Weisheng Holdings announced its results in the first half of fiscal year 20, during which it was affected by the epidemic situation of COVID-19.
As we expect performance to pick up in the second half of the year, we have slightly adjusted our net profit forecast for fiscal year 20-22.
We believe that the weak share price is partly due to the reduction of major shareholders.
We maintain our "overweight" rating and raise our target price to HK $3.63, based on 11 times 2020 p / e. The increase in our target price is mainly due to the increase in net profit forecast. We maintain our "overweight" rating in part because of its dividend yield and the value of its holdings in Weisheng Information [688100.CH].
Summary of results in the first half of FY20
Revenue of Weisheng Holdings fell 12% in the first half of fiscal year 20 compared with the same period last year, from 1.923 billion yuan in the first half of fiscal year 19 to 1.6877 billion yuan in the first half of fiscal year 20. Revenue from the AMI business fell 28% year-on-year, from 986.3 million yuan in the first half of fiscal year 19 to 711.1 million yuan in the first half of fiscal year 20. Revenue from the communications and fluid AMI business increased 9% year-on-year, from 584.9 million yuan in the first half of fiscal year 19 to 636.5 million yuan in the first half of fiscal year 20. ADO business revenue fell 4% year-on-year, from 352.7 million yuan in the first half of fiscal year 19 to 340 million yuan in the first half of fiscal year 20.
Weisheng's net profit in the first half of fiscal year 20 was 116.3 million yuan, down 32 per cent from 170.3 million yuan in the first half of fiscal year 19. There is no interim dividend and HK6 cents per share in the first half of fiscal year 19. The company's gross profit margin increased from 30.2% in the first half of fiscal 19 to 32.2% in the first half of fiscal 20. The increase in gross profit margin is due to continued cost-cutting measures and most of the revenue comes from higher-margin products. Sales and general administrative expenses as a percentage of revenue increased from 18% in the first half of FY19 to 21% in the first half of FY20, due to a year-on-year decline in revenue and an increase in R & D spending. Weisheng's performance in the first half of FY20 was affected by the COVID-19 epidemic (the local market in the first and early second quarters of FY20 and the overseas markets in the second quarter of FY20).
The macro theme remains solid
We still believe that fixed asset investment, especially capital expenditure related to new infrastructure construction (the Internet of things related to grid investment), is likely to pick up by the end of 2020 to boost economic activity. Despite a slow start in the first half of FY20, we expect full-year results for the industry, including Weisheng, to remain good, as the power grid industry in 2020 is less likely to cut capital expenditure than in 2019. We still believe that Weisheng's weak performance in the first half of fiscal year 20 is over, and full-year results will be supported by current orders, which are up about 4% year-on-year.
Slightly adjust net profit forecast and target price
Although Weisheng's performance in the first half of fiscal year 20 was weak, we slightly adjusted our net profit forecast for fiscal year 20 to 22 after the company announced its results. We believe that the weak performance in the second half of FY19 and the first half of FY20 is over, and the increase in grid investment and the opportunities brought about by the application of IoT technology will help the company's revenue growth pick up year-on-year in the second half of FY20. The reduction of major shareholders has limited the recent performance of Weisheng's share price. We raised our target price from HK $3.52 to HK $3.63, mainly due to higher net profit forecasts and based on 11 times 2020 price-to-earnings ratios. We maintain the "overweight" rating because of its dividend yield and the value of its shareholding in Weisheng Information.