Earnings in 1H2018 missed expectations. Sales, gross profit and net profitof GCL New Energy in 6M2018 went up YoY by 49.2%, 44.9% and down YoYby 28.2%, respectively. Net profit in 6M2018 was merely RMB 345 mn, belowexpectations. Increased finance expense and forex loss due to RMBdeprecation are key reasons behind the earnings decline. Gross margin wentdown by 2.0 ppts to 68.7% due to lower on-grid tariffs for new solar projects.
Total installed solar capacity further climbed to 7.14 GW in 1H2018. Theaggregate installed solar capacity and grid connected capacity by the of1H2018 reached 7.14 GW and 6.1 GW, up YoY by 40.6% and 46.4%,respectively. Electricity sales went up YoY by 59% to 3,765 mn kWh andaverage tariff was down by 3.8% YoY to RMB 0.77/kWh during the period.We expect aggregate installed solar capacity to further climb to 7.7 GW/ 8.6GW/ 9.4 GW from 2018 to 2020, respectively.
We have adjusted our earnings estimates from 2018 to 2020 under newassumptions. The increase in finance cost and RMB depreciation areexpected to undermine the profitability of GCL New Energy in 2018, but weexpect earnings to grow sharply in 2019 due to debt structure optimizationand deleveraging. Our revised EPS forecasts from 2018 to 2020 are RMB0.036/ RMB 0.057/ RMB 0.060, respectively.
We maintain the "Buy" investment rating but cut our TP to HK$ 0.33. Ournew TP corresponds to 8.0x/ 5.0x/ 4.7x FY18 to FY20 PER or 0.7x/ 0.6x/ 0.5xFY18 to FY20 PBR.