Event:
The company released its Q3 2008 report: in the first three quarters, it realized turnover of Rmb257mn (+45.52% yoy), net profit attributable to parent of Rmb16.06mn (almost equal to that of corresponding period last year) and EPS of Rmb0.19. In Q3 2008, its revenue increased by 51.63% while net profit dropped by 7.81%.
Our analysis and estimation:
Revenue and net profit are basically in line with our expectation.
As an electric equipment supplier, the company mainly produces arc-suppression device with line selected protection and VF speed regulating device. Since its related product revenue is mainly settled in Q4 2008 while expenses distribution is comparatively even in the whole year, net profit grows more slowly than revenue. We forecast revenue will reach our expectation Rmb422mn and net profit growth margin synchronizes with the revenue.
Q1-Q3 gross profit margin slightly declines, while annual gross profit is expected to rebound.
In the first three quarters, the company received orders for arc-suppression device with line selected protection with comparatively low price, which induced gross profit margin slightly lower than that of 2007. However, we forecast with price decline of main raw materials like steel and copper, the company’s self-owned products such as earthing transformer and phase-shifting transformer will enhance their proportion; meantime, gross profit margin will gradually increase, with annual gross profit beating that of last year.
2008 still in investment period, VF speed regulating products will see explosive growth with bright future ahead for the company.
The company’s main product, VF speed regulating system is growing explosively. The company has entered the market quite early and has ranked No. 3 among VF speed regulating system suppliers; it has developed self-owned technology and built its own brand within the industry.
Comparing with other makers who entered the market hastily, the company is advantageous over high creditability and branch distribution mode as well as the pertinence in product market development and technology development. We see booming prospective and forecast VF speed regulating system will realize Rmb200mn in revenue in 2008 and maintain fast growth. Besides, the company needs to increase investment in early-stage market expansion and follow-up after-sales service, thus 2008 is still a year to invest; however, the company will gradually enter harvesting period with layout completion of distribution and after-sales service network.
Investment rating: Current share price is fairly attractive and we give "Recommended" rating for the counter.
We forecast 2008-2010E EPS to be Rmb0.51, Rmb0.87 and Rmb1.19. Considering relative estimation and DCF absolute estimation, reasonable price for the company should be Rmb17.
Attentions should be paid to potential risks: 1) customer of VF speed regulating device postponed electric motor energy-saving upgrade; and 2) lower-than-expected growth.