Main points of investment:
Product price competition and increased costs have led to a decline in profits. The company announced that its operating income in 2016 was 889 million yuan, down 2.4 percent from the same period last year. The net profit returned to its mother was 120 million yuan, down 34.9 percent from the same period last year. The net profit after deducting non-return was 109 million yuan, down 28.3 percent from the same period last year. The main influencing factors of performance decline include: (1) during the reporting period, the market competition of USB Key products intensified, product sales and unit price decreased; (2) management expenses increased, financial income decreased and software tax rebate decreased. The company disclosed a forecast of results for the first quarter of 2017, showing that the net profit was 1.678 million yuan to 3.556 million yuan, down 60% to 80% compared with the same period last year. The company expects gross profit to decline compared with the same period, while expenses during the period have increased, resulting in a decline in net profit compared with the same period last year. The impact of non-recurring profit and loss on net profit in the first quarter is 6 million yuan to 7.2 million yuan.
The gross profit margin is steadily rising. (1) operating income of USB Key products, USB Key products was 507 million yuan, down 8.9% from the same period last year, revenue accounted for 57.1%, gross profit margin was 43.4%, an increase of 1.4% over the same period last year; (2) OTP dynamic token products, operating income of 285 million yuan, an increase of 2.5% over the same period last year, revenue accounted for 32.1%, gross profit margin was 36.7%, an increase of 3.3% over the same period last year (3) for encryption lock products, the operating income is 40.91 million yuan, an increase of 7.4% over the same period last year, accounting for 4.6%; (4) the income from cards and other products is 47.25 million yuan, an increase of 43.8% over the same period last year, with a rapid growth rate, accounting for 5.3% of the income. During the reporting period, the company's sales expense rate was 9.8%, an increase of 0.4% over the same period last year, and the management expense rate was 21.8%, an increase of 3.0% over the same period last year. The company's comprehensive gross profit margin was 40.7%, up 1.0 percentage points from the same period last year.
Speed up the development of new business. (1) Financial services business, which mainly provides financial services based on Internet applications to banks and other financial institutions, and has provided a variety of Internet financial services from bank e-commerce to bank Wechat marketing for many banks. (2) acquisition of chip companies. In December 2016, the company acquired Hongsi Electronics, which has core technical advantages in random number chips, dedicated high-performance cryptographic algorithm chips and commercial information security SOC chips. After the acquisition, the company can combine the company's COS operating system and application development capabilities and technological advantages with the chip design capabilities of the target company. (3) identity cloud service, Feitian Yunxin service based on dynamic face recognition technology, is an important direction of company identity recognition business in the future. In August 2016, the company formally reached a cooperation intention with Guangxi Beibu Gulf Bank on the "face recognition identity authentication module project". (4) blockchain business. In August 2016, Feitian Credit officially reached a strategic cooperation with Bubby (Beijing) Network Technology Co., Ltd. in the field of blockchain technology; in September 2016, during Shanghai blockchain International week, Feitian released the industry's first hardware product for blockchain technology-digital currency fingerprint hardware wallet CoinPass Bio.
Profit forecast and investment advice. We believe that the price competition faced by traditional products leads to a temporary decline in the company's performance; the gradual expansion of new business and the integration of the industrial chain are expected to contribute new profit increments to the company. We estimate that the EPS of the company from 2017 to 2019 will be 0.38 Universe 0.47 Universe 0.58 respectively. Refer to comparable companies in the same industry, give the company a dynamic PE of 75 times in 2017, with a 6-month target price of 28.70 yuan. Cover for the first time, giving a "buy" rating.
Risk hint. The risk of industrial chain integration is lower than expected, and price competition leads to the risk of gross profit margin decline.