1H16 results roughly in-line
Wasion announced their 1H16 results last Friday. The results were aslight miss vs our estimates due to worse than expected AMI andSM orders, with -23% SM orders yoy, mainly due to a change inState grid’s payment policy, which delayed the timing of revenuerecognition; and -3% AMI orders vs our FY estimates of flat SM and-1%AMI orders. Overall gross margin were largely in-line, but notethat AMI’s GM was surprisingly strong (~flat yoy @36%) whileADO’s margin disappoints at 27% (FY15 ~30%) as Wasion providetheir products at a discount. Overall net margin was 13.6%, roughlyin line with our 14% estimates.
Business still lacking in visibility
During the investor meeting, management continues to showuncertainty on company’s performance in 2H16 due to the weakeconomy and falling government spending on smart grid, and webelieve traditional electric AMI segment will only see mediocreperformance during 2016-2017 as 2nd gen smart meter renewalcycle will not be kicking in before 2018. On the other hand, althoughmanagement is confident in ADO’s growth, they had to offer theirproducts at a discounted price to control the payment cycle as theirclients lacks liquidity (clearly shown on the 63 days increased inreceivable days), lead to the 3% qoq drop in ADO GM in 1H16.
Valuation at trough but no clear catalyst, maintain Neutral
We find tuned our FY16 estimates, trim down AMI sales/ ADOmargin while lifting ADO sales/ AMI margin. Our new NP comes atRMB429mn vs our old estimates at RMB464mn. Although we seeno visible near term catalyst, we believe Wasion business is at itsnear term trough now, thus we lift our target PE slightly from 7.5x to8.0x, which is a 10.8% discount to its 1 year trade average PE. Ournew TP arrives at HK$3.95, representing a 2% downside potential.