The performance in the first half of 2020 is basically in line with our expectations.

The company announced its results for the first half of 2020, with revenue of 3.64 billion yuan, an increase of 1.3% over the same period last year, and net profit of 401 million yuan, an increase of 3.7% over the same period last year. Revenue in the second quarter of 2020 was 1.91 billion yuan, down 2.2% from the same period last year, and the net profit was 243 million yuan, an increase of 4.7% over the same period last year. The company's performance is basically in line with our expectations.

Trend of development

The performance against the trend highlights resilience, and the income structure is optimized. In the first half of 2020, the implementation of projects in all industries of the company was delayed due to the impact of the epidemic, which put pressure on the recognition of its revenue, and the company's overall revenue still achieved positive growth in the first half of the year. Among them, the revenue of the health industry (medical informatization) reached 820 million yuan, an increase of 18.3% over the same period last year, and its share of revenue increased to 23% from 19% in the same period last year. The company further focused its business on the booming medical track; at the same time, the share of system integration in revenue decreased to 60% from 66% in the same period last year, and the company is accelerating the transformation from a traditional IT integrator to a software service company.

As a result of the change in business structure, the company's gross profit margin also increased by two percentage points compared with the same period last year.

Continued efforts on the medical track, outstanding performance in the first half of the year. In terms of hospital information, the company won the bid for the whole hospital PACS system project of the people's Hospital of Tibet Autonomous region in March, realizing full coverage of the products in 31 provinces, municipalities and autonomous regions across the country; in the latest EMR high-level (level 5 or above) hospital list, 7 of the 51 hospitals are Donghua Medical customers, and the company has a solid edge in the high-end market. In terms of Internet medical care, Donghua Medical has obtained an Internet hospital license and built an Internet hospital ecosystem for more than a dozen hospitals, including Beijing traditional Chinese Medicine Hospital, Qingdao University affiliated Hospital, Weifang people's Hospital, and so on. At the same time, it won the bid and launched the Beijing Internet Hospital Supervision platform. In terms of medical insurance informatization, the company won the bid for the third package of the second phase of Hainan Medical Insurance Information platform construction project-application support and management subsystem in July, with a winning bid amount of 22.2 million yuan. The company was responsible for the system integration of the national health insurance information platform in 2019, and the winning core subsystem marks a partial breakthrough in the field of health insurance information.

The police security track has repeatedly won large orders, and the order is expected to be increased in the future. Donghua, a subsidiary, won the bid in July for the Ping an City Construction PPP Project of Shouguang City Public Security Bureau, Weifang City, Shandong Province, with a total amount of 550 million yuan, including intelligent policing, intelligent traffic police, intelligent bus and intelligent school bus. Donghua Co-chuang also won the bid for the networking application project of public safety video surveillance in Jizhou District of Tianjin (Xueliang Project) in April, with a winning amount of 73 million yuan. In the financial track, the company also harvested orders from new and old customers such as Postal savings Bank, people's Bank of China and Agricultural Bank Of China in the first half of the year.

From the perspective of advance collection, the company's contract liabilities reached 1.65 billion yuan in the first half of the year, an increase of 36% over the same period last year. We believe that the company is now full of orders on hand and has a lot of potential for growth.

Profit forecast and valuation

The company's performance is basically in line with expectations, and we keep our profit forecast unchanged. Maintain an outperform industry rating and a target price of 18 yuan, with a target price based on 50 times 2020 price-to-earnings ratio, with 42% upside from the current share price. The current share price trades at 34 times 2020 earnings and 29 times 2021 earnings.

Risk.

The implementation cycle of the project is large, the receivables exceed expectations, and the international situation changes.