Event: the company released its semi-annual report on the evening of August 14, 2020. The company's operating income in the first half of 2020 was 1.9 billion yuan, up 19.31% from the same period last year. The net profit belonging to shareholders of listed companies was 60.6856 million yuan, up 35.44% from the same period last year. The net profit belonging to shareholders of listed companies after deducting non-recurring gains and losses was 48.3018 million yuan, up 38.55% from the same period last year. In the first half of 2020, the company achieved an EPS of 0.10 yuan, and the performance was in line with expectations.

Comments:

1. The revenue of the company's financial sector surpassed that of the telecommunications sector for the first time, and the demand continued to improve in the second half of the year. In the first half of 2020, the company's operating income and net profit in the first half of 2020 were 1.9 billion yuan and 60.6856 million yuan respectively, up 19.31% and 35.44% respectively over the same period last year. The company's half-year performance forecast median value is 58.2492 million yuan, the actual performance is slightly higher than the forecast median, the performance is in line with expectations. Among them, the operating income and net profit in the second quarter were 1.151 billion yuan and 55.8969 million yuan respectively, up 95.67% and 74.99% respectively over the same period last year. In the first half of the year, the company's revenue growth mainly came from the good year-on-year performance of the financial and public security sectors, and the network product sales business also achieved a rapid improvement.

From the industry composition of the company's income: 1) the revenue of the telecommunications industry is 158 million yuan (8.3%), down 6.83% from the same period last year. The acceptance of projects in the telecommunications industry has been delayed compared with the same period last year, and the revenue and profits of the telecommunications industry have declined slightly; 2) the income of the financial industry is 245 million yuan (12.9%), up 24.71% from the same period last year. The company has successively obtained the outsourcing service qualifications of a number of large banks in the areas of electric promotion, e-sales and letter audit business outsourcing, participated in the construction of a new generation of core business systems of many large banks, and signed contracts with a number of overseas banks to provide them with overall solutions for digital banking, with revenue exceeding that of the telecommunications sector for the first time. 3) the revenue of the government industry was 34.6701 million yuan (1.8%), an increase of 11.38% over the same period last year. The company has launched intelligent applications such as police data center, intelligent traffic management platform, public security prevention and control platform, and Tieqi command platform, which have been widely used in Jiangsu, Guangdong and other places, and the bid winning situation has been greatly improved. revenue settlement will mainly be reflected in the second half of the year; 4) the income of other industries is 35.581 million yuan (1.9%), down 46.63% from the same period last year. 5) the sales revenue of network products was 1.427 billion yuan (75.1%), an increase of 26.39% over the same period last year.

2. In terms of reducing the cost and increasing the gross profit margin through management improvement, process optimization and science and technology, the company's comprehensive gross profit margin in the first half of 2020 was 17.24%, down 2.84 percentage points from the same period last year. Among them, the gross profit margin of the telecommunications industry was 45.81%, down 5.15% from the same period last year; the gross profit margin of the financial industry was 48.28%, up 0.06% from the same period last year; the gross profit margin of the government industry was 35.91%, down 9.1% from the same period last year; the gross profit margin of other industries was 38.15%, down 8.57% from the same period last year; and the gross profit margin of online product sales was 7.77%, down 0.51% from the same period last year.

The gross profit margin of the financial sector remained at a high level, while gross profit margins of other sectors (telecommunications, government and other industries) all declined to varying degrees. The gross profit margin of telecommunications and government industries has declined significantly, mainly affected by factors such as its bidding process, procurement review rhythm, quarterly investment budget control and the overall progress of large-scale construction projects. Business settlement is generally concentrated in the second half of the year or even the fourth quarter. The company won bids in the military sector and smart cities in the first half of the year, but the settlement was less.

On the other hand, the company's quarterly expenses are mainly manpower costs, which are relatively fixed, resulting in quarterly operating performance fluctuations. In addition, the sales revenue of network products has increased rapidly, and the proportion of revenue has increased, but the gross profit margin of the distribution business is much lower than that of other main businesses, resulting in fluctuations in the overall profit level of the company.

In terms of expenses, the company has continued to strengthen its control over the cost side since the beginning of this year, and sales and management expenses have declined in the first half of the year compared with the same period last year. Specifically, the company's sales expenses in the first half of the year were 55.0828 million yuan, down 12.5% from the same period last year, the sales expense rate was 2.90%, down 1.1% from the same period last year; the management expenses were 63.7066 million yuan, down 16.5% from the same period last year, and the management expense rate was 3.4%, 1.4% lower than the same period last year. Cost control has achieved remarkable results. The financial expenses were 37.544 million yuan, an increase of 23.0% over the same period last year, and the financial expense rate was 2.0%, which was basically the same as that of the same period last year. The increase in financial expenses in the first half of the year was mainly due to the increase in interest expenses on corporate financing loans. In the first half of this year, the company achieved remarkable results by reducing cost and increasing efficiency through management improvement, process optimization and science and technology.

The company's R & D expenditure in the first half of the year was 100.8928 million yuan, down 1.7% from the same period last year, and the R & D expenditure rate was 5.3%, down 1.1% from the same period last year. With the goal of improving efficiency and core competitiveness, the company encourages technical teams to develop reusable software products. Ensure the implementation of pre-research investment, ensure the core version of R & D investment, reduce the proportion of customization in the contract delivery process, and continuously improve the level of lean operation.

3. The cash flow of the company improved significantly in the first half of the year compared with the same period last year, and the net cash flow of operation improved significantly in the first half of 2020 compared with the same period last year. The net operating cash flow of the company in the first and second quarters of this year was 359 million yuan and 257 million yuan respectively. From the perspective of the company's historical cash flow, the net cash flow generated by operating activities shows obvious seasonal fluctuations, and the peak demand for cash flow generally occurs in the fourth quarter. The net cash flow generated by operating activities in the first half of this year was 616 million yuan, a sharp increase of 2108.12% over the same period last year, mainly due to the increase in sales rebates of the company.

