3Q20 performance was higher than our expectations
Keyuan Intelligence announced results for the first to third quarter: operating income of 607 million yuan, an increase of 25.5% over the previous year; net profit of Guimu was 96 million yuan, an increase of 12.8% over the previous year; net profit after deducting non-return mother's net profit was 88 million yuan, an increase of 24.9% over the previous year. Looking at a single quarter, the company's 3Q20 revenue was 233 million yuan, an increase of 33.0% over the previous year, and the net profit of the mother was 28 million yuan, an increase of 38.9% over the previous year. Benefiting from the recovery in the industrial automation boom, the company's main business was fully expanded, exceeding market expectations.
Gross margin was steady, and the cost rate rebounded in a single quarter. The 3Q20 gross margin was 40.8%, an increase of 3ppt over the previous year. Overall, the company's gross profit margin in the first three quarters was 41.7%, which was basically stable compared to 42.3% last year. The company's sales/management/R&D/financial expenses ratio in the third quarter were +0.6/+0.2/0.3/+0.5ppt to 10.4%/6.1%/9.2%/-1.2%, respectively. Overall, the net profit margin of the 3Q20 company increased slightly by 0.5ppt to 11.9% year-on-year.
Enjoy the 2019 income tax refund to enhance this year's results. The company was recently recognized as an enterprise that enjoyed income tax benefits for key software enterprises within the national planning layout in 2019. According to the announcement, it will increase net profit in 2020 by 5.5776 million yuan. We estimate that this year's profit will increase by 3.8%.
Operating cash flow improved substantially. Due to the impact of the previous pandemic on order acceptance and repayment, the company's net operating cash flow fell 67.0% year-on-year in the first half of the year. In 3Q20, the company strengthened repayment of goods. Combined with factors such as tax refunds, the net operating cash inflow was 75 million yuan, a sharp increase of 97.0% over the previous year.
Development trends
The automated recovery continues, and I am optimistic about the company's order volume. On July 10, the Ministry of Industry and Information Technology issued the “Industrial Internet Special Working Group 2020 Work Plan”. Domestic policies accelerate automation upgrades and build the foundation for the industrial Internet. According to the forecast of the Forward-looking Industry Research Institute, China's industrial Internet market exceeded 600 billion yuan in 2019, with an average CAGR of 13% in 2020-2025, with a market space of trillion yuan. In the third quarter, domestic industrial automation downstream showed an overall recovery trend. In September, the monthly growth rate of robot/metal-cutting machine tool production hit the highest in the year, which favors the recovery in industrial Internet demand. We are optimistic about the company's subsequent order volume.
Profit forecasting and valuation
As the domestic automation recovery exceeded expectations, we raised our 2020/2021 net profit by 5.0%/8.8% to 1.48/189 million yuan, corresponding to a year-on-year increase of 16.5/27.5%. The company's current stock price corresponds to 25.2/19.8x2020/2021e P/E. We raised the company's target price by 10.6% to 19.75 yuan, corresponding to the 2021e25x P/E. There is room for a 27% increase from the current stock price to maintain an outperforming industry rating.
risks
Demand in the industrial automation industry fell short of expectations.