3Q16 performance is lower than expected.
National Technology announced its results for the third quarter of 2016: operating income was 121 million yuan, down 1.03% from the same period last year; net profit attributed to the parent company was 1.5508 million yuan, down 95.63% from the same period last year, corresponding to 0.0028 yuan per share, which was lower than our forecast of 0.07 yuan. Mainly due to the decline in sales of USBKEY products, domestic financial IC cards have not improved due to the fact that the market has not been fully started.
Trend of development
The main control chip of the financial terminal is the only revenue driver in the first three quarters, and the decline in non-operating income is a drag on net profit; the company's sales of USBKEY products declined in the first three quarters, and the revenue contribution of domestic financial IC cards has not improved because the market has not been fully started. Mobile payment chip RCC business is still exploring a new operation model, so revenue contribution is not much.
We expect the company's sales revenue to increase in the financial terminal master chip market (secure memory chips). However, due to the impact of the decline in the yield of financial products, the investment income dropped compared with the same period last year. At the same time, due to a decline in the size of deposits and lower interest rates on bank deposits, interest income fell compared with the same period last year, so net profit fell compared with the same period last year.
Long-term drive-accelerated launch of mobile payments driven by ApplePay and bottom-up promoters of national technology; since Apple launched ApplePay, the ecosystem of mobile payments has begun to expand and mobile payments are on the rise. RCC2.45GHz mobile payment solution, as a national technology patent, is another mobile payment solution in China besides NFC. 2.45GHz technology has been tried out in some second-tier cities in China, but the penetration rate is not high at present. The Ministry of Industry and Information Technology announced "Technical requirements for contactless Reader Terminal based on 2.45GHz RCC (Limited area Communication) Technology for Mobile payment on its official website on December 30."
Eight national standards are reported and approved, and with the approach of establishing the national standard of RCC, the industry ushered in a breakthrough opportunity.
Profit forecast
Due to the lower-than-expected revenue and net profit of 3Q16, we have lowered our earnings per share forecasts for 2016 and 2017 by 10% and 8% respectively from RMB 0.24 and RMB 0.32 to RMB 0.22 and RMB 0.29, respectively.
Valuation and suggestion
At present, the company's share price corresponds to 67.8 times 2017 price-to-earnings ratio. We maintain a neutral rating and a target price of 18.30 yuan, which is 7.72% lower than the current share price. Based on a price-to-earnings ratio of 63.1x 2017.
Risk.
It is difficult to get the expected return on R & D investment, and the promotion of mobile payment and financial IC falls short of expectations.