Key highlights on 2019results. The revenue growth in 2H19was 50% YoYand gross margin expanded 1.3ppt YoY to 30% (stable HoH). However, S&Dexpense ratio increased to 9% in 2H19, compared with 8.3% in 2H18and 8.4%in 1H19. Besides, R&D expense ratio increased to 5% in 2H19, up significantlyfrom 2.7% in 2H18and 2.1% in 1H19. We believe the higher expense ratiowas due to the launch of new products. Thanks to lower finance expense andeffective tax rate, net profit in 2H19grew 55% YoY to ~RMB1.8bn.
Dividend cut reflects the conservative approach taken by the Company.We are surprised about the dividend cut as the Company generated strongoperating cash flow of RMB6bn in 2019, though it spent RMB2.1bn on sharebuyback for employee share incentive scheme. The latest dividend policysuggested that the Company is potentially planning for debt repayment orredemption. Several tranches of bonds will be matured over the coming fewyears, with the first one in Dec 2022(principal amount of US$600m withcoupon rate of 6.13%). The recent volatile bond market due to the lack ofliquidity may offer the Company with the opportunity to buyback at discount.
Risk factors: (1) Unexpected weakness on property construction activities;(2) Slow recovery of infrastructure spending;(3) High earnings volatility.
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