As the quarterly report showed, the company’s net profit growth rate was much higher than that of its operational income; especially non-operating revenue went up to 87.22 million yuan, 137 times greater than the 0.63 million yuan of the same period in 2006, accounting for 47.3% of the company’s total profit. Reasons for the high growth rate of non-operating revenue are as follows:
In order to support the domestic shipping industry, the nation has been encouraging the domestic ship owners to build ships in the domestic shipyards and offer 17% of the ship price without tax as the financial subsidy to reduce the shipbuilding cost. According to the old accounting standards, the company’s subsidy income includes domestic specific boats and ships subsidy which adopts installment calculation with percentage-of-completion method and is classified into the account by the same proportion in the same period when the product sales income is conformed. As such specific ships took a small proportion in 2006, the company didn’t receive much subsidy of such kind.
Sales proportion of such specific ships increased by a wide margin in Q1of 2007 and the corresponding financial subsidy was classified as non-operating revenue according to the new accounting standards, so the company’s subsidy income in Q1 report was zero while non-operating revenue increased a lot.
In fact, non-operating revenue of specific boats and ships is a part of their shipbuilding income and is classified into non-recurring profit and loss, therefore the company’s actual gross profit margin of shipbuilding can be roughly calculated as about 18% in Q1of 2007 which was equal to Q4 of 2006. Obviously, that the company’s net profit increased by 460% in Q1 was mainly because of the company’s achievement in shipbuilding as well as the adjustment of the accounting standards.
The company expects a net profit increase of 300% over the same period last year in 1H07E. in this way, the company’s EPS in 1H07E can be calculated as over 0.60 yuan. We conclude, thanks to the positive environment of the whole industry and capacity expansion of the company, the financial results of the company in 07 and 08 will keep rapid growth and respective EPS is estimated to reach 1.28 yuan and 1.48 yuan. Clear growth and good expectancy brought by its capital operation are the two main reasons for the company's attractive valuation and "overweight" rating is reiterated.