Following slower growth in the first half of 2020, Weishijiajie accelerated growth in the second half of the year, mainly due to an increase in terminal demand.
The growth of the component business is expected to slow year-on-year, but the company believes that other and service businesses, such as network security products, have growth potential.
We expect the company's revenue and net profit to reach record highs in 2020.
We have raised our net profit forecast, mainly taking into account faster income growth, higher gross profit margins and improved effectiveness of cost control. Weishijiajie's valuation is not expensive. We reiterate our "overweight" rating and raise the target price to HK $7.01 (based on 11 times 2020 price-to-earnings ratio). We have raised the target price-to-earnings ratio because we expect the shares to continue to be revalued.
Growth accelerated in the third quarter of 2020
Wei Shijiajie's income fell 4% in the first half of 2020 compared with the same period last year, mainly due to the outbreak of COVID-19 in the region. However, revenue growth accelerated in the third quarter of 2020 due to increasing downstream demand for IT products and services in the region (China and Southeast Asia). We reiterate the view that the potential demand for IT products in the region is huge and that Visa has successfully identified growth-driven market segments. In terms of product types, the growth of enterprise systems, cloud computing and network security is accelerating given the potential demand for digital and cloud-based toB. Component business revenue rebounded in the second half of the year after a 29% year-on-year growth in the first half of 2020, and we believe that component revenue will grow more slowly in 2020 due to a high base in 2019. The company continues to expand and diversify its product types to provide more choices to customers, and the company intends to expand its toB business by working with leading companies. The company also actively develops the market for information technology innovation, especially to enhance its business relationship with local enterprises.
Has not been adversely affected by US sanctions against Chinese companies.
We initially thought that Weishijiajie and his peers could have a short-term negative impact as Chinese companies such as Huawei were subject to sanctions.
However, at this stage, Weishijiajie's operation has not been affected. We believe that the company's broad product portfolio will drive its long-term growth. The company plans to continue to implement strategies to increase market share and product types. Weishijiajie is transforming to provide solution-based services to drive growth. In addition to the growing demand for network products and servers due to the widespread use of cloud services and big data, the company is also seeing a growing demand for cyber security products in China.
Raise profit forecasts and target prices
In view of the strong rebound in the second half of 2020, we expect Weishijiajie's income and net profit to reach record highs in 2020. We expect revenue in the second half of the year to grow 15.8% year-on-year, down 4.0% from the first half, and 14.1% in the second half of 2019. We raised our net profit forecasts for 2020, 2021 and 2022 by 23.1%, 9.1% and 9.0% respectively, mainly due to faster income growth, higher gross profit margins and improved cost control effectiveness. Weishijiajie's valuation is not expensive.
We reiterate our "overweight" rating and raise the target price to HK $7.01 (based on 11 times 2020 price-to-earnings ratio). We have raised the target price-to-earnings ratio because we expect the shares to continue to be revalued.