Revenue grew steadily, and performance growth was lower than expected
The company released its 2020 annual report on March 30. It achieved annual revenue of 5.254 billion yuan (yoy +17.52%) and net profit of 132 million yuan (yoy +13.18%). The performance fell short of our previous expectations (216 million yuan). The main reason was affected by the epidemic. The main reason was that due to the impact of the epidemic, the implementation of the company's telecom and government business projects and the postponement of contract signing, as a result of which some cost investment did not contribute to revenue, resulting in a significant decline in gross margin. We believe that as the impact of the 2021 epidemic subsides, the company's gross margin is expected to pick up. Also, considering that 5G industry applications have brought about a continuous increase in cloud demand in the operator and government and enterprise sectors, the company's related businesses are expected to benefit. We expect the company's 2021-2023 EPS to be 0.31, 0.43, and 0.59 yuan respectively, maintaining the “buy” rating.
Financial and network product distribution business achieved rapid revenue growth
By business, the company's financial business benefited from the accelerated demand for digital transformation in the banking industry, achieving revenue of 532 million yuan, an increase of 20.69% over the previous year. The network product distribution business benefited from the rapid development of Huawei's government business and achieved a 25.55% year-on-year increase in revenue. Telecom business revenue fell 0.86% year on year, mainly due to reduced investment in BSS and OCS construction by operator provincial branches, and a sharp decline in overseas operators' business revenue due to the pandemic and trade frictions between China and the US. In terms of government and enterprise business, the company covers business fields such as military industry, public security, government industry, and digitalization of large enterprises. Affected by factors such as the epidemic, the progress of some projects fell short of expectations, causing the revenue growth rate of this business to drop 6.40% year-on-year.
The comprehensive gross margin has declined and is expected to pick up in 2021. The cost ratio continues to be optimized. The company's comprehensive gross margin fell 2.67 percentage points from 19. The main reason was affected by the pandemic, the implementation of the company's telecom and government business projects and the postponement of contract signing, as a result, some of the cost investment did not contribute to revenue. As project progress accelerated in '21 and demand for cloud-based projects brought about by 5G commercialization continued to rise, we think the company's gross margin level is expected to pick up in '21. In terms of cost rates, the company continued to strengthen the reuse of personnel and dynamic monitoring of costs, so that the sales, management and R&D expense ratio showed a continuous optimization trend in 19-20.
The company has a lot of room for growth and maintains a “buy” rating
We continue to be optimistic about the core advantages that the company has accumulated in vertical industries over a long period of time. It is expected that it will benefit from the increase in enterprise IT cloud popularity in the 5G era, leading to a situation where the three major fields of operators, government, and finance have blossomed more.
Considering the impact of the execution cycle and upfront cost investment of the company's telecom and government and enterprise business projects on revenue recognition and gross margin, we lowered the company's profit forecast, estimated EPS for 21-22 to be 0.31 and 0.43 yuan respectively (previous values were 0.43 and 0.58 yuan), and predicted EPS for 23 to be 0.59 yuan. Referring to Wind's consistent forecast, the average PE valuation of A-share comparable companies in '21 is 22.63 times. Considering that the company's cloud and big data business still has plenty of room for growth, the company was given 23 times PE in '21, corresponding target price of 7.13 yuan/share (previously predicted value was 10.20 yuan/share), maintaining the “buy” rating.
Risk warning: Operators' 5G construction progress is lower than expected, and revenue confirmation for government and enterprise projects has been delayed.