From the asset side, by the end of June 2020, the company's inventory balance was 1.409 billion yuan, an increase of 5.7% over the same period last year, mainly due to the increase in sales reserves. From the perspective of accounts receivable, the balance of accounts receivable at the end of the second quarter was 1.345 billion yuan, a decrease of 232 million yuan from the beginning of the year and 157 million yuan from the first quarter, reflecting that the company continued to strengthen the management of payback, and the accounts receivable period was good.

4. At the initial stage of 5G construction, CAPEX focuses on the upstream, supporting network investment gradually picks up and 5G scale construction starts in 2020. According to the operator's capital expenditure plan, network construction investment will be the first to recover. Looking back to the law of historical capital expenditure of the three major operators in China, with the gradual completion of network construction, the investment in telecom support network will also be gradually increased. In the 5G era, with the double growth of traffic and the innovation of business model, it is necessary to comprehensively upgrade the existing BOSS system.

Tianyuan Dike is mainly engaged in B-domain business, in which the billing system and CRM system will change greatly. From the point of view of the billing model, the multi-dimensional billing model based on usage, connection volume, service volume, application content, delay level, speed level, customer level and network slice will be introduced; in terms of computing power, the implementation of the Internet of things will bring more traffic, and telecom operators need software platforms with larger scale and more powerful computing power. From the perspective of customer relationship management, the target customer group in the 5G era has shifted from C to B, and the richness of product types has been further improved. At present, the company occupies about 20% of China Telecom Corporation's market share in the BOSS field, has established deep cooperation with China Unicom, and has entered the China Mobile Limited market through big data's business and professional subsidiaries. The company's business in China Mobile Limited and Telecom has maintained steady and sustained growth.

The competition pattern of BOSS industry has been initially established, and cloud computing is expected to become the catalyst for the change of industry pattern. Tianyuan Dike was one of the first manufacturers to cloud the BOSS system for China Unicom. In 2016, together with BABA, he won China Unicom's first card centralized cloud project and got the first opportunity to cloud the BOSS system. In addition, the company in China Telecom Corporation has undertaken Anhui Telecom BSS3.0 cloud, Shaanxi Telecom CRM cloud, Shanghai Telecom OCS cloud and other major projects. In the future, the company is expected to take advantage of the first-mover advantage and leading experience of BOSS system cloud to achieve corner overtaking.

5. The demand for bank credit management is growing rapidly, the development of the company's financial sector is good, affected by the epidemic, the demand for bank credit collection management has increased significantly, and the company continues to break through new customers. Under the background of strong demand for bank credit management, Dicco's performance shows a trend of rapid growth, thanks to the introduction of business operation outsourcing service providers by financial institutions, the company has successively obtained the outsourcing service qualifications of a number of large banks in the areas of electric promotion, electric sales and credit audit business outsourcing, and the growth rate is expected to maintain for the whole year. Weinbert mainly provides consulting, development and IT services for large banks. By actively expanding new customers and developing new products to expand the scale of business, Weinbert has participated in the construction of a new generation of core business systems of many large banks, and has signed contracts with a number of overseas banks to provide them with overall solutions for digital banking.

In addition to the banking sector, the company's insurance IT business revenue has also achieved rapid growth. The insurance industry has a strong demand for claims settlement, big data and other applications, such as geographic information big data can be used in the field of agricultural insurance to solve the problems of scattered agricultural insurance policyholders, high operating costs and complex procedures for surveying and determining losses. Overall, the company's annual financial sector revenue is expected to maintain rapid growth, credit management platform, new marketing system, big data application is expected to become the main driving force to increase plate income.

6. Product componentization helps the company's public security business sink, and the bid-winning situation is greatly improved. under the background of the information age, the value of big data gradually appears, and the establishment of a public security data system connected by different types of police is the primary task of public security information reform. The company deeply ploughs the field of public security information construction, and has landed projects in developed cities and cities such as the Pearl River Delta, Yangtze River Delta and Central China. After modularizing and slicing the public security products, the company successfully sank to the public security business needs of third-tier cities and district and county cities. In the first half of this year, the company launched intelligent applications such as police data center, intelligent traffic management platform, public security prevention and control platform, and iron riding command platform, which have been widely used in Jiangsu, Guangdong and other places, and the bid winning situation has been greatly improved. According to the historical settlement law of the public security industry, the project is expected to recognize revenue one after another in the fourth quarter, and the public security business sector is developing well throughout the year.

7. the company accelerates the recovery of operation, is optimistic about the growth of the financial and government sectors for the whole year, and maintains the "strong recommendation-A".

Rating

The burst of traffic in the 5G era and the comprehensive innovation of application scenarios have brought about the demand for iterative upgrade of telecom software systems. The company has been engaged in the BOSS field of the three major operators for many years and occupies a high share in the operator field. With the recovery of investment in 5G network support systems, the company's telecom sector revenue is expected to return to growth. The demand of the financial sector continues to rise, the demand for credit management such as collection under the epidemic is high, the company deeply serves customers in the financial industry, and revenue for the whole year is expected to maintain a high growth rate. The number of government orders picked up significantly compared with the same period last year, and revenue will be confirmed one after another in the second half of the year. Optimistic about the long-term growth value of the company in the 5G period, the company's net profit from 2020 to 2022 is expected to be 216 million yuan, 273 million yuan and 356 million yuan respectively, corresponding to 26.1,20.6,15.8 times of PE, maintaining the "highly recommended-A" rating.

Risk tips: operators' capital expenditure is not as expected, market expansion is not as expected, and industry investment is declining.