3Q20 performance is in line with our expectations
Yunnan germanium industry announced 1-3Q20 results: operating income 500 million yuan, year-on-year + 49.7%; return to the mother net profit of 9.05 million yuan, corresponding to 0.014 yuan per share profit, year-on-year turnaround, in line with the performance forecast range (700-10 million yuan). Company performance year-on-year turnaround, mainly due to the rebound in germanium prices, and the company's infrared-grade germanium products, photovoltaic grade germanium products, semiconductor material-level products sales increase. 3Q20 single-quarter operating income of 140 million yuan, year-on-year + 37.5% / month-on-month-27.2%, return to the mother net profit of 3.01 million yuan, year-on-year turnround / month-on-month-37.6%.
The increase in sales volume of deeply processed products offset the decline in the prices of traditional products, driving the growth of gross profit against the trend. In the first three quarters, the domestic germanium price decreased compared with the same period last year. The average price of the company's material grade / optical fiber grade germanium products was-12% and 19% compared with the same period last year, and the sales volume was-3% and 6% respectively. The sales volume of infrared / photovoltaic / semiconductor products is + 44% "500%" 131% compared with the same period last year. In the first three quarters, the company's gross profit margin was year-on-year-1.7ppt, but the gross profit was + 34.8% year-on-year.
The total net cash flow decreased compared with the same period last year. In the first three quarters, the company's net operating inflow was 100 million yuan, + 209.0% compared with the same period last year, mainly due to an increase in cash obtained from sales; a net investment outflow of 170 million yuan and a net outflow of + 449.8% from a year earlier, mainly due to an increase in the purchase of fixed assets; a net inflow of financing of 80 million yuan, year-on-year-44.1%, mainly due to an increase in debt repayment.
Trend of development
The price of germanium fell and stabilized, but it is still in a historically low range. The average domestic price of metal germanium in 3Q20 is-8.1% to 6971 yuan / kg compared with the same period last year, but the germanium price on October 26 also rebounded nearly 7% higher than that of 2Q20 + 1.3% month-on-month. Considering that the germanium price is in the low range of nearly a decade and has fallen below the cost line of some smelters, we believe that the germanium price has a strong cost support.
The development of high-end downstream areas is expected to continue to boost germanium prices. The company is committed to the transformation and upgrading of deep processing, and germanium products are widely used in new high-end fields such as communications: 1) 5G field: more than 30% of the world's germanium is used in the field of optical fiber, and germanium tetrachloride is used as an additive in optical fiber. It is an irreplaceable important raw material in optical fiber production. We believe that germanium price is expected to benefit from the further promotion of 5G network and the construction of fiber-to-the-home integrated broadband network in the future. 2) Satellite field: the company's photovoltaic germanium products are germanium single wafers for solar cells, and solar germanium cells are mostly used in spacecraft and other fields. As of September, fixed asset investment in telecommunications, broadcasting and satellite transmission services totaled + 33.4% year-on-year, with a growth rate of + 27.8ppt. We believe that as China's satellite industry enters a period of rapid development, germanium price is expected to benefit.
Profit forecast and valuation
Keep profit forecasts for 2020 and 2021 unchanged. The current share price corresponds to a price-to-book ratio of 5.8x in 2021. Maintain a neutral rating and a target price of 15.78 yuan, corresponding to a price-to-book ratio of 6.6x in 2021, which has 13.1% upside compared to the current stock price.
Risk
The demand for germanium is lower than expected, and the price of germanium has dropped sharply.
