1H20 revenue and gross profit margin slightly decreased, expenses properly controlled corresponding to a slight decline in net profit 2020H1 realized revenue of 52.8 billion yuan, down 4% from the same period last year, of which domestic operator business, domestic non-operator business and overseas business accounted for 56.7%, 40.6% and 2.7% respectively, mainly due to a significant decline in domestic telecom operator business. This is partly offset by sustained growth in domestic non-operator business and overseas business. The gross profit margin was 11.0%, a slight decrease of 0.2 percentage points from the same period last year, mainly due to the company's expansion of high gross margin business, optimization of business structure, reduction of cost and efficiency, reducing the impact of the epidemic on gross profit margin; at the same time, strengthening the control of sales and administrative expenses, the rate of sales and administrative expenses was the same as the same period last year. Due to the slight decline in income and gross profit margin, net profit fell 6.1 per cent year-on-year to 1.59 billion yuan, corresponding to a net profit margin of 3.0 per cent.
Operator business rebounded in the second half of the year, driving full-year profit recovery positive growth. 97% of the company's performance contribution came from the domestic market. Considering the gradual relief of the domestic epidemic, the problems on the demand side and supply side have been significantly improved in the second quarter. With the acceleration of the pace of domestic operator network construction in the second half of the year, it is expected to drive operators' business to resume healthy growth. At the same time, the limitation of non-operator business mainly lies in the expansion of new customers. With the resumption of normal business travel across the country, the growth rate of non-operator business is expected to increase; combined with the business performance of operators and non-operators, we expect the company's full-year revenue to maintain positive growth. Considering that the rigid costs related to the epidemic and the reduction in epidemic prevention expenditure are expected to drive the increase in net profit in the second half of the year compared with the first half of the year, we expect the net profit to grow by about 5% for the whole year.
The opportunity for non-operator profit margin improvement is clearer, which is expected to drive the overall profit margin improvement. Operators' business is subject to the strong bargaining power of downstream operators and the pressure of continuous decline in gross profit margin. In the future, the improvement of overall profit margin depends on the improvement of gross profit margin of non-operator business. By providing the proportion of total package integration projects and the proportion of high-value business, the opportunity for improvement of gross profit margin of non-operator business is clearer. In non-operator business, the proportion of contracts for more than 100 million large projects increased from 8% in 19 years to 14% of 1H20.
Valuation and rating
Taking into account the better-than-expected gross profit margin of 1H20, we raised our 20-year net profit forecast by 1% to 3.17 billion yuan, maintaining the 21-year forecast of 3.67 billion yuan, and the new 22-year forecast of 4.17 billion yuan, an increase of 5.4%, 15.7% and 13.6% respectively over the same period last year. With the end of the epidemic and successive investments in operators and non-operator markets in the 5G era, the company's 21-year performance is expected to rebound significantly, taking into account the future performance with sustainable and steady growth opportunities and a stable dividend level, maintain the target price of HK $6.6 (corresponding to 20-21-22, 13-11-10 times PE) and maintain the "buy" rating.
Risk tips: the domestic epidemic situation is fermenting; 5G construction is slowing down; operators' gross profit margin pressure is increasing; non-operator business is slowing down.