Net profit for 3Q20 is forecast to increase 36%-61% year-on-year

Company performance forecast: 1-3Q20 net profit is expected to be 131-142 million yuan, an increase of 18% to 28% over the previous year; 3Q20 net profit is expected to be 6009-71.117 million yuan, an increase of 36%-61% over the previous year.

Key points of interest

Excluding the impact of one-time earnings: 1) Due to the appreciation of the RMB in 3Q20, the company's hedging brought one-time income. The total non-recurring profit and loss for the current period was 18.17 million yuan; the company's non-recurring profit and loss in 3Q19 was 480,000 yuan; excluding the above effects, net profit after deduction of 3Q20 fell 4% to 22% year-on-year. 2) The total non-recurring profit and loss of 1-3Q20 was 11.74 million yuan, and the non-recurring profit and loss of 1-3Q19 was 4.92 million yuan; excluding the above effects, the net profit of 1-3Q20 after deduction increased 12%-23% year-on-year.

The global market share of washing machine drain pumps has increased: 1) The company is already the leading drain pump in the global washing machine market. 2) During the global pandemic, some competitors' supply chains were affected.

In order to ensure the stability of supply and product quality, the world's leading washing machines concentrated orders on the company, which led to an increase in the company's share. 3) The company's main products are currently in China. In response to the increase in US tariffs, the company set up a production base in Thailand in 2019. 4) As global washing machine orders moved to China, the company's drain pump orders increased more from Chinese companies, which led to 1H20's domestic and overseas revenue of +30% and -20%, respectively.

Chinese home appliance companies have global advantages: 1) We expect that in 3-5 years, Chinese home appliance brands (including private brands and foreign brands acquired) will become mainstream globally. Under the upgrading of the digital economy, the global comparative advantage of Chinese enterprises is no longer limited to cost advantages; it has been converted into comprehensive industrial chain advantages, product advantages, and retail efficiency advantages. Based on this, the globalization of Chinese enterprises has entered the fast track. In 2019-2020, Chinese home appliance companies experienced the test of trade frictions and the COVID-19 pandemic, showing strong resilience to risks and sound business ability. 2) As one of the outstanding parts companies in China's home appliance industry, the company also has strong competitiveness globally. The company's products use aluminum instead of copper, which has obvious performance and cost advantages compared to Italian competitors. The company's automation rate is constantly improving in terms of production efficiency, and it is deeply connected with Midea and other companies' Industry 4.0 systems.

Valuation and advice

Considering the recovery in overseas demand and the impact of one-time earnings, we raised our 2020/21 EPS forecast by 17%/6% to $0.33/0.35. Maintaining a neutral rating, due to an increase in profit forecasts, we raised our target price by 19% to 6.78 yuan, corresponding to 21x/20x 2020/21e P/E, with room for increase of -4%. The company's current stock price corresponds to 22x/20x 2020/21e P/E.

risks

Risk of RMB exchange rate fluctuation; risk of trade friction between China and the US; risk of developing new business.