4Q20 performance fell short of our expectations
The company announced 2020 results: revenue/net profit attributable to the mother fell 2.1%/34.4% year-on-year to 3326/427 million yuan, mainly due to the divestment of Longxin Technology in 2019, which generated large investment income. Excluding this factor, 2020 revenue/net profit attributable to the mother was -0.9%/+6.0% year on year. Looking at a single quarter, 4Q20 revenue/net profit returned to the mother fell 3.6%/91.7% year-on-year to 811/036 million yuan, lower than our expectations, mainly due to rising expense rates.
The rail transit business has increased slightly, and new energy vehicles have declined a lot. In 2020, rail transit and new energy vehicle parts revenue increased 4.8/ -49.4% year-on-year to 28.05/170 million yuan, mainly due to the impact of the pandemic on customer orders and product prices. In the rail transit business, revenue from door systems, connectors, interior decoration and accessories was +0.5/ +12.6%/+74.2%/+32.2% year-on-year to 23.30/0.66/0.55/355 billion yuan, respectively. The gross margin of the rail transit business increased 1.2ppt to 40.3%.
Benefiting from changes in product structure, the company's comprehensive gross margin increased 2.1ppt to 36.7% year-on-year in 2020.
The net profit margin was higher than normal, and cash flow from operating activities improved year on year. The company's expense rate for the 4Q20/2020 period increased by 3.0/1.4ppt over the same period, mainly due to a higher increase in management and R&D expenses. Due to the high cost rate for the period, the net profit margin of 4Q20 was only 4.5%, which is below the normal level. However, the company's net profit margin in 2020 was 12.8%, reaching a new high since 2012 (not taking into account large investment returns in 2019). Due to a decrease in the use of working capital, the net cash inflow from the company's operating activities in 2020/4Q20 was 586/740 million yuan, an increase of 180/177 million yuan over the previous year.
Development trends
The rail transit business is expected to remain stable. At the end of 2020, the company's rail transit orders were 5.140 billion yuan, an increase of 28.44% over the previous year. In 2020, the company's urban rail and high-speed rail vehicle door systems maintained the highest domestic share, and the market share of safety gate products increased to number one in the country. During the “13th Five-Year Plan” period, the operating mileage of China's urban rail was increased by 4,360 kilometers, an increase of 102% over the “12th Five-Year Plan” period. According to the NDRC's project approval and various urban construction plans, we expect that urban rail construction will still be at its peak during the “14th Five-Year Plan” period, and business such as gate systems is expected to grow steadily.
The NEV business is expected to grow at an accelerated pace in 2021. In 2020, the company added new customers such as Daimler, GAC Toyota, FAW Toyota, and Changan Mazda, and launched new products such as high-voltage connectors and DC charging guns. According to the China Automobile Association, China sold 515,000 new energy vehicles in 1Q21, an increase of 280% over the previous year. The Association of Automobile Manufacturers predicts that sales of new energy vehicles in China are expected to reach 1.8 million units in 2021, an increase of 32% over the previous year. We expect the growth of the company's new energy vehicles to accelerate in 2021, and long-term business development prospects are good in the context of carbon neutrality.
Profit forecasting and valuation
Considering the rising cost rate, we lowered the 2021 EPS forecast by 8% to 0.51 yuan, and introduced the 2022 EPS forecast of 0.58 yuan, corresponding to a 13% year-on-year increase. The company's current stock price corresponds to 2021/2022 10.6x/9.4x P/E. Considering profit cuts and sector valuation declines, we lowered our target price by 22% to 6.58 yuan. Corresponding to 2021/2022 12.8x/11.3x P/E, there is room for 20% upward, maintaining a neutral rating.
risks
The downstream recovery of the industry fell short of expectations.