Contracts from State Grid increased visibility of future earnings. TheCompany won contracts with an accumulated value of approximately RMB 442mn from State Grid thus far in 2016 and was ranked in a leading position interms of volume and contract value within two centralized State Grid tenders in2016. The results of the third tender in 2016 are scheduled to be released inDecember.
Earnings in the first 6 months were below market expectation. Sales,gross profit and net profit in 1H16 was down YoY by 5.4%, 8.3% and 18.7%,respectively. The earnings decline was mainly due to a tougher marketenvironment that continues to impact Wasion in 1H16. During the period, grossmargin and net margin experienced a sharp YoY decrease of 0.9 ppts and 2.2ppts, respectively. We expect 2017 to be a critical turnaround year for Wasion.
We trim our earnings forecast based on more conservative assumptions.
Earnings over the last 18-month period (spanning from 2015 to 1H16) droppedsharply, forming new concerns over the future of Wasion. We thereby cut theearnings forecast for FY16 / FY17 / FY18 by 25% / 29% / 33%, respectively.
We cut our TP to HKD 5.50 and downgrade the investment rating to"Accumulate". Our new TP corresponds to 12.5x / 11.1x / 10.0x FY16 / FY17 /FY18 PER or 1.2x / 1.2x / 1.1x FY16 / FY17 / FY18 PBR, respectively.