The 2019 performance fell far short of our expectations. The 1Q20 results were in line with our expectations. Fenda Technology announced its 2019 annual report and 2020 quarterly report: 1) 2019 revenue was 3.54 billion yuan, up 5.5% from the previous year, and the return mother's net profit was a loss of 3.05 billion yuan, a further decline from the loss of 780 million yuan in 2018, far below our expectations, due to excessive impairment.
2) 1Q20 revenue was 6.0 million yuan, down 12.2% year on year, net profit was 63.75 million yuan, up 31.9% year on year, after deducting non-net profit of 52.38 million yuan, up 101% year on year, in line with expectations.
The sharp loss in 2019 was mainly due to the company accruing impairment of 3.13 billion yuan for the two major metal parts subsidiaries Fuchengda, Opengda Goodwill and Fixed Assets: including goodwill impairment of 2,800 million yuan, fixed assets of 190 million yuan, and inventory, molds, etc. of 130 million yuan.
After calculation in 2019, we believe that the company's metal parts-related assets will no longer drag down the company: 1) The company has acquired Openda and Fuchengda metal parts companies one after another in the past, but due to declining demand and increased competition, the two companies lost 160 million yuan and 190 million yuan respectively in 2019. 2) This time, the company fully credited Opengda and Futengda's remaining 2.8 billion yuan of goodwill, and calculated 230 million yuan for fixed assets, inventory, etc., which we believe will greatly reduce the pressure on future cost amortization, which is beneficial to operational improvement.
Excluding the metal parts business, Fenda's headquarters still performed steadily in 2019. We estimate that it contributed about 300 million yuan in profit in 2019:1) revenue from the electroacoustic business was 1.14 billion yuan, up 12.9% year on year; health appliance revenue was 770 million yuan, up 12.0% year on year; 2) Smart wearable revenue increased by 295% to 540 million yuan thanks to contributions from Huawei bracelet, etc.; 3) Net operating cash flow was 7.1 billion yuan, an increase of 22.4% over the previous year.
Development trends
Smart speakers drive the growth of the electroacoustic business. The company is the main foundry for mainstream smart speaker brands such as Ali, Baidu, and Jingdong. We expect stable performance this year. At the same time, the company's expansion into Europe and other overseas customers will also see results, driving the electroacoustic business to grow close to 20%.
Smart wearables are expected to continue to grow at a high rate. Smart wearables were the company's biggest source of growth last year. We expect smart watches/bracelets such as Huawei and Philips to continue to grow this year, and TWS headsets will also increase, contributing 30% to the growth of smart wearables, and will benefit from AIOT opportunities in the future.
Profit forecasting and valuation
Considering the profit and loss from the stock compensation cancellation of Fuchengda's original shareholders (about 600 million yuan based on the current stock price), we raised the 2020e EPS by 91% to 0.47 yuan, and introduced the 2021e EPS of 0.25 yuan, corresponding to 20/21e 6.5x/12.0x P/E. Maintaining a neutral rating, considering the pandemic and being affected by ST, the target price was lowered by 20% to the target price of 4.00 yuan, corresponding to the 2020/2021 e8.5x/15.9x P/E. Compared with the current situation, there is still room for a 32% increase.
risks
Uncertainty about the global epidemic is high; shipments of health appliances and smart wearables fell short of expectations.