1H20 performance is slightly lower than we expected.
The company announced 1H20 results: revenue was 1.18 billion yuan, down 3.3% from the same period last year; net profit from home was 74.87 million yuan, down 82.8% from the same period last year; and net profit from non-return was 81.25 million yuan, down 66.2% from the same period last year, slightly lower than we expected, mainly because the fair value of financial assets held by the company decreased more than previously expected.
Trend of development
The epidemic affected market promotion, and the growth rate of HD interactive digital TV users and home broadband users slowed down. 1H20, the company's cable TV subscribers increased by 20, 000 to 6.01 million from the end of 2019; HD interactive digital TV users increased by 3.3% year-on-year to 5.55 million, up 0.9% from the end of 2019; and the number of household broadband users was 680000, up 5.1% from the end of 2019 and 1.5% from the end of 2019. We believe that, taking into account the competition in the cable business and the impact of the epidemic, the growth of the company's cable TV service users may continue to be restricted in 2020.
Market competition intensifies and profitability continues to decline. Due to the still competitive pressure in the market, 1H20 gross profit margin also fell by 10.8ppt to 15.1%. In addition, 1H20 lost 27.5 million yuan in fair value changes due to other non-current financial assets. Operating margins also fell by 28.9ppt to 7.2 per cent. We judge that under the influence of competition such as IPTV and OTT, the company's unit price of cable TV services in 2020 is under pressure, and the overall profit scale may still decline.
Substantial progress has been made in the integration of the national network, and Gehua Cable has invested in the establishment of the national network joint-stock company. On August 26, 2020, the company announced that the sponsor agreement for the establishment of China Radio and Television Network Co., Ltd. (chip) was reached through consultation by all sponsors, and a preliminary agreement was reached to determine the shareholding structure of the sponsors. Among them, the company's controlling shareholder, Beiguang Media Investment Center, intends to hold 3.85% of the company after its 265 million shares (19.09% of the total share capital of Gehua Cable), while Beiguang Media Investment and Development Center holds 37.42% of Gehua Cable. We believe that the landing of "national network integration" is expected to break down regional barriers, achieve resource integration and economies of scale, accelerate the transformation and upgrading of cable networks, and enhance the carrying capacity and content support capacity of cable private networks. On the other hand, the "national network integration" is expected to help solve the problems such as the dispersion of the right to use the frequency band and the elimination of the existing spectrum in the radio and television system, so as to accelerate the construction of the radio and television 5G network and the landing of 5G applications.
We are optimistic that under the background of 5G era and "national network integration", the company integrates the development potential of emerging businesses such as media technology platform, ultra-high-definition content and smart city, which is expected to inject new momentum into the company's long-term growth.
Profit forecast and valuation
Keep the original profit forecast unchanged. The current share price corresponds to 32.4 times the price of 2021, respectively.
To maintain a neutral rating, considering the substantial progress made in the "national network integration", the company, as one of the major participants, is expected to benefit. We raise our target price by 39.4% to 15.19 yuan, corresponding to 35 times Pamp E in 2021, which has 8.0% upside compared to the current stock price.
Risk.
The progress of "national network integration" is not as expected; competition in video and broadband services has intensified; and subscribers have been lost.
