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Allowance for impairment of subsidiary assets affects profit for 19 years, but has limited impact on long-term performance. The company announced on December 28 that it carried out an impairment test on the book assets of its wholly-owned subsidiary Hongqunsheng (Yingkou Factory), accrued 211 million yuan in asset impairment reserves, and transferred equipment and inventory to Huai'an and Qinhuangdao plants. As Hongqunsheng is far from the electronics industry cluster, it is unable to obtain high-efficiency and low-cost industrial support, and it is difficult to provide customers with high-quality products and services. Closing the subsidiary's production and operation activities is beneficial to the company in the long run. Further optimize resource allocation and improve the company's overall asset management efficiency and operating efficiency. Therefore, the provision for asset impairment this time will have a certain impact on the company's 19-year profit (the profit for the year will decrease by about 200 million yuan), but it will have a limited negative impact on long-term performance.
In 2020, a number of new models of major customers will be released, and the company's business will usher in good development opportunities. A customer in North America is the company's largest source of revenue, and A customer's revenue accounted for more than 70% in 18 years. Affected by iPhone11 series sales surpassing pessimistic expectations, superimposed strong growth in wearable devices such as AirPods and Watch, the company's operating income has remained stable since this year. The market is expected to be a major customer innovation year for North America in 2020. The release of new iPhone SE2 models in the first half of the year will help balance off-season production capacity. The release of 5G iPhones in the second half of the year will fully stimulate demand in the high-end market. With rapid growth, the company's business is expected to usher in opportunities for both volume and price.
Yield & profitability of class substrates remain the industry leader, benefiting Japanese manufacturers to withdraw from production capacity. Compared with HDI boards, SLP motherboards with the same number of electronic components have a thickness reduction of about 30% and an area reduction of about 50%, which can free up more space for smartphones and increase the amount of hardware or battery capacity, which is very suitable for thin and lighter smartphones. And multi-functional development trend. From a technical point of view, the SLP production process has higher requirements for refined production capacity and higher technical barriers. The company's SLP business has maintained industry leadership in cost structure, investment efficiency, and production capacity, and has rapidly increased its share in the A client. Benefiting from the impact of the withdrawal of production capacity of Japanese manufacturers, the company's SLP share in A-client is expected to continue to increase.
The automatic promotion effect is obvious, and the cost reduction and gain effect is remarkable. The company has gradually promoted automation transformation since 2018, reducing the number of front-line employees to improve profitability and achieve better results. The number of employees of the company decreased from 37,700 in 2017 to about 35,500 in 2018, and the proportion of direct labor in operating income decreased from 7.09% to 6.56%. In the first three quarters of this year, the company's operating income increased slightly by 0.40% year-on-year, but benefited from lower labor costs and product structure optimization, net profit attributable to mothers increased by 8.97% year-on-year, and significant gains were achieved in reducing costs.
Earnings forecasts and investment advice. The impairment provision of Yingkou Plant will have an impact on the 19-year performance, but it is expected that the medium- and long-term impact will be limited. As a global PCB leader, the company will fully benefit the large customers' new product volume and product material number improvement, and is optimistic about the annual performance. It is estimated that the company's EPS for 2019-2020 will be 1.24 and 1.62 yuan, corresponding to PE of 38 times and 29 times, respectively, and maintain the "recommended" rating.
Risk warning: The sales of major customers' products are less than expected, and the share increase is not as expected.