Dahua Alert:Assuming the growth phase
2016profit grew 32%YoY; cash dividend of CNY0.1.
Dahua released its 2016annual report with EPS of CNY0.63, compared to DBforecast of CNY0.64. 2016revenue grew 32%YoY, driven by shipment growthof 42% as the company continues to gain market shares. More importantly,GPM expanded from 37.2% in 2015to 37.7% in 2016, a stabilization followingtwo consecutive years of severe margin erosion due to rising economies ofscale and the increasing contribution of total solution revenue. On the otherhand, opex ratio rose from 25.5% in 2015to 27% in 2016as the companytransitioned itself to target the solution business and rising R&D investment.Net profit of CNY1.8bn, +33%YoY, was in-line with our forecast. Dahua hasproposed paying a cash dividend of CNY0.1per share.Stabilizing cash conversion cycle.
We have noted Dahua’s lengthening cash conversation cycle (CCC),particularly with the rise in AR days as the company has been transitioningfrom a hardware supplier to a total solution provider, which has a longerpayment period due to more projects than direct products sold. By looking atDahua’s year-end balance sheet, CCC days slightly increased by two days to213days in 2016(+38days in 2015), mainly due to a decline in AR days.Dahua attributed the AR improvement to management efforts as thereceivables are now part of the KPI for the sales team. With regard to the risinginventory days, the management noted that 80-90% inventory will be shippedwithin the next 3months. We expect Dahua’s CCC to stabilize at current level.Positive 2017outlook driven by solution and overseas businesses.
Looking into 2017, we are still positive on Dahua’s growth outlook as thecompany continued to expand its market share. Following two years oftransition with a shift to the total solution business, Dahua expects the totalsolution business to begin harvesting with rising contributions. At the sametime, the company will continue expanding market share in the overseasmarket, following 39%YoY growth in 2016. In addition, the rising contributionfrom these two segment could also help the company to sustain group GPM atthe current level due to the rising software content for the solution businessand the higher margin profile for the overseas business at 42%. We expectopex ratio to trend down in 2017as the management expects the risingefficiency following the transitions. Currently, we expect 2017e revenue togrow 22% with expanding OPM at 13%.Valuation and risks.
We leave our earnings forecast and target price unchanged as the 2016resultsare much in-line with our forecast. Our target price of CNY17.3is based on 20x2017E P/E, supported by 2016-18earnings CAGR of 31%, average ROE of 27%and solid industry growth. Downside risks: order loss to video surveillancecompetitors and higher component costs.