Event

The company released a report for the third quarter of 2020, with revenue of 606 million yuan in the first three quarters, an increase of 3.54% over the same period last year, and a net profit of 142 million yuan, an increase of 19.56% over the same period last year, deducting 129 million yuan in non-net profit, an increase of 21.31% over the same period last year. In the third quarter alone, revenue reached 268 million yuan, an increase of 10.53% over the same period last year, and the net profit returned to the mother was 63 million yuan, an increase of 3.51% over the same period last year, deducting 62 million yuan from non-net profit, an increase of 19.74% over the same period last year.

Brief comment

1. The performance in the third quarter increased slightly, which was generally in line with expectations.

In the third quarter of 2020, the company achieved revenue of 268 million yuan, an increase of 10.53% over the same period last year, which was significantly lower than that of the second quarter (22.92%). It is expected that due to the impact of the epidemic, the tender of the Water Department was delayed in the first half of the year, affecting the company's new orders. it is reflected in the revenue side of the third quarter (the confirmation period of smart meter orders is usually 3-6 months). In the third quarter of 2020, the company achieved a net profit of 63 million yuan, an increase of 3.51% over the same period last year, and deducted a non-net profit of 62 million yuan, an increase of 19.74% over the same period last year, in line with expectations. Based on this, we expect that with the weakening of the impact of the epidemic and the increase in the permeability of smart water meters, the future performance is expected to improve again.

2. the gross profit margin and expense rate remain stable, and the loss of credit impairment affects the net interest rate.

In the third quarter of 2020, the company's gross profit margin was 37.98%, an increase of 0.18ppp over the same period last year; the expense rate was 17.90%, an increase of 0.14pp over the same period last year, in which the rates of sales, management, R & D and financial expenses decreased by 0.67pp, 0.28pp, 0.15pp and 1.24pp, respectively. The increase in the rate of financial expenses is mainly due to the decrease in interest income and the increase in exchange losses. The net interest rate was 23.79%, down 1.86pp from the same period last year, mainly due to the company's provision for credit impairment losses.

3. The customer payment cycle affects cash flow and is expected to improve in the fourth quarter.

In the first three quarters of 2020, the net cash flow of the company's operating activities was-62.1282 million yuan and-12.2424 million yuan in the third quarter, mainly because the water department usually concentrated payments in the fourth quarter, affecting the cash flow in the first three quarters. Bills and accounts receivable of the company reached 567 million yuan in the third quarter, an increase of 64.2643 million yuan compared with the end of the second quarter.

4. Since the second half of the year, two major bid-winning projects have been disclosed, and the performance is expected to pick up gradually.

On July 17, the company announced that it won the bid "2020 Shanghai Urban Investment Water (Group) Co., Ltd. Small caliber Internet of things (NB-IoT) remote water meter procurement and installation project", involving 136500 NB-IoT meters. On September 5, the company announced that it had won the bid for the replacement project of water meters for overdue residents of Tianjin Water Group Company, involving 150000 IC card meters. We believe that as the impact of the domestic epidemic gradually fades, the bidding of the Water Department will return to normal, and the company's order and performance growth rate is expected to pick up gradually.

5. With the accelerated infiltration of intelligent water meters, the company will be in the forefront of the industry and will fully benefit.

In recent years, with the continuous improvement of technology and the acceleration of smart cities and smart water, the market demand for smart meters has increased greatly, especially the NB-IoT wireless smart water meters. Especially during the epidemic period, problems such as low efficiency of manual reading of mechanical water meters, long-term funding of water departments and large errors in copying data have been further exposed. it is a general trend for water metering to be intelligent, information-based and systematic. The number of water meters in stock in China is close to 400 million, among which the penetration rate of smart meters is still very low and there is a broad space for development in the future. The company has ploughed the water meter industry for decades, and has business in 31 provinces, municipalities and autonomous regions across the country. It has established and maintained long-term, stable and close business relations with many domestic water departments, with a customer coverage rate of about 40% and a leading market position. In the field of smart meters, the company is one of the first enterprises to apply NB-IoT to smart water meters, and it is also the first enterprise to cooperate with Huawei to realize the large-scale commercial use of NB-IoT Internet of things water meters in China. In 2019, the company's smart meter revenue was 600 million yuan, an increase of 90.97% over the same period last year, and smart meter revenue accounted for 60.75%, an increase in 15.03pp over the same period last year. In the future, the company will continue to benefit from the outbreak of demand for smart water meters, especially NB-IoT Internet meters.

6. Profit forecast and rating: in the short term, the epidemic affects the bidding rhythm of the Water Division, and the company's performance growth has slowed down, but as the impact of the epidemic recedes, orders and performance are expected to pick up gradually. In the long run, the general trend of replacing mechanical water meters with intelligent water meters is that the company, as a veteran water meter manufacturer in China, has a leading position in the industry and will fully benefit. We estimate that the company's net profit in 2020 and 2021 will be 236 million yuan and 290 million yuan respectively, and the current market capitalization corresponding to PE is 27x and 22x respectively, giving the "overweight" rating for the first time.

7. Risk hints: the impact of the epidemic is higher than expected; the permeability of smart water meters is not as expected; the competition in the industry is intensified.