Key points of investment

Ping An's point of view:

The small home appliance business is progressing steadily, contributing to performance: Dehao Runda was founded in Zhuhai in May 1996 and listed on the Shenzhen Stock Exchange in June 2004. The main industries covered a series of products such as small home appliances, LED chips, devices, displays and lighting. The small home appliance business achieved revenue of 2 billion yuan in 2017, an increase of 13.12% over the previous year. Mainly, the company increased its investment in R&D of new products and increased the volume of new product development over the same period last year. At the same time, it vigorously promoted the upgrading and transformation of small home appliance production lines to improve automation/semi-automation levels, productivity efficiency and product quality. Effective improvement, which in turn increased customer satisfaction, and orders increased; in addition, the company's own brand ACA actively developed the domestic market through brand rebuilding, optimized management, optimized product structure, and optimized marketing methods, and the sales scale increased year-on-year.

Operations are gradually improving, and the chip side is expected to gradually reverse losses: the company's LED business achieved revenue of 1,956 billion yuan in 2017, a year-on-year decrease of 8.44%. By the end of 2017, a total of 92 MOCVD equipment had been delivered from Wuhu Dehao Runda and Yangzhou Dehao Runda. Of these, 80 units had been commissioned and mass production began, and 2 were used for R&D; the remaining 10 were equipment from the Yangzhou base, which was devalued and is awaiting sale. Due to the rapid change in MOCVD technology, the old machine is not as efficient as the new machine, and at the same time faces greater depreciation costs. The LED chip business has been at a loss for the past three years. In 2017, the company scrapped, sold and disposed of some equipment whose technical level had lagged behind the current market level and did not meet the company's product production requirements, which is conducive to the improvement of the company's future profitability; at the same time, by optimizing the product structure, the proportion of high-margin products such as inverted chips, inverted COB, high-voltage chips, etc., will gradually increase.

It is proposed to acquire NVC Optoelectronics to strengthen its downstream layout: NVC Optoelectronics is a high-quality domestic lighting manufacturer under Nace Lighting, which engages in R&D, production and sales of commercial lighting and home lighting under the “NVC” brand. NVC began a major transition from non-LED to LED earlier. The revenue share of LED products increased from 19.62% in 2013 to 77.91% in 2017. Revenue rose rapidly from 741 million yuan in 2013 to 3.166 billion yuan in 2017. CAGR = 33.7%, and the gross margin of LED products rose from 16.4% in 2013 to 31.4% in 2017, an increase of 91.46%. Thanks to the company's earlier transformation and the company's broad channels and far-reaching brand influence, the company has become a well-deserved leader in general lighting, especially commercial lighting. It is expected that after integrating Nace Optoelectronics and its own lighting business, the company will be able to make full use of the synergistic effects of upstream and downstream of the industrial chain to form a “epitaxial and chip-packaging and module-LED application product (lighting and display) - brand and channel” LED industry chain business pattern, and the LED business can be greatly improved.

Investment suggestions: Dehao Runda's main business began to exceed 4 billion yuan in revenue in 2014 and has remained relatively stable since then. Among them, the small home appliance business has been in the company's business for many years. It has a certain market position, product prices are relatively stable, and the overall gross margin has not changed much; in the LED business, the chip side deducts the value of some uneconomical fixed assets in use, and disposes of some assets whose technology lags behind the current market level. The application side plans to acquire 100% of Nace Optoelectronics's shares. Nace Optoelectronics is a high-quality domestic lighting manufacturer under Nace Lighting The manufacturer is engaged in R&D, production and sales of commercial lighting and household lighting under the “Nace” brand. It is expected that after Dehao Runda integrates Nestlé Optoelectronics, the two will be able to exert synergies upstream and downstream of the industrial chain to form a “epitaxial and chip-package and module-LED application product (lighting and display) - brand and channel” LED industry chain business pattern. At that time, Dehao Runda's competitiveness in the LED industry will be strengthened. The company's revenue for 2018-2020 is estimated to be 4456/4879/5,392 billion yuan respectively, the corresponding net profit returned to the mother is 0.57/132/157 million yuan respectively, and the corresponding PE is 95/41/35 times respectively. It was covered for the first time and gave a “recommended” rating.

Risk warning: 1) Industrial chain integration falls short of expected risks. The integration between the company and NVC Lighting's industry chain has come to an end, and the signing of a formal agreement still needs to be reviewed and approved by the company and NVC Lighting's board of directors and shareholders' meetings. Therefore, the final plan of this transaction is still uncertain. 2) The risk of industrial upgrading. The lighting industry is in the process of industrial upgrading, and the development of LED technology will change the competitive model of the industry, thereby bringing about a new round of industry reshuffle. If a company faces challenges and cannot respond appropriately, it will face a series of risks such as declining market competitiveness, loss of market share, and declining performance. 3) Risk of fluctuations in raw material prices. In recent years, due to factors such as technological progress and capacity expansion, LED chip prices have shown an overall downward trend, but the industry is currently developing rapidly. There is a possibility that prices will fluctuate in the future, and as the proportion of sales of the company's LED lighting products increases, fluctuations in LED chip prices may have a great impact on the company's profits. 4) Market competition risk. The lighting industry is already a globally competitive market. Well-known international brands have taken China as one of their main sales markets. At the same time, the rise of e-commerce in recent years has also had an impact on traditional marketing channels. In the future, the methods, methods and intensity of market competition in the lighting industry will all change. If companies cannot adapt to the future competitive situation, they may face the risk of loss of market share.