Earnings in 1H2018 fell YoY by 75.3%, in line with profit warning. Sales,gross profit and net profit in 1H2018 dropped YoY by 24.1%, 28.1% and75.3%, respectively. The sharp decline in net profit was mainly due to reducedsales and gross margin decline. Company gross margin was down YoY by 0.7ppt to 11.9% in 1H2018 as gross margin in key business segments dropped.
Overseas sales contributed 29.9% of total sales and reached RMB 3.8 bn,down YoY by 42.8%.
More reforms are expected to take place to revive Harbin Electric. Theprofit decline in recent years was mainly due to thermal downtrend in thedomestic market. We expect more reforms and corporate transformation totake place in order to reverse the current downtrend of Harbin Electric.
Earnings forecasts were adjusted following the disappointing interimresults. We expect sales to drop 22% in 2018 but to remain stable in 2019and 2020. Gross margin is estimated to be 13.7%/ 13.9%/ 14.1% in 2018 to2020, respectively. Our revised EPS forecasts from FY18 to FY20 are RMB0.071/ RMB 0.109/ RMB 0.120, respectively.
We maintain our "Accumulate" investment rating but cut the TP to HK$3.00. The new TP corresponds to 0.3x FY18/ FY19 PBR.