3Q20's performance is better than we expected.

Citic Hai Zhi released its results for the third quarter of 2020: operating income was 391 million yuan, down 0.4% from the same period last year, up 4.7% from the previous year, and its net profit was 68.913 million yuan, up 4.3% from the same period last year and 42.7% from the previous year, deducting 68.681 million yuan from non-parent net profit, an increase of 4% over the same period last year, which was better than we expected, mainly because the financial expenses and the business performance of subsidiaries were better than we expected.

After deducting the influence of one-time factors, we estimate that the company's profit in the third quarter increased by 54% compared with the same period last year.

Regardless of the impact of the special fund subsidy for navigation development (27.698 million yuan) in the third quarter of last year, we estimate that the company's profit in the third quarter increased by 54% compared with the same period last year (about 24.22 million yuan).

Benefiting from the impact of the appreciation of the RMB against the US dollar, the company's financial expenses decreased significantly in the third quarter.

The financial expenses of the company's 3Q20 are about 2.1 million yuan, a decrease of about 22.91 million yuan compared with the same period last year, a decrease of 92% compared with the same period last year, a decrease of about 17.46 million yuan compared with 2Q20, and a month-on-month decrease of 89%. In the third quarter, the RMB appreciated by about 3.8% against the US dollar. According to the company, the decline in financial expenses was mainly due to the reduction of borrowing interest expenses and the realization of foreign exchange gains.

Cost control is strong, gross profit margin improved in the third quarter. The company's third-quarter gross profit margin rose 2.5ppt year-on-year and 5.8ppt to 30.5% month-on-month. In the third quarter, the operating income of the parent company (mainly offshore oil and port pilotage business) fell 5.9% from the same period last year, the operating cost increased 0.2% from the same period last year, and the gross profit margin decreased from 4.1ppt to 32.4%. The operating income of subsidiaries increased by 32.1%, the operating cost decreased by 16.1%, and the gross profit margin changed from-22.3% of 3Q19 to 22.3%.

Trend of development

Increasing and optimizing the asset structure may help to enhance the competitiveness of the company. According to the announcement, the company intends to carry out a non-public offering of shares, with a total amount of no more than 1.36 billion yuan. The issuing object is not more than 35 objects, including Citic Investment Holdings, a related party controlled by the actual controller (the lock-up period of "CITIC Investment Holdings" is 36 months, and that of other investors is 6 months). After the completion of the fixed increase, the actual controller of the company will still be CITIC Group. The issuance still needs to be approved by SASAC, CAAC, CSRC and other relevant departments. The funds raised by the company will be used for the purchase of aircraft materials and aircraft maintenance (613 million yuan), the purchase of six H135 helicopters (339 million yuan), the repayment of interest-bearing liabilities and supplementary liquidity (408 million yuan).

As of 3Q20, the company's debt ratio is about 36%. We believe that the completion of the fixed increase may help to optimize the company's asset structure, while storing aircraft materials and purchasing helicopters may help the company enhance the competitiveness of its core business.

Profit forecast and valuation

Considering that the company's cost control is better than we had expected and will benefit from the appreciation of the RMB against the US dollar, we have raised the 2020max 2021 net profit by 44.1% to 209 million yuan / 248 million yuan. The current share price corresponds to 23.3 times 2021 / 19.6 times earnings.

Maintain a neutral rating, taking into account earnings adjustment, sector valuation level has yet to be repaired, raise the target price 4.5% to 6.90 yuan, corresponding to 20.0 pound 16.9 times 2020 pound 2021 price-to-earnings ratio, compared with the current share price has 14.0% downward space. Considering the dilution of the rights issue, according to our estimates, the company's target price corresponds to the price-to-earnings ratio of 21.6 times 2020max 2021.

Risk.

Demand in the offshore oil market was lower than expected; the renminbi depreciated sharply against the dollar; subsidies declined.