Earnings missed expectation
In 2015, the company’s operating revenue increased 16.13% YoY to Rmb1.111bn; net profit attributable toshareholders slipped 6.03% YoY to Rmb165mn.
Income statement: G&A expenses rose 44.29% due to cooperation with Heidelberg to develop new machines.
Balance sheet: accounts receivable’s share of revenue rose 3.68ppt due to extension of credit terms for some clients.
Cash flow: investment cash flow surged 1,881.61% on Brilliant Circle Holdings’ dividends and property sales.
Trends to watch
Equipment business likely to improve in 2016. 1) The export business was affected by the integration of thecompany and Heidelberg in 2015 and will likely regain growth in 2016 with the completion of asset and technologytransfers in 2015. 2) The Drupa Exhibition will be held in Germany at end-May. The global printing technology exhibitionmay drive sales of new equipment. 3) The market of technological renovation for smart printing equipment may exceedRmb10bn. The printing equipment sector may rebound in 2016 and demand for technological renovation may expand.The company has started to cooperate with Brilliant Circle Holdings in smart renovation projects and may becomeamong the first to benefit.
Breakthroughs in cloud printing business. 1) The company signed a contract with Jinlun Cloud Printing to makethe latter its first regional franchise plant. Jinlun is a leading player in Southeastern China and the cooperation shouldallow Masterwork to expand beyond the Beijing-Tianjin-Hebei region. This may serve an example for future replication.3) Quarterly sales of cloud printing are increasing gradually. Cloud printing orders in 1Q16 are estimated to exceedRmb20mn and the number of online active trading accounts is also expanding.
Earnings forecast
Considering the lower-than-expected earnings, we cut 2016e net profit forecast by 17.7% toRmb224mn and introduce 2017e net profit forecast of Rmb284mn.
Valuation and recommendation
The stock is trading at 26.9x/21.2x 2016/17e P/E. Maintain BUY. Cut TP by 21% to Rmb22 (33x 2016eP/E). Risks: expansion of cloud printing and exports of printing equipment disappoint.