What’s new.We cut our 2016 earnings estimate due to a delay in smart meter orders.
　　Smart meter orders from SGCC down 30% in 2016 Smart meter orders from theState Grid Corporation of China （SGCC） were mainly sold to third-tier cities in 2016,thus, both the number sold and contract value will be lower than in 2015. SGCCpurchased 65.7m smart meters during 2016, down 27% YoY. Wasion has won threecontracts from state grids, with a total value of Rmb597.3m, down 30% YoY. Demandfor smart meters from SGCC may remain weak in 2017 until the second generation ofsmart meter is launched, which we believe will be in 2018.
　　Smart meter orders from CSG delayed The company won Rmb110m in its first tenderorder from China Southern Power Grid （CSG） in 2016. It was also expected toannounce a second tender order in Dec 2016, but has not done so yet. Given the delayin SGCC orders, we estimate revenue in its smart meter segment will have declined by17% in 2016.
　　ADO segment driving growth Wasion announced last Friday that it won an AdvancedDistribution Operations （ADO） contract for the Changsha railway construction project,with a contract size of Rmb15.6m, which represents 3.6% of the ADO segment’srevenue in 2015. The company will help to prepare a series of high-end low-voltagepower distribution systems and services for the project. The ADO segment, mainlydriven by demand from railway, transportation, data centers and municipal industries, isthe company’s key growth driver. We expect 27% revenue growth in the segment in2016, which should make up 18% of revenue during the year.
　　Opportunities in overseas markets Revenue from overseas markets, including Egypt,Tanzania, and Indonesia etc, accounted for 11% of total revenue in 1H16. The companyis also looking to explore opportunities in developed countries. Wasion recentlyannounced that its metering products are embedded in Itron’s OpenwayRiva loTSolution. Itron is a world-leading technology and services company that gets most of itsrevenue from the US. This is an important step for the company to enter the US powerequipment market.
　　Maintain Accumulate but cut TP from HK$5.10 to HK$5.00 To reflect the delay inCSG smart meter orders and potential reduction in SGCC smart meter orders, we havecut our revenue forecasts for 2016/17 by 4.2%/10.3% to Rmb3.04bn/3.19bn, and netprofit forecasts by 2.2% and 5.3% to Rmb415m/459m respectively. The stock iscurrently trading at 8.5x 2017E P/E, with a 4.7% 2017E dividend yield. We maintain ourAccumulate rating but lower our TP from HK$5.10 to HK$5.00, based on 10x 2017EP/E. The potential announcement of a second round of tender results from CSG in thenear future would be a short term catalyst.
　　Key risks 1） Receivables turnover days remain high in 2016/17 （320 days in FY15）； 2）AMI and smart meter orders are delayed; 3） Greater-than-expected downward pressureon GPM