2020 and 1Q21 results are in line with previous forecasts and our expectations

The company announced the results of 2020 and 1Q21: revenue in 2020 was 2.927 billion yuan, an increase of 5.4% over the same period last year, and net profit was 56 million yuan, a decrease of 57.8% in revenue and 475 million yuan in net profit, an increase of 39.2% and 121.0% over the same period last year. The net profit was the best in the first quarter of the year. The performance is in line with the previous forecast and our expectations.

The core business has grown steadily and its profitability has improved. In 2020, the business income of rail transit signaling system and semiconductors was 1.635 trillion yuan, an increase of 40.9 percent and 43.9 percent over the same period last year. Affected by the adjustment of business strategy, the scale of environmental protection business shrank and the table was completed in December. In 2020, the company's comprehensive gross profit margin increased by 0.8ppt to 29.7% compared with the same period last year, of which the gross profit margin of the rail crossing signalling system and the semiconductor business increased by 3.9/8.5ppt to 30.9% / 36.8%, respectively, setting and approaching the highest level in history. With the completion of business integration and improved operating efficiency, 1Q21's gross profit margin increased significantly to 38.3% compared with the same period last year.

In 2020, the expense rate increased compared with the same period last year, and the net profit margin of 1Q21 stabilized and rebounded. In 2020, the company's expense rate increased by 3.6 ppt compared with the same period last year, mainly due to exchange losses caused by the devaluation of the 1Q20 Mexican peso and increased investment in research and development throughout the year. 1Q21's expense rate returned to the normal level, and the company's net profit margin rebounded to 6.7%. Due to the expansion of the delivery scale of the rail transit signal system, the net cash inflow of the company's operating activities decreased to 43 million yuan in 2020 compared with the same period last year.

Development trend

The strategic transformation is progressing smoothly, and the profitability of the semiconductor business continues to improve. In November 2020, the company completed the second phase of the transaction with Shanghai Shenneng, and the energy saving and environmental protection business has been completed since December. The company plans to take rail communication and Fan Semiconductor as the two core business directions in the future.

Affected by the epidemic, the company's new rail transportation orders decreased to 1.904 billion yuan in 2020, but its share is still firmly in the top three in the industry. We expect the market boom to pick up in 2021 compared with the same period last year.

New orders for pan-semiconductors rose 44 per cent year-on-year to 217 million yuan in 2020, while gross profit margin and net profit margin rose to 36.7 per cent and 8.0 per cent, which has been growing since 2017. At present, the company's domestic market share in the field of heavily doped TSV (transient suppression transistors) has reached 60%, and the company plans to extend to large-size products in the future.

Increase the proportion of employee shareholding, and the incentive mechanism will be gradually improved. In February 2020, the company announced that it planned to launch the employee stock ownership plan, in which the management subscribed for about 50% of the shares and completed the share transfer in July, and the employee stock ownership plan became the largest shareholder of the company with a 6.49% shareholding ratio. In February 2021, the company announced that the company plans to launch a stock incentive plan, which intends to grant a total of 22.1 million rights and interests to 76 managers and core technical personnel, accounting for 4.07% of the total share capital, including 610 million stock options and 16 million restricted shares. The grant price of stock option is 6.22 yuan, and the grant price of restricted stock is 3.11 yuan.

Profit forecast and valuation

Taking into account the business table, we downgrade the 2021 EPS forecast by 6% to 0.33 yuan, and introduce the 2022 EPS forecast of 0.41 yuan, corresponding to 24% year-on-year growth. The company's current share price corresponds to 2021 21.1x/17.0x 2022 25.0x/20.2x Pmax E, and we slightly lower our target price by 6% to 8.27 yuan, taking into account the profit reduction, and the company's current stock price has 19% upside compared to the current stock price. Maintain an industry rating that outperforms.

Risk

The delivery of rail orders is not as expected; the volume of semiconductor products is not as expected.