Net profit in 2018 was down YoY by 63.3% to RMB 71 mn. Sales, grossprofit and net profit in 2018 dropped YoY by 17.9%, 25.3% and 63.3%,respectively. The sharp decline in net profit was mainly due to shrinking salesand continued gross margin decline. Company gross margin was down YoYby 1.2 ppt to 12.3% in 2018 as gross margin in most business segmentsdeclined. Overseas sales contributed 28.5% of total sales but went down YoYby 30.2%. New contracts signed in 2018 reached RMB 33.744 bn, down YoYby 1.2%. Overseas new orders contributed RMB 14.35 bn during the period,up sharply by 377.6% YoY.
The parent, Harbin Electric Group, has offered to acquire all the issuedH-shares of Harbin Electric at HK$ 4.56 per share. Harbin Electric Groupand Harbin Electric jointly announced on December 24th, 2018 that the formerintends to make a voluntary conditional cash offer to acquire all the issuedH-shares of Harbin Electric at HK$ 4.56 per share. The offer price ofHK$ 4.56 per share represents an upside of 10.95% from last closing price ofHarbin Electric. The H-share voluntary offer will be paid in cash.
We maintain the "Accumulate" investment rating and TP of HK$ 4.56.We expect the H-share offer, the delisting and the merger with Harbin ElectricGroup to be successfully completed in 2019 amid the significant premiumoffered by Harbin Electric Group and the irreversible downtrend of the thermalequipment market in China. The TP of HK$ 4.56 corresponds to 0.5x/ 0.4x/0.4x 2019-2021 PBR, respectively.