3Q20 performance is in line with our expectations
The company announced 3Q20 results: 1-3Q20 operating income of 2.778 billion yuan, down 3.31% from the same period last year; net profit of 13 million yuan, down 85.12% from the same period last year. 3Q20's operating income was 947 million yuan, down 10.91% from the same period last year, and its net profit was 134 million yuan, 184.15% compared with the same period last year. Although the company's homing net profit increased rapidly compared with the same period last year, we believe that the return to profit mainly comes from investment income. Excluding this factor, the company's homing net profit is still likely to be negative. Without considering the factors of investment income, the company's performance is basically in line with our expectations.
Trend of development
The decline in revenue from Tongding Interconnection is mainly due to the decline in the optical fiber and cable business. According to the previous disclosure, the company's 1H20 optical fiber and cable business fell 0.92% year-on-year, power cable business increased by 57.23%, and communication cable business increased by 13.31%. The growth of the company's 1H20 power cable and other businesses made up for the decline in the optical fiber and cable business, making the overall revenue generally stable. While 1-3Q20's overall revenue declined, we speculate that the possible reason is: 1) the company failed to win the bid for China Mobile Limited's latest batch of ordinary optical cable collection in July, leading to a further decline in optical fiber and cable business; 2) the epidemic led to lower-than-expected cable demand from downstream customers, and the growth of the company's cable sector could not make up for the decline in optical fiber and cable business. The sharp decline in the collection price of optical fiber and cable by operators since 2019 has also led to a decline in the gross profit margin of the company's optical fiber and cable business, dragging down the overall gross profit margin of 14.00% for 1-3Q20, a decrease of 9.19ppt compared with the same period last year.
Tongding Interconnection has taken certain fee control measures. 1-3Q20 sales expenses decreased by 21.36% to 151 million yuan compared with the same period last year, management expenses decreased by 13.49% to 122 million yuan, R & D expenses decreased by 10.95% to 159 million yuan, financial expenses decreased by 4.09% to 115 million yuan, and 1-3Q20 OPEX/ operating revenue decreased by 2.28ppt to 19.67% compared with the same period last year. However, company 1-3Q20 has a fair value change loss of 81 million yuan due to financial derivatives losses, a credit impairment loss of 24 million yuan due to bad accounts receivable, and an asset impairment loss of 25 million yuan due to inventory decline, which still has a negative impact on the company's operating profit. At the same time, the company's 3Q20 disposes of long-term equity investment assets to achieve a larger book value of investment income, 1-3Q20 company investment net income of 302 million yuan, so that the company 1-3Q20 overall operating profit is positive, the final net profit is positive.
Profit forecast and valuation
Keep profit forecasts for 2020 and 2021 unchanged. The current share price corresponds to 2020 / 2021-98.0 times / 36.7 times earnings. Maintain a neutral rating and a target price of 5.63 yuan, corresponding to-106.9 times 2020 price-to-earnings ratio and 40.0 times 2021 price-to-earnings ratio, which has 9.1 per cent upside from the current share price.
Risk
The progress of network security orders is not as expected; the competition in the power cable industry is fierce.