Net profit for the first half of 2020 fell 7.2% year on year, lower than we expected 3.8% China Communications Services announced results for the first half of 2020: revenue fell 4.0% year-on-year to 53.8 billion yuan (year-on-year growth rate rebounded to 7.4% in the first quarter of 2020 (15.3% year-on-year in the first quarter of 2020), and the company's net profit fell 7.2% year-on-year to 1.6 billion yuan, 3.8% lower than our expectations. This is mainly due to the increase in company costs and the pressure on revenue during the outbreak.
Development trend
The impact of the epidemic is expected to abate in the second half of 2020. In the first half of 2020, the company's telecom infrastructure service revenue fell 5.7% compared with the same period last year, and the company's core business process outsourcing service business (excluding product distribution business) decreased 4.4% year-on-year, of which supply chain business revenue decreased by 13.9% year-on-year. Network maintenance and property management business performance is resilient (revenue is down 0.4% and 4.7%, respectively) The bidding, construction and delivery of infrastructure projects lagged behind due to the epidemic in the first half of 2020. The overall revenue contributed by domestic telecom operators to the company fell 9.2% from the same period last year, of which revenue from telecom infrastructure services fell 12.8% from the same period last year, and revenue from core business process outsourcing services fell 5.1% from the same period last year. As the capital expenditure of telecom operators enters the upstream cycle and the construction of base stations is expected to accelerate in the second half of 2020, we expect China Communications Services to take advantage of the general contracting capacity of EPC projects to promote the recovery of company revenue growth (it is expected to return to low double-digit growth in the second half of 2020).
The contribution of non-operator customer income is rising, and the application service business is growing against the trend. Driven by intelligent products and solution products, the company's revenue from non-telecom operators grew 3.7% year-on-year, accounting for 40.6% of the total revenue. The company's revenue from application, content and other services increased by 10.1% to 7.8 billion yuan compared with the same period last year, of which more than 60% came from customers of non-telecom operators, while revenue from system integration and software development increased by 15.6% and 21.1%, respectively. Benefiting from new opportunities in the field of new infrastructure, China Communications Services signed new orders for data centers of more than 4 billion yuan in the first half of 2020. at the same time, the proportion of the company's large-scale project contracts (projects worth more than 100 million yuan) further increased to 14% from 8% in fiscal year 2019.
Strict control of costs, profit margin pressure still exists. In the first half of 2020, the company's gross profit margin fell 0.28 percentage points year-on-year to 11.0%, and net profit margin fell 0.1 percentage points to 2.9% year-on-year. The decline of the company's profit margin is mainly due to the increase in material costs caused by the growth of the system integration business, and the company has taken a series of epidemic prevention measures during the epidemic. We have noticed that the company's gross profit margin has continued to pick up since February, mainly due to the rebound in revenue and the optimization of management expenses. We expect that the company's near-term profitability will still be under pressure from operator customer pricing and new business promotion costs.
Profit forecast and valuation
We slightly lowered our revenue forecasts for 2020 and 2021 by 0.9% and 1.0%, respectively, and lowered our profit forecasts for 2020 and 2021 by 3.3% and 6.6%, respectively. This is mainly due to pricing pressure from operator customers and rising fees brought about by the climbing period of non-operator business. At present, the company's share price corresponds to a price-to-earnings ratio of 10.0 times 2020 earnings. We maintain the company's "outperform industry" rating and target price of HK $6.50 (corresponding to 13 times 2020 price-to-earnings ratio), which is 25.7% upside from the company's current share price. Risk:
Product pricing pressure; non-operator business uncertainty.