3Q17 performance meets expectations

Provincial Guangzhou shares announced 3Q17 results: operating income was 7.015 billion yuan, up 4.10% over the same period last year; net profit belonging to the parent company was 172 million yuan, down 59.78% from the same period last year, falling into the lower limit of the forecast net profit range of 1.71-299 million yuan, in line with expectations; corresponding to 0.10 yuan per share.

Trend of development

The scale of revenue has expanded steadily, and profits have fallen due to the impairment of goodwill. The company's gross profit margin for the first three quarters was 14.63% (YoY-3.59pct). Of this total, the revenue in the third quarter was 2.542 billion yuan (YoY+10.23%), the net profit was-18.29 million yuan, and the gross profit margin was 14.06% (YoY-5.53pct). The decline in gross profit margin caused by the great impact of competition such as new media on the media agency business in traditional channels is still magnifying. In addition, the company expects to set aside a provision for impairment of goodwill of about 100 million yuan (Kaida), resulting in an impairment loss of 110 million yuan in assets during the reporting period, an increase of 985% over the same period last year, and the risk of impairment of goodwill is gradually released.

The rate is relatively stable and the operating cash flow is tight. In the first three quarters of 2017, the sales expense rate / management expense rate / financial expense rate was 6.26%, 3.15%, 0.50%, respectively, with year-on-year changes + 0.03pct/+0.21pct and-0.17pct. The decline in the financial expense rate is mainly due to the increase in the company's liquidity, resulting in a reduction in the company's interest expenses. The company's operating net cash flow in the first three quarters of 2017 was-148 million yuan, compared with 59.45 million yuan in the same period last year, down 365% from the same period last year, mainly due to the long payback cycle of the company's new major customers and the increase in advance payment business.

Expect the pressure of goodwill impairment to release and grow again. The company expects 17-year net profit of 6112-183.37 million yuan, down 90-70% from the same period last year, mainly due to the decline in the performance of subsidiaries and the impairment of goodwill. In the short and medium term, the gross profit margin of the traditional media agency business is under pressure, or it may continue to drag on net profit; the impairment of goodwill will still be a drag on performance. However, the company's comprehensive competitive strength is still strong, and it is actively transforming to an integrated marketing group with digital marketing as the core. With the deepening of the strategic transformation of "big data" and "full marketing", the performance is expected to achieve restorative growth and reverse the decline.

Profit forecast

Considering the potential impairment of goodwill of nearly 400 million yuan for companies such as Cedar / Arun, the 18-year net profit of 17 raceme will be reduced by 70.8% to 120 million yuan / 489 million yuan, and the EPS will be 0.07 Sterling 0.28 yuan.

Valuation and suggestion

At present, the company's stock price corresponds to the 18-year EPS of 17max as 93X/23X. We maintain a neutral rating and a target price of 5.80 yuan, which is 9.66% lower than the current share price.

Risk

Goodwill impairment risk, business transformation progress is lower than expected.