Earnings in 2017 fell YoY by 53.0%. Sales went up YoY by 2.0% in 2017,while gross profit and net profit dropped YoY by 0.7% and 53.0%, respectively.
The sharp decline in net profit was mainly due to increased asset impairmentloss, which doubled to RMB 1 bn. Gross margin was down YoY by 0.4 ppt to13.5% as gross margin in most business segments remained stable. Exportsales contributed 33.6% of total revenue in 2017 and is expected to drivegrowth in the future.
We expect deep reforms to take place in 2018 to reverse the decliningtrend of Harbin Electric. The profit decline in recent years was mainly due tothe investment slowdown of conventional power equipment in the domesticmarket. We expect corporate transformation and deep reforms to take placein order to reverse the current downtrend.
We have adjusted the earnings forecast to reflect our confidence in theCompany. The Company's results in 2017 were below expectation due to theunexpected increase in asset impairment loss during the period, but weexpect the situation to improve in 2018. Our revised EPS forecasts from FY18- FY20 are RMB 0.329 / RMB 0.347 / RMB 0.373, respectively.
We maintain our "Accumulate" investment rating but cut the TP to HK$4.00. The new TP corresponds to 9.9x / 9.3x / 8.7x FY18 to FY20 PER or 0.4xFY18 PBR.