Earnings in 1H17 slid YoY by 4.4%, worse than expected. Sales and grossprofit in 1H17 went up YoY by 13.4% and 18.0%, respectively. However, netprofit was down by 4.4% due to increased asset impairment loss during theperiod. Gross margin went up YoY by 0.5 ppt to 12.6% as a result of marginrecovery on power equipment sold. Export sales contributed 39.6% of overallsales in 1H17 and we expect offshore market to drive growth moving forward.
Offshore market and SOE reform are the keys to strengthen thefundamentals of Harbin Electric. Out of the RMB 11.98 bn new orderssigned in 1H17, export orders contributed RMB 1.76 bn (+346.2% YoY). Weexpect offshore sales to fill the gap caused by a demand slowdown in thedomestic market. Meanwhile, we expect SOE reform to help improve theprofitability and strengthen the fundamentals of the Company.
We trimmed down the earnings forecast following a disappointing 1H17.The RMB 125 mn net profit recorded in 1H17 was worse than our priorforecast, and we have therefore re-adjusted our assumptions and earningsprojection. Our revised EPS forecasts from FY17 to FY19 are RMB 0.324,RMB 0.423 and RMB 0.451, respectively.
We maintain our “Accumulate” investment rating but cut the TP to HK$5.00. The new TP corresponds to 13.1x / 10.0x / 9.4x FY17 to FY19 PER or0.4x FY17 PBR.