Event: The company announced to have been authorized as one of the first Hi-tech enterprises of Zhejiang Province. Thus, the company may receive an income tax rate of 15%.As a result, its income tax rate will be cut to 15%. The company has been paying its corporate income tax at the rate of 25% this year.
Our Analysis and Estimation:
The company will pay its corporate income tax corporation tax at the rate of 15% during 2008 and 2010, and the previous rate of 25% is approved to be somewhat adjusted to balance tax rate of the whole year in 2008.
Designation of the company is in line with our expectation. According to incentive methods on Hi-tech enterprises implemented this year, all Hi-tech enterprises must be re-designated as required. Comparatively, products of Zhejiang Dahua Technology (002236) are more advancing in terms of technology, thus no suspension in its authorization.
Moreover, the company is working on further approval of State planning key software enterprises. Should this goal be reached, the company will pay 2008 corporate income tax at the rate of 10%. Since it had been awarded this honor during the previous 2 years, it is quite possible that the company will get the approval this year. However, it is still under observation.
Should the company’s corporation tax rate be calculated as 15%, its interim net profit will be increased by 61% yoy, which will outperform than that announced in the interim report of 49%. Obviously, business performance for 1H2008 is prominent.
Earning Forecast and Rating:
Despite the economic fluctuation in China, demands of video monitoring products mainly came from relative government investments, thus there will not be much negative influences towards this sector. On the other hand, sales growth of the company will be slashed by the overseas market, whereas its interim sales proportion abroad takes up 17.7% of the total.
Given tightened domestic security, video monitoring products are considered to be in hot demand. Due to economic fluctuation, we slightly adjusted our earning forecast towards the company, with its annual income to be increased by 91% to Rmb774mn, net profit to be increased by 55% or Rmb133mn, EPS to be Rmb1.99, and P/E ratio at 14.9x; performance of the company in 2009 will maintain substantial growth, with profit to be increased by 27%, and predicted P/E ratio only at 11.7x.
The company takes obvious advantages in segmented industries and sector centralization, oligopolistic competition has already become a trend. We predict its product of embedded DVR will be in hot demand in the following 2-3 years.
We remain our rating of “Cautious” for the counter.