Results in the first three quarters of 2020 are in line with market expectations

Gehua Cable announced 1-3Q20 results: operating income was 1.739 billion yuan, down 4.2% from the same period last year; net profit from home was 151 million yuan, down 68.0% from the same period last year; net profit from non-return was 156 million yuan, down 52.5% from 3Q20, down 6.0% from the same period last year; net profit from home was 76.47 million yuan, up 109.1% from the same period last year, in line with market expectations.

Trend of development

Revenue is still declining and profitability is improving month-on-month. The company's 3Q20 achieved operating revenue of 559 million yuan, down 6.0% from the same period last year. We expect this to be mainly due to the limited promotion of HDTV users and home broadband users due to the continuation of the epidemic in 2020, and the decline in advertising revenue caused by the downturn in the advertising industry. In terms of profit, taking into account the impact of changes in the fair value of Guigang network shares held by the company's 3Q19, the net loss on fair value changes was 59.5453 million yuan, while the net loss on fair value changes in 3Q20 was 698700 yuan. The net profit of 3Q20 increased by 109.1% year-on-year and 37.5% month-on-month.

In addition, the gross profit margin fell 4ppt to 18.1% compared with the same period last year, and we believe that the company's cable TV business still faces fierce competition.

The scale of users is basically stable, ultra-high-definition video and smart city construction bring long-term opportunities.

As of 3Q20, the company had 6.0286 million cable TV subscribers, a net increase of 18600 compared with the previous month, and a net increase of 36800 with 5.5868 million high-definition interactive TV subscribers.

We expect the number of cable TV subscribers and HD interactive TV users to remain stable throughout the year, and the company's cable TV service subscriber growth may continue to be constrained in 2020.

As an important participant in the "national network integration", the company is expected to benefit from the promotion of 5G construction under resource integration. On October 12, 2020, China Radio and Television Network Co., Ltd. was officially put into operation. Among them, the company's controlling shareholder, Beiguang Media Investment Center, intends to hold 3.85% of the company after its 265 million shares (19.09% of the total share capital of Gehua Cable), while Beiguang Media Investment and Development Center holds 37.42% of Gehua Cable. We believe that the continuous promotion of "national network integration" is expected to achieve resource integration and economies of scale, accelerate the transformation and upgrading of the cable network, and enhance the carrying capacity and content support capacity of the cable network. In addition, the "national network integration" may also help solve the problems such as the dispersion of the right to use the frequency band of the radio and television system and the elimination of the existing spectrum, so as to accelerate the construction of the radio and television 5G network and the landing of the 5G application. We are optimistic that under the background of 5G era and "national network integration", the company integrates the development potential of emerging businesses such as media technology platform, ultra-high-definition content and smart city, which is expected to inject new momentum into the company's long-term growth.

Profit forecast and valuation

Due to the continued pressure on the company's cable business, we cut our net profit by 18.4% in 2020 and 8.4% in 2021 to 251 million yuan and 553 million yuan, respectively. The current share price corresponds to 28.2 times 2021 p / e. To maintain our neutral rating, we lowered our target price by 21.5% to 11.93 yuan, corresponding to 30 times 2021 price-to-earnings ratio, which is 6.2% higher than the current share price.

Risk.

The progress of "national network integration" is not as expected; competition in video and broadband services has intensified; and subscribers have been lost.