1Q20's performance fell short of our expectations.
Zhonghe Technology announced its 2019 and 1Q20 results: business income in 2019 was 2.778 billion yuan, an increase of 32.98% over the same period last year and 134 million yuan, an increase of 395.62%. 1Q20's income was 340 million yuan, down 33.8% from the same period last year, and its net profit was a loss of 150 million yuan. The loss was mainly due to the epidemic affecting project delivery, and the sudden sharp devaluation of the Mexican peso exchange rate led to large exchange losses, and 1Q20's financial expenses increased by 150 million yuan compared with the same period last year.
Core business grew steadily, while overall gross margin declined slightly. In 2019, the revenue of rail transit signalling system / automatic ticketing system / sewage treatment project increased by 42.4% 29.1% 59.6% to 11.61 525 million yuan. The company's comprehensive gross profit margin fell 0.9ppt to 28.9% year-on-year in 2019. 1Q20's consolidated gross margin fell 6.0ppt to 25.1 per cent year-on-year.
2019 the profitability has improved, and the profitability of 1Q20 has declined significantly. In 2019, the company's overall expense rate decreased 1.6ppt compared with the same period last year, while 1Q20 increased 65.5ppt year-on-year, mainly due to a 565% year-on-year increase in financial expenses to 181 million yuan. 2019/1Q20 's net profit margin rose 3.5 per cent year-on-year and fell 46.7ppt to 4.8 per cent Mather 44.7 per cent. Due to the increase in income and the decline in working capital, in 2019, the company's operating activities net cash inflow of 348 million yuan, year-on-year inflow of 193 million yuan; 1Q20 net outflow of 475 million yuan.
Trend of development
In 2019, the company's newly signed orders are steadily increasing, and the performance of the signal system is outstanding. In 2019, the company signed a new order of 2.817 billion yuan for smart transportation, an increase of 12% over the same period last year. Of this total, 2.246 billion yuan was added to the rail transit signal system (71% of which was self-developed signal system), 417 million yuan was added to the AFC/ACC system, 154 million yuan was added to other non-bidding projects, and 1.397 billion yuan was signed for energy conservation and environmental protection, including 1.246 billion yuan for water treatment business. We are optimistic that with the gradual confirmation of orders, the company's performance will achieve steady growth.
Take the lead in card wisdom, benefiting from the wave of industry upgrading. According to the outline of Intelligent Urban Rail Transit Development of China Urban Rail Transit issued by China Urban Rail Transit Association in 2020, intelligence is the main direction of urban rail construction in the future. In the layout of intelligent rail transit products, in addition to the signal system with independent intellectual property rights, the company also has full electronic interlocking, automatic ticket inspection and line network sorting, EMU video surveillance, intelligent operation and maintenance systems.
Profit forecast and valuation
Taking into account the large decline in 1Q20 performance due to an one-off impact, we have lowered our 2020 profit forecast by 74% to 50 million yuan, and introduced a profit forecast of 220 million yuan in 2021. The current share price corresponds to 19.6 times 2021e PCME. We keep the company's target price unchanged at 7.20 yuan, corresponding to 18 times the 2021e Pmax E, with 8% room to fall and maintain a neutral rating.
Risk.
The market competition of rail transit signal system is intensified.