Incident: The company released its 2019 annual report, with annual revenue of 5.559 billion yuan, an increase of 56.43% over the previous year; Guimu's net profit was 159 million yuan, a decrease of 26.15% over the previous year. At the same time, the company released its report for the first quarter of 2020, with revenue of 1,895 million yuan, an increase of 89.42% over the previous year; losses of 45.406 million yuan.
The advertising and gaming business contributed to increased revenue, and the decline in gross margin of the self-media business dragged down performance growth: during the reporting period, the company's communication network equipment business developed steadily, the Internet advertising and media business continued to expand rapidly, and the total annual revenue increased by 56.43%. The 26.15% decrease in net profit was mainly due to a decrease in gross margin of 3.84pct over the same period last year. According to business analysis, the communication equipment business achieved revenue of 813 million yuan (YoY -1.72%). In the context where 4G investment fell sharply in 2019 and 5G construction was not carried out on a large scale, the company's NetPremium equipment and service business maintained stable revenue, but due to increased market competition, gross margin fell slightly by 2.50 pct; Internet business revenue was 4.675 billion yuan (YoY 75.01%), of which advertising business (YoY 80.15%) and game intermodal transportation (YoY 94.76%) were the main sources of revenue growth, and since The decline in gross margin of the media business (YoY -22.86pct) dragged down profit growth.
Q1 The communication equipment business risks are manageable, and the Internet business continues to grow rapidly: the company released the first quarterly report of 2020 and is expected to achieve revenue of 1,895 billion yuan (YoY 89.42%); losses of 450406 million yuan (YoY -287.52%). During the epidemic, the company organized emergency overtime production, strived to deliver major projects as scheduled, and revenue from the communications sector did not fluctuate significantly. Furthermore, extended holidays led to an increase in online activity, the company's investment in games, literature, and education surged, and the Internet business continued to grow rapidly. However, due to the low gross margin of the Internet business, it dragged down the Q1 composite gross margin to -10.66 pct year-on-year. Gross profit declined, but the period expenses remained basically the same, and the final Q1 loss was 4,5046,600 yuan.
Expenses were well controlled during the period, and the management & R&D expense rate dropped significantly: during the reporting period, the company's revenue expanded, expenses were properly controlled, and the cost rate for the period (6.95%) was reduced by 2.85 pct. Among them, there were no major changes in the amounts of sales expenses, management expenses, and R&D expenses, but due to revenue growth, the share declined by -0.72pct, -0.98pct, and -1.01pct, respectively. However, the increase in interest on corporate loans led to a 34.03% increase in financial expenses, accounting for the same share of revenue as in 2018.
Operating cash flow increased, injecting vitality into the company's development: during the reporting period, while the company's Internet advertising business continued to grow, prepaid advertising fees decreased compared to the previous period. As a result, the company's cash inflow from operating activities increased 60.35% year on year, while the increase in cash outflow (38.16%) was small. In the end, net cash flow from operating activities was 779 million yuan (YoY 2056.49%), providing financial support for the company's development.
Strengthen 5G business and enhance core competitiveness: The company issued a fixed increase plan on April 11, which plans to raise 1,272 million yuan for 5G communication infrastructure construction and next-generation multi-network integration industrialization projects. At present, the company has begun research and development of network coverage products and technology platforms related to 5G, including high-speed optical fiber transmission technology, high-bandwidth RF transceivers, multi-network integrated access systems supporting 5G, communication technology platforms based on Open RAN architecture, 5G small base stations, and industrial IoT, etc., and has achieved breakthroughs. After the fixed increase, the company will further increase its investment in R&D of 5G network coverage products to seize 5G infrastructure opportunities.
The Internet business has expanded at an accelerated pace and has become a new growth point: in the Tencent KA advertising service field, the subsidiary Juwang Technology has risen to prominence with its professional operating service experience. Currently, it can provide customers with full-case marketing solutions covering the six major industries of gaming, finance, education, travel, online services and platform e-commerce. In the field of Tencent SMB advertising services, Giwang Technology uses Tencent's full advertising platform traffic resources to provide customers with refined operations, covering industries that focus on e-commerce, online education, knowledge payment, online literature, etc. Advertising SMB service providers are far ahead, with the highest consumption exceeding 25 million yuan in a single day; in addition, Juwang Technology continues to build on the original e-commerce industry, successfully covering the self-media industry, covering a total of over 100 million user groups in various segments such as literature, light entertainment, original animation, online education, and games. Online traffic surged after the pandemic, and an Internet business outbreak can be expected. According to the gambling agreement, the giant net agreement is expected to make a profit of 170 million in 2020, which is expected to continue to contribute high profits.
Investment suggestions: In summary, the company has benefited from the new 5G infrastructure and the increase in online traffic brought about by the epidemic. We expect the company's revenue for 20-22 to be 8537/118.13/15.149 billion yuan, net profit of the mother is 2.10/289/373 billion yuan respectively, EPS is 0.29/0.40/0.52 yuan respectively, and the corresponding PE is 30X/22X/17X respectively. First coverage, giving a “recommended” rating.
Risk warning: The 5G product development process fell short of expectations; the gross margin of the Internet business continued to decline.
