2Q20 performance was slightly lower than our expectations

The company announced 1H20 results. In the first half of the year, the company achieved revenue of 1,832 million yuan, an increase of 1% over the previous year. Under the double influence of the epidemic and China Mobile's bidding price decline, Guimu lost 122 million yuan in net profit. Among them, 2Q20 achieved revenue of 1,019 million yuan, an increase of 6% over the previous year, and the net profit loss to the mother in the single quarter was 69 million yuan. The gross margin of the company's fiber-optic cable business declined significantly, causing the overall profit to fall short of our expectations.

Development trends

Without winning the bid for China Mobile's collection, the revenue and gross profit of the optical fiber and cable business in the second half of the year will be under pressure.

1H20's fiber-optic cable products achieved revenue of 585 million yuan, a year-on-year decrease of 0.92%; product sales gross margin fell 15.42ppt to 4.92% year on year, mainly due to: 1) China Mobile's low price for the 2019 batch of ordinary optical cable collection only began in May 2019. Furthermore, Tongding's winning bid price was also low among competitors; 2) Profit margin pressure also hampered the company's production, leading to lower capacity utilization, and vacant equipment also caused cost waste; 3) The epidemic in the first half of the year further dragged down gross profit margins. Looking ahead, since China Mobile collected the latest batch of ordinary optical cables in July, Tongding Internet failed to win the bid. We think the company's revenue from the company's optical fiber products may decline sequentially in the second half of the year, and profits will continue to be under pressure.

The communications & power cable business performed well in the first half of the year; the 2H20 Baizhuo Network order is expected to boost the performance of the cybersecurity business sector. The 1H20 communication cable business achieved revenue of 376 million yuan, up 13.31% year on year, and gross margin increased 7.82 ppt year on year; the power cable business continued its growth trend, achieving revenue of 509 million yuan, up 27.80% year on year, and gross margin increased 57.23ppt year on year. Affected by the COVID-19 pandemic, the bidding period for most collection projects involving Baizhuo Network, a wholly-owned subsidiary of Tongding Internet, was delayed, causing cybersecurity business revenue to drop 82.91% year on year to 28 million yuan, and gross margin fell 52.84ppt year on year. As the epidemic improved and cybersecurity tendering resumed, the 2H20 cybersecurity business sector is expected to achieve significant marginal improvements.

Profit and loss from changes in fair value dragged down performance, and changes in accounting errors on participating companies had limited impact.

2Q20 was mainly due to a decrease in the fair value of gold derivatives invested by the company with its own funds, which led to profit and loss from changes in fair value - 66 million yuan. The company generated 300.7 million contract assets in the current period, long-term receivables increased 50% compared to the end of 2019, and performance is picking up steadily. Furthermore, Tongding announced that its participating company, Jiangsu Highstar Power Co., Ltd., corrected accounting errors and reduced net profit for 2018, causing Tongding Internet's net profit in 2018 to drop 3%. We believe that the risk of this adjustment is limited.

Profit forecasting and valuation

Since the company did not win the bid for China Mobile Mining in July, the improvement in capacity utilization may be slower than expected, dragging down gross margin performance below previous expectations. We lowered our 2020/2021 net profit by 155.0%/44.3% to -65.84 million yuan/175.8 million yuan. The current stock price corresponds to a price-earnings ratio of 38.3 times in 2021. Maintaining a neutral rating, the target price was lowered by 10.1% to 5.63 yuan based on 40.0 times the price-earnings ratio in 2021, with room for 4.7% upward from the current stock price.

risks

Cybersecurity orders have fallen short of expectations; competition in the power cable industry is fierce.