Main points of investment
Abstract: on October 27, Zhongshi Science and Technology released its third quarter 2020 results: operating income in the first three quarters was 768 million yuan, an increase of 52.44% over the same period last year, and net profit in the first three quarters was 129 million yuan, an increase of 79.73% over the same period last year.
The increase in the share of major customers drives the company's performance steadily upward: Zhongshi Science and Technology 2020Q3 performance increased steadily, achieving a total revenue of 372 million yuan, an increase of 47.87% over the same period last year, and a net profit of 72 million yuan, an increase of 48.32% over the same period last year. The main reason is that during the reporting period, the supply share of major customers at home and abroad increased, and the sales revenue increased significantly compared with the same period last year. Due to the substantial increase in sales revenue compared with the same period last year, the company's production capacity is fully utilized, forming a scale effect. It also benefits from terminal needs such as downstream smartphones, tablets and smart wearables. We believe that with the increasing share of the company's large overseas mobile phone terminal enterprises and the gradual release of new mobile phone terminals, the downstream demand side is expected to drive the performance to a new height.
Profit growth is significantly affected by cost advantage: the company's gross profit margin was 34.06% in the first three quarters of 2020, down 1.15pp from 35.21% in 2019. At the same time, the net interest rate in the first three quarters of 2020 was 17.5%, higher than that of 1.06pp in 2019. The profit growth mainly benefited from the decline in the company's gross profit margin and the increase in net profit margin. The net cash flow generated by business activities in the first three quarters of 2020 was 90 million yuan, of which cash received by Q3 from selling goods and providing services this year accounted for 168.07%, a new high compared with Q2 (81.32%). We believe that with the increase of the company's revenue, under the high-quality payback ability, the company will ensure the steady growth of cash flow from operating activities in the future.
With the forward-looking layout of technology, a variety of heat dissipation solutions help the company stabilize its leading position in the industry: the R & D cost is rising year by year, and the R & D cost of Q3 reached 13 million yuan in 2020. Accounts for 3.6% of total revenue. Including raising 831 million yuan in mid-2020 for the development of 5G high-efficiency heat dissipation module, cooperating with 5G base stations to meet the high-power heat dissipation needs of servers, and at the same time, the company has gradually completed the technical integration of graphite + VC and graphite + heat pipe combined heat dissipation solutions since 2019. With the heat dissipation demand of the follow-up 5G market, the company will gradually provide graphite + VC heat dissipation solution for domestic first-line mobile phone terminal brands in the future. We believe that the rise of major domestic customers can bring greater flexibility to the company's performance, which is expected to help the company's business to steadily improve its volume and price.
Earnings forecast and investment rating: we expect operating income from 2020 to 2022 to be 985 million yuan, 1.293 billion yuan and 1.603 billion yuan, respectively, and earnings per share to be 0.68,0.97,1.23 yuan, respectively. The corresponding PE valuation is 23.67 times of 42.82 pounds, maintaining the "buy" rating.
Risk hint: 5G development is not as expected, and terminal demand release is not as expected.
