R & D expense rate was 8.46%, an increase of 2.2pct over the same period last year. The financial expense rate was-1.97%, and the financial expense was-11.6166 million yuan, down 239.10% from the same period last year, mainly due to exchange gains and losses caused by changes in the exchange rate of foreign currency assets and the increase in interest on bank loans. In addition, the net operating cash flow increased by 47.76%, due to the reduction of travel expenses under the influence of the epidemic.

Investment suggestion: from 2020 to 2022, the company is expected to achieve operating income of 29.25,33.28,3.782 billion yuan, net profit of 2.88,3.79 and 443 million yuan, EPS of 0.33,0.43,0.50 yuan respectively, corresponding to 28X, 221X and 18X, maintaining the "recommended" rating.

Risk tips: cloud transformation is not as expected; competition in the consulting industry has intensified; demand for traditional ERP has shrunk.