Shanghai Greennew: Earnings Slightly Miss Forecast, Vaping Business Advances

Event:
    The company released its Q3 2014 report, achieving revenue of 1.61 billion yuan in the first three quarters, a year-on-year growth rate of 28.1%, with a net profit attributable to the parent company of 150 million yuan, a year-on-year growth rate of -5.0%.
    1) In the third quarter alone, revenue was 480 million yuan, a year-on-year growth rate of 2.1%, with a net profit attributable to the parent company of 30 million yuan, a year-on-year growth rate of -45.6%.
    Comment:
    The contribution from consolidation brought revenue growth, while the short-term performance fluctuations of subsidiaries led to a decline in Q3 performance: Against the backdrop of steady development in the downstream tobacco industry, we believe that the contributions from the acquisitions of 60% equity in Demei Color Printing in August 2013 and 100% equity in Jinsheng Color Packaging in January 2014 are the main drivers of the company's revenue growth. Analyzing the changes in minority shareholders' profits and losses, we estimate that the delay in revenue recognition from subsidiaries with downstream clients is the main reason for the decline in Q3 performance, and it is expected to be re-confirmed in Q4. We anticipate that the annual performance growth rate will remain around 20%.     The e-cigarette business is starting to turn a profit, and we remain optimistic about the future development of e-cigarettes: The company previously announced that the e-cigarette business will begin to be profitable in the second half of the year, and we estimate the net profit scale to be in the millions.     1) On the export side, based on our industry research, we believe that unfavorable policies regarding e-cigarettes in some regions of the United States and changes in foreign policies are the main reasons for the short-term pressure on domestic e-cigarette manufacturers. However, considering that e-cigarettes are more environmentally friendly, healthier, and more economical products, and that e-cigarettes account for only 1% of the tobacco market, we believe that short-term industry fluctuations cannot change its positive long-term trend.     2) Domestically, the company is actively cooperating with China Tobacco, having previously collaborated with Jilin Tobacco and Zhengzhou Tobacco Research Institute to jointly develop Changbai Mountain cigarette companions, and has successively partnered with Luoqi Health and Yihe Trading to explore the domestic market, with the potential to share in the vast domestic e-cigarette market space in the future.     The cloud printing layout is gradually advancing, and future progress is worth paying attention to: The company previously announced plans to acquire 100% ownership of Shanghai Shenweida Machinery under Shanghai Electric Group, 100% ownership of Shanghai Ziguang Machinery, and to jointly establish a subsidiary with Shanghai Denghong, indicating the gradual advancement of the company's cloud printing layout, with future progress worth monitoring, and it is expected to form a new growth point for the company.     1) Cloud printing is a network printing service established based on modern communication, computer, printing technology, and logistics systems; it is a general term for printing processing, management, and cloud platforms based on cloud computing business models. Compared to traditional printing methods, "cloud printing" can achieve personalized customization, such as business cards, envelopes, and promotional materials, and allows for on-demand ordering and quick delivery, reducing costs by 30% compared to traditional independent printing.     The advantages of the listed company platform provide growth momentum for external development: On July 5, the company announced plans to acquire three downstream cigarette label printing companies and the remaining 15% equity of its subsidiary Fujian Taixing, which we believe demonstrates the company's strategic planning for external development. From an industry perspective, the expected consolidation of the downstream cigarette industry will provide historical opportunities for the upstream cigarette label and vacuum aluminum paper industries to increase concentration, and the company, relying on the listed company platform, is expected to become a beneficiary of industry consolidation, gaining sustainable growth momentum through external expansion.     Maintain an "overweight" rating. Considering the contribution of the assets acquired through this public offering plan to next year's consolidated results, as well as the company's active expansion into cloud printing and e-cigarette businesses, future growth is expected to blossom in multiple areas. We slightly adjust the EPS for 2014-2016 to 0.40, 0.53, and 0.64 (originally 0.45/0.58/0.70), with year-on-year growth rates of 22.9%, 31.0%, and 21.3%, corresponding to PE ratios of 22 times, 17 times, and 14 times, maintaining an "overweight" rating.
    Risk warning: Strengthened enforcement of smoking bans, significant price declines.