Key points of investment

Summary of the announcement: Huaxing Venture announced its 2017 interim report that 2017H1 achieved operating income of 628 million yuan, an increase of 19.8% over the previous year; net profit attributable to shareholders of listed companies was 25.86 million yuan, a decrease of 7.28% over the same period last year. It is at the lower end of the -10% to 10% range of the early forecast, which is basically in line with expectations.

The network construction cycle is declining, dragging down the development of the company's main business. Due to the sharp decline in operator capital expenditure in the first half of 2017, the company's traditional business declined. Among them, network optimization revenue increased 2 in the first half of the year.

At 17%, gross margin fell 2.64 percentage points; network construction business revenue fell 31.92%, gross margin increased 1.35 percentage points; network maintenance revenue fell 34.76%, and gross margin increased 3.6% year over year. Management costs increased by 32.87%, mainly due to the increase in intermediary costs due to the consolidation of connected ports and restructuring. Financial expenses increased by 48.82%, mainly due to the cash merger and acquisition of 51% of Connected Port's shares in 2016, which led to a significant increase in interest on loans. The company completed a 51% equity acquisition in Connected Port at the end of last year, increasing net profit by about 15.6 million yuan in the first half of this year.

Revenue and net profit of connected ports have doubled, and continued to grow rapidly. Connected Port achieved operating revenue of 140 million yuan in the first half of the year, an increase of 100% over the previous year, and net profit of 30.59 million yuan, an increase of about 100% over the previous year. It continues to develop rapidly. It is expected that the annual net profit will exceed the requirement for gambling performance of 72 million yuan.

IDC's business achieved revenue of 116 million yuan in the first half of the year. In terms of cloud computing services, the company is actively cooperating with several major cloud computing vendors in resale and technical service work. It has reached cooperation with AWS, Alibaba Cloud, Azure, etc. to achieve new applications such as network self-scheduling and cloud computing resource pool load balancing through the SDN network and hybrid cloud unified management platform. Cloud computing services achieved revenue of 18.85 million yuan in the first half of the year, with gross margin reaching 65%.

Acquire remaining shares in Connected Port to further enhance the company's performance. The company announced in June that it intends to acquire the remaining 49% of the shares in Connected Port, making Connected Port a 100% owned subsidiary of the company. The IDC/DCI/cloud computing business will become the company's future business focus, and Ren Zhiyuan, founder of Connected Port, is also actively participating in the company's management. The current price is far lower than the stock exchange price, and there is a certain margin of safety. The exchange price for Huaxing Venture's acquisition of the remaining 49% of the shares of Connected Port is 9.4 yuan, which is far higher than the current price of 7.52 yuan per share. There is a certain margin of safety at the current price.

Investment advice: Maintain the “buy” rating with a target price of 10 yuan. Connected Port is a leading hybrid cloud provider in China and one of the few Internet infrastructure companies that can continue to grow rapidly. We are optimistic about the rapid development of the DCI/hybrid cloud business of connected ports, and its rapid penetration into financial and other industries. Actual performance is expected to far exceed gambling requirements. Considering the combined performance of Connected Port, we expect net profit for 2017-2019 to be 113 million/155 million/215 million yuan respectively, and EPS of 0.23 yuan/0.32 yuan/0.45 yuan respectively, maintaining the “buy” rating, with a target price of 10 yuan.

Risk warning: the risk that the progress of the acquisition target does not meet expectations; the risk that new business development falls short of expectations