Company Profile

Zhejiang Yankon Group is mainly engaged in the production and sale of energy-saving lamps.

Events

On August 22, Zhejiang Yankon Group released its 2016 interim report. The company made CNY 2.1 billionin operating revenue, up 11.92% YoY. The net profit attributable to shareholders of the listed companiesstands at CNY 218 million, up 22% YoY. The earnings per share was CNY 0.15. In the second quarter of2016, the company recorded operating revenue of CNY 1.1 billion, up 11.8% YoY. The net profitattributable to shareholders of the listed company reached CNY 117 million, up 43% YoY. The earnings pershare was CNY 0.08, broadly in line with our expectations.

Comments

Key Financial Indicators: In the second quarter of 2016, Zhejiang Yankon Group reported operatingrevenue of CNY 1.1 billion, up 11.8% YoY or 7.8% QoQ. The net profit attributable to shareholders of thelisted company reached CNY 117 million, up 43% YoY or 16.4% QoQ. The gross margin for the secondquarter was 27%, up 3.78 percentage points from a year earlier or up 0.84 percentage points from aquarter earlier. The cost/income ratio for the second quarter was 13.5%, up 0.17 percentage points YoYbut down 1.7 percentage points QoQ. Days sales of inventory was 61 days, down 19 days YoY or down 11days QoQ.

The company’s net profit increased remarkably in the second quarter. The earnings per share broadlymeet expectations. The net profit attributable to shareholders of the listed company increased by 43%YoY to CNY 117 million, broadly in line with expectation. The growth of net profit and operating profit faroutpaced the operating revenue growth. This is primarily thanks to the company’s improving profitability.

The LED business grew at a fast pace, substantially lifting the gross profit margin. In the first half of2016, the company made operating revenue of CNY 2.1 billion, up 11.9% YoY. Specifically, sales of LEDproducts contributed revenue of CNY 1.74 billion, up 39.7% YoY and accounting for 82.8% of totalrevenue; the gross profit margin of the LED business 26.4%, up 1.36 percentage points. Revenue from thesale of the traditional energy-saving lamps was CNY 362 million, down 42.7% YoY and accounting for17.2% of total revenue. The gross profit margin of the traditional energy-saving lamp business was 25.5%,up 4.0 percentage points. The LED business has maintained YoY growth of 40%, meeting expectations. Thegross profit margin of both LED and energy-saving lamp businesses were improved remarkably. Theincrease in gross profit margin of the LED business is mainly attributed to the company’s increasing inputin innovations. New products and patent products contributed increasing revenue to the company. Thecompany has managed to control its cost through automation renovation The increase in gross profit ofthe traditional energy-saving lamps was mainly attributed to the phase-out of less profitable products.

The company fully benefits from the increasing penetration of LED products. Reiterate STRONG BUY. In2016, the penetration of LED lights has been increasing. In 2016, the company will see fast customerincrease, which will push up its earnings. Our conservative estimates show that in 2016 the company willsecure net profit of CNY 400 million. From the interim results and the company fundamentals, we believethe company’s net profit for 2016 will very likely exceed expectations. We predict that in the second halfof 2016, the company will report net profit of CNY 250 million-CNY 300 million. We made our earningsforecast for the company at CNY 490 million in 2016, CNY 590 million in 2017 and CNY 690 million in2018. Earnings per share was estimated at CNY 0.34 in 2016, CNY 0.41in 2017 and CNY 0.48 in 2018,implying 23xd 16E PE, 19x 17E PE and 16x 18E PE. Reiterate STRONG BUY.

Potential Risk: Sharper-than-expected drop in LED light prices, slower-than-expected businessdevelopment