Core viewpoints
The company achieved EPS of 0.06 yuan in the first half of 2019, excluding the impact of final assembly product income price difference, the company's revenue growth was steady, and the gross profit margin increased slightly. Taking into account the continued improvement in orders for the company's defense products and the gradual improvement in profitability, the company maintained its annual EPS forecast of 0.22max 0.24max in 2019-20-21. Considering the gradual deepening of the reform of the Arms Industry Group, the possibility of the company as an integrated platform for optoelectronic information products has been enhanced, and the "overweight" rating has been maintained with a target price of 12.5 yuan.
After excluding the influence of price difference income of final assembly products, the income and net profit increased steadily. The company's 2019H1 realized income of 627 million yuan (- 28.48%), net profit of 30.68 million yuan (+ 23.41%), and EPS of 0.06 yuan. According to our estimates, after excluding the impact of the price difference income of the final assembly products in the first quarter of last year, the company's revenue in the first half of the year increased by about 8% compared with the same period last year, achieving a gross profit margin of 17.38%, which was about 0.5pct higher than that of the same period last year. If the income from the price difference is not adjusted, the gross profit margin of 2019H1 will increase by 6.3pcts compared with the same period last year. We expect that in the future, with the improvement of the profitability of the defense business and the gradual opening of the market for new optoelectronic products, the company's performance is expected to maintain rapid growth.
Defense products: the product structure may be improved and profitability is expected to be enhanced. During the reporting period, the revenue of Xi'an Defense (Defense products), a subsidiary, reached 375 million yuan, a decrease of 35.2% over the same period last year, an increase of about 34% after excluding the impact of price difference income, and a net profit of 18.63 million yuan, an increase of 74% over the same period last year. In the field of final assembly integration, the company actively participates in the development and bidding of many important types of equipment; the order of the company in the field of seeker continues to increase, and its output ranks the largest in the country and in the forefront of the world; in the field of optoelectronic information equipment, the company's aviation and ground optoelectronic projects are advancing steadily, and Tou Xianfen's pre-research project is successful. In 2019, the proportion of the company's final assembly products is expected to decline, the proportion of seeker products may increase, and the profitability of the defense business is expected to improve.
Optical materials and devices: the market position is stable, and new products are produced one after another. Affected by the market competition pattern, Xinhua Huaguang (optical materials and devices products), a subsidiary, achieved 289 million yuan in revenue during the reporting period, down 16.4% from the same period last year, and its net profit was 11.35 million yuan, down 13.2% from the same period last year. Good progress has been made in the research and development of new fluorophosphorus glass products, the production capacity of aspheric pressing of optical glass has increased to 150,000 pieces per month, the molding technology of infrared series products has been newly developed, and the precision molding of infrared materials has entered small and medium-sized batch production. The company's market share remains the second in China and the top four in the world. It is expected that in the future, with the gradual opening of the new product market, the company's optical materials and devices business is expected to return to growth.
The mixed reform of military industry is expected to accelerate, and the company may benefit from the injection of high-quality assets. The Arms Group plans to increase the asset securitization rate to 50% by the end of the 13th five-year Plan. With the expansion of the "double hundred Action" in 2019, four military enterprises have been shortlisted, and the mixed reform of groups and the restructuring of scientific research institutes are expected to accelerate. We expect that the company, as the optoelectronic information business platform of Northern Optoelectronics Group and even the entire weapons industry, may be injected into the high-quality assets of Northern Optoelectronics Group in the future, and is expected to become a comprehensive listing platform for laser, night vision and other sub-groups.
Risk factors. The profit growth rate of military and civilian products is not up to expectations, the time and content of asset injection are uncertain, and the holdings of important shareholders are reduced.
Investment advice: taking into account the continued improvement in orders for the company's defense products and the gradual improvement in profitability, we maintain the annual EPS forecast of 0.22max 0.24max 0.27 yuan in 2019-20-21. The current price is 10.73 yuan, corresponding to the PE of 2019-20-21 is twice that of 50-44-39. Considering the gradual deepening of the reform of the Arms Industry Group, the possibility of the company as an integrated platform for optoelectronic information products has been enhanced, and the "overweight" rating has been maintained with a target price of 12.50 yuan (corresponding to 57 times PE valuation in 2019).