[Investment points]
The company published its three-quarter report. The first three quarters of 2020 achieved revenue of 15.82 billion yuan, down 11% from the previous year; the net profit of the mother was 280 million yuan, a decrease of 55.2% over the previous year; net profit after deducting the net profit of the non-return mother was 250 million yuan, a decrease of 58.3% over the previous year.
The impact of the pandemic has abated, and third-quarter results have recovered. The company achieved revenue of 6.39 billion yuan in Q3, an increase of 10.3% over the previous year; net profit returned to the mother in the single quarter was 220 million yuan, up 15.6% year on year, and net profit after deducting non-net profit for the single quarter was 200 million yuan, up 12% year on year. During the reporting period, domestic telecom operators' investment in late-stage network construction such as network optimization was declining year by year, and competition in the communications market intensified. At the same time, due to the impact of the COVID-19 pandemic, the upstream and downstream industries of the communications industry to which the company belonged in the first half of the year were delayed, putting some operating pressure on the company's main business. By actively expanding new business areas, strengthening internal controls, and reducing operating costs, the company's net profit growth rate was corrected year-on-year in the third quarter of 2020.
Gross margin has declined, and R&D expenses have been rising steadily. During the reporting period, the company's gross margin was 20.6%, down 1.34 pct from the previous year; the net interest rate was 1.9%, down 1.78 pct from the previous year; in terms of expenses, the company's sales expenses rate/management expenses rate/financial expenses rate/R&D expenses ratio in the first three quarters of '20 were 6.4%/1.2%/1.2%/11.4% respectively, and YOY was +0.05pct/0.02pct/+0.43pct/+0.5pct respectively; overall, although the company was affected by the epidemic and increased competition, gross margin declined. However, the company continues to maintain R&D investment in high-end, core key technologies to vigorously promote product competitiveness. It is expected that the company will probably reverse the declining trend in gross margin in the future.
Seize “new infrastructure” opportunities and actively deploy 5G, rail transit, big data centers, artificial intelligence, and the industrial Internet. In 2020, “new infrastructure” was launched. Among them, 5G, big data, and the Industrial Internet of Things all put forward new requirements for the construction and capacity bandwidth of communication networks. The demand for high-bandwidth, high-capacity, low-latency transmission equipment and high-speed long-distance transmission has become mainstream in the market.
The company is a provider of information and communication equipment and network solutions, and has the ability to provide a package of solutions for communication network construction, integration, optimization and service. As of the reporting period, Firefight has built more than 70 5G carrier networks. In the recent 5G carrier tenders of the three major operators, Fenghuo won more than 23% of the bids.
Technological breakthroughs in various fields ensure the competitiveness of the company's future products. In terms of “three super” optical transmission, the company initiated commercialization development of the all-optical cross-device platform; self-developed optical modules achieved low power consumption, small size and excellent cost; in terms of 5G carrying, urban products completed breakthroughs in some key technologies; in terms of cloud computing, FiToS already has independent R&D capabilities; in terms of special optical cables, some optical cable products have made breakthroughs in key technologies.
[Investment advice]
The company is a provider of information and communication equipment and network solutions, and has the ability to provide a package of solutions for communication network construction, integration, optimization and service. The next three years will be the peak period for 5G investment. With the comprehensive and technological advantages of the industrial chain, the company hopes to gain more share in 5G construction.
We expect the company's revenue to be 226.89/258.92/29.484 billion yuan in 2020-2022, net profit of 688/999/1,101 billion yuan, EPS is 0.58/0.81/0.94 yuan, and the corresponding PE is 41/29/25 times respectively. We are cautiously optimistic about the company's future performance and give it an “increase in holdings” rating.
[Risk Reminder]
5G investment fell short of expectations;
The price of optical fiber and cable fell more than expected;
New business expansion fell short of expectations.