Dahua’s substantial growth in gross profit margin still has room for improvement

In the first half of 2010, the security industry continued its steady growth in the second half of 2009. In the context of the industry climate, the company achieved a main business income of 5,706,410,000 yuan, a year-on-year increase of 90.84%. The total profit realized was 87.0542 million yuan, a year-on-year increase of 138.30%, and the net profit attributable to the shareholders of the parent company was 78.844 million yuan, a year-on-year increase of 130.57%.

Semi-annual report performance review

1. In the first half of 2010, the company's main business income achieved a year-on-year increase of 90.84%, while its performance in the second quarter was more eye-catching, contributing 62.72% of operating revenue in the first half of the year, achieving a year-on-year growth rate of 111.64% and a growth rate of 68.25% from the previous quarter. From the perspective of gross profit margin, the gross profit margin in the first half of 2010 increased by nearly 3 percentage points year-on-year, and also slightly improved in the second quarter. The increase in gross profit margin led to higher profit growth than operating income. The increase in operating income and the improvement in gross profit margins confirm that the business climate is improving.

2, the product point of view:

The embedded digital hard disk recorder is still the company's core product, accounting for 77.81% of the company’s operating income in 2007, up to 77.81% in the first half of 2009, and even reaching 81.97% by the first half of 2010. In the first half of 2010, the company’s revenue growth rate for this product was 108.12%, and its gross profit margin improved significantly by 5.75 percentage points year-on-year. The revenue from digital program control machines, dome machines, and installation services also has an increasing trend similar to that of embedded digital hard disk recorders: the proportion is increased, gross profit margin is improved, and revenue growth rate is higher than the company's overall level.

However, the proportion of digital remote image monitoring systems in the revenue of the company decreased significantly, and the gross profit margin decreased by nearly 5 percentage points year-on-year. The revenue only achieved an increase of 18.73% under the background of industry prosperity.

3. Gross profit margin still has room for improvement Compared with Hikvision, the industry leader, the company's gross profit margin is relatively low, with a difference of more than 12 percentage points in the whole year of 2009. In the second quarter of 2010, the difference narrowed, but it was still lower than Hikvision. 7 percentage points. The main reason is the product structure and sales channel construction. The company's gross profit margin in the future still has room for improvement.

4. Other significant changes: In the first half of 2010, the non-operating income was 16.45 million yuan, an increase of 6.7 million yuan over the same period of last year, an increase of 68.67%, mainly due to the return of value-added tax; in the first half of 2010, a total of 7653 administrative expenses occurred. Ten thousand yuan, compared with the 40.98 million yuan in the first half of 2009, an increase of 86.74% year on year, mainly due to the company's increased investment in research and development.

Earnings forecast and investment rating

We expect the security industry will continue to boom. As the leading company in the industry, the company will fully enjoy the high growth of the industry. At the same time as the rapid growth of sales, the company increased its R&D investment, resulting in a certain degree of improvement in gross profit margin. We forecast that the EPS for 2010~2012 will be 1.25 yuan, 1.55 yuan, and 1.86 yuan respectively. According to the closing price of 68.90 yuan on August 19, the company's dynamic PE for the next three years will be about 55x, 44x, and 37x, respectively. The valuation is relatively high. We give a neutral rating and we do not have a target price for the time being.