Net profit in 1H2019 stayed flat to reach RMB31 mn. Sales and gross profitin 1H2019 dropped YoY by 21.8%/ 9.9% and net profit increased YoY by2.2%. Results were below our expectation. Accounting for 73% of total sales,thermal power equipment and power plant engineering sales went down YoYby 29.2% and 25.7%, respectively. Consolidated gross margin went up YoYby 1.8 ppt to 13.7% in 1H2019 as a result margin recovery of thermal powerequipment. New contracts signed in 1H2019 reached RMB6.133 bn, downYoY by 29.1%. Overseas new orders contributed RMB340 mn during theperiod, up by 39.9% YoY.
　　The privatization plan is officially dead following failure to secure therequired rate of acceptances from shareholders. As at the end of theextended closing date on 19th July 2019, HEG still lacked 1.68% ofshareholder acceptance in order to carry out the privatization plan for HarbinElectric. We believe that the failure was due to the low offer price of HK$4.56per share, which represents only 0.5x 2018 PBR. We remain hopeful that arevised version of the takeover plan may be rolled out again in the future.
　　We maintain the "Accumulate" investment rating but cut our TP toHK$2.70. With margin recovery underway and deep reforms expected to takeplace, our adjusted EPS forecasts from FY19 to FY21 are RMB0.057,RMB0.133 and RMB0.218, respectively. The new TP of HK$2.70 translatesto 18.0x/ 10.9x 2020-2021 PER or 0.3x/ 0.3x/ 0.3x 2019-2021 PBR,respectively.