Net profit in 1H2020 dropped YoY by 7.3%, missing expectation.
Revenues and net profit in 1H2020 went down YoY by 3.5% and 7.3% to RMB9,614 mn and RMB 29 mn, respectively. Finance expense jumped YoY by220% to RMB99 mn and was the key cause of earnings decline in 1H2020.
Consolidated gross margin of Harbin Electric went down YoY by 0.5 ppt to13.2% in 1H2020 as a result of 5.3 ppt gross margin decline seen in thermal power equipment. New contracts signed in 1H2020 reached RMB8.814 bn, up YoY by 43.7%. Overseas new orders contributed RMB0.5 bn, up YoY by47.3%, Power engineering investment in 7M2020 went up YoY by 71.7% to RMB213.9 bn. Nationwide power sector investment in 7M2020 reached RMB419.2 bn, up YoY by 28.3%, Of which, power engineering investment went up YoY by 71.7% to RMB213.9 bn, while power grid investment was upYoY by 1.6% to RMB205.3 bn. During the period, thermal power investment was down 10.6% YoY, while investment in hydro, nuclear and wind power surged YoY by 8.0%, 6.7% and 203.8%, respectively. Power sector investment in the domestic market is expected to remain high in the 2"d half of2020 in a bid to boost domestic economic growth.
We maintain the "Accumulate"investment rating and reiterate our TP of HK$3.80. With expected margin recovery and improvement in operating efficiency, our adjusted EPS forecasts from 2020 to 2022 are RMB 0.132.
RMB 0.173 and RMB 0.261, respectively. Our TP translates to 26.1x/20.0x/13.3x 2020-2022 PER or 0.4x/0.4x/0.3x 2020-2022 PBR, respectively.