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1 Aug, 2019 (Thursday)



Yonyou(600588)
Analysis¡G
The group announced its first quarter results for 2019. During the period, the revenue was RMB 125 million , up 16.6% YoY; the operating loss was RMB 155 million, an increase of about RMB 40 million over last year. In addition, gross profit margin decreased by 1.6% to 62.5%, but the cost control improved. Selling and administrative expenses to revenue decreased by 3.5% and 4.7% respectively. Net profit was RMB 102 million, which turned into a profit from last year, mainly due to the sale of SuiRui Technology this year. The net loss attributable to owners after deducting non-recurring gains was RMB 54.77 million, a decrease of 51.2% YoY. Revenue from Cloud services reached RMB 125 million, a YoY increase of 95%. Currently, there are about 4.77 million cloud service enterprise users and about 380,000 paid enterprise customers, increased by 46.3% YoY. In other business areas, revenue from software business was RMB 864 million, up 20.6% YoY; payment service revenue was RMB 74 million, up 230.1% YoY; however, revenue from Internet investment and financing information service business decreased 29.7% YoY to RMB 197 million. Media reported that the Huawei ERP team visited Yonyou Industrial Park in Beijing. Therefore, it is speculated that Huawei may abandon SAP, their current ERP system, and adopt a domestic one. We think it is likely to happen. Under the China-United trade war, Huawei became one of the targets United States wants to restrain. US prohibited companies in US from providing any services to Huawei. In order to reduce the dependence on foreign software, we believe that Huawei has sufficient incentives to shift their current foreign ERP system into domestic. Although there is no confirmation at present, this visit reflects the intention of Huawei.
Strategy¡G
Buy-in Price: RMB28.00, Target Price: RMB32.50, Cut Loss Price: RMB24.50



BOC Aviation (2588.HK) - 2018 result beat expectations; concerning 737 MAX issue

Investment Summary

BOC aviation (BOCA) is a leading global aircraft operating leasing company in Asia, currently with a portfolio of 310 owned and 25 managed aircrafts. We remain an ¡§Accumulate¡¨ rating based on a Price-to-book ratio vs. Return on Equity method, deriving a target price of HK$74.8, 10.5% potential upside. (Closing price at 29 July 2019)

2018 result beat our expectations

BOCA reported its 2018 result with revenue of US$1725.5mn, up by 23.2%. The net profit reached US$620.4mn, increased by 5.8%. The increase in profit was lower than that in revenue, due to its positive tax effective rate. The revenue/net profit beat our estimate about 6.2%/13%, due mainly to the strong growth in interest and fee income and net gain on sale on aircraft. The lease rate factor in 2018 was 10.8%, 0.1% higher than our expectation and cost of funds was 3.3%, 0.4% higher than estimate, due to the rising share of fixed rate debt, making the net lease yield dropping to 8.3%, 0.1% lower than estimate. The total number of aircraft delivered or scheduled to be delivered in 2019 is 79.

BOCA released the operating performance in 1Q19. The aircraft owned, managed and on order was 310, 25 and 172, in total of 507. The average aircraft age and average remaining lease term was 3.1 /8.2 years respectively. As of the first quarter, there are 11 aircraft to be delivered and signed 7 lease commitments, with aircraft utilization rate at 99.9%.

737 MAX issue

The 737 MAX only accounts for 1.9% of its owned aircraft, and BOCA could still receive rental income even though it were suspended for flight. As a result, there is no significant impact on the current aircraft fleet. However, there are still 87 to be delivered in the next few years. If the issue remains, it may delay or even cancel the remaining deliveries, slowing the growth in lease rental income.

Capex and Aircraft NBV

BOCA stated that the committed Capex from 2019 to 2021 was US$9.217bn. We expect the committed Capex in 2019 should be US$3.0-3.5bn. Due to 737 Max issue, we believe the committed Capex in 2019 could be 2.5-3.0bn. Historically, it will have a US$1-1.5bn additional Capex, implying a total Capex of US$4.0-4.5bn. We expect the aircraft NBV will boost by around US$2.0-2.5bn after considering an aircraft disposal of around US$1.4bn and depreciation of around US$0.6bn.

Valuation

The result in 2018 beat the estimate and development goes well. Although the 737 MAX issue may adversely affect the growth in in lease rental income in short term, we believe the competitive advantage of BOCA still remains in long term. We derived our target price to be HK$74.8 based on the book value per share in 2019F, implying P/B 1.43/1.29x in 2019/20F respectively and maintain an ¡§accumulate¡¨ rating, with 9.7% potential upside. (HKD/USD: 7.8)

Risk

1. Higher-than-expected increase in interest rate

2. The demand for traveling and aircrafts slow down

3. Delayed aircrafts deliveries

4. Depreciating value for aircrafts in secondary markets

Financials

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Recommendation on 1-8-2019
RecommendationAccumulate
Price on Recommendation Date$ 67.700
Suggested purchase priceN/A
Target Price$ 74.800
Writer Info
Terry Li
(Research Analyst)
Tel: +852 2277 6527
Email:
terryli@phillip.com.hk

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