Matters:
The company announced its financial report for the first half of 2018. The company achieved revenue of 1,862 million yuan (-3.23% YoY) in the first half of the year, net profit attributable to shareholders of listed companies of 20 million yuan (129.68% YoY), and earnings of 0.01 yuan per share.
Ping An's point of view:
Operating income fell slightly year-on-year, and net profit of the mother turned a loss into a profit: the company announced the financial report for the first half of 2018. The company achieved revenue of 1,862 billion yuan (-3.23% YoY) in the first half of the year, and the gross sales margin was 19.80%, down 0.93pct from the same period last year. The company improved its profitability through precise control of costs and expenses, and management expenses, financial expenses, and asset impairment losses fell 11.18 pct, 56.01 pct, and 232.87pct respectively, achieving net profit attributable to shareholders of listed companies of 20 million yuan (129.68%) YoY), net profit after deduction increased 91.53% year-on-year, and the company's performance was basically in line with expectations. By business, the revenue of the LED business and the small home appliance business was 891 million yuan (-2.23% YoY) and 860 million yuan (-7.17% YoY) respectively. The gross margin of the small home appliance business fell 4.12 percentage points to 15.05%, mainly due to the combined impact of factors such as changes in the European and American market environment, rising raw material prices, and rising labor costs.
LED business operations improved, and chips gradually reversed losses: LED business revenue in the first half of 2018 was 891 million yuan, a slight decrease of 2.23% over the previous year. However, as far as product structure is concerned, the company's increased investment in chips resulted in the release of production capacity. The company's chip and packaging business sales all increased, but lighting products were affected by real estate regulation policies, which dragged down the overall revenue of the LED business. On the chip side, in the past three years, due to the inefficiency of the machine, the company has been losing money in the chip business. Starting in 2017, the company scrapped and sold and disposed of equipment that did not meet production requirements, and gradually increased the proportion of high-margin products such as inverted chips, inverted COB, and high-voltage chips, and the profitability of chips improved. The overall gross profit margin of the LED business in the first half of the year was 24.39%, an increase of 2.08% over the previous year. Starting this year, the company's LED chip business is expected to gradually reverse losses and achieve partial profit.
The merger and acquisition of NVC Optoelectronics continues to advance, and the overall LED industry chain layout: NVC Optoelectronics is a high-quality domestic lighting manufacturer under Nace Lighting, engaged 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 was about 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 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 products (lighting and display) - brand and channel” LED industry chain business pattern, and the LED business can be greatly improved.
Investment strategy: The company's revenue declined slightly. Among them, the sales scale of the LED lighting and small home appliance business declined slightly, but LED chips and packaging are expected to turn a loss into a profit. In the future, the company will continue to advance plans to acquire Nestlé Optoelectronics. It is expected that after successful integration, the LED business will be greatly improved. We maintain our previous profit forecast. The company's net profit attributable to the parent company in 2018-2020 is estimated to be 0.57/132/157 million yuan respectively. The corresponding PE is 96/42/35 times, maintaining the company's “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.