Dropping orders from State Grid increased the uncertainties ofWasion’s outlook. The Company secured RMB 255.4 mn worth of newcontracts, down YoY by 25.0%, in the first centralized tender on smart meterand data collection terminals in 2017 from State Grid. New contracts fromState Grid dropped YoY by 9.9% and 44.8% in 2015 and 2016, respectively.
　　Earnings in 2016 were below expectation. Sales, gross profit and net profitin 2016 were down YoY by 12.2%, 8.9% and 27.4%, respectively. Theearnings decline was mainly due to the volume shrinkage in the centralizedtender from State Grid and a more challenging market environment in 2016.During the period, gross margin recovered and went up YoY by 1.1 ppt to31.3% but net margin experienced a YoY decline of 2.5 ppts to 11.8% due toincreased financing cost and higher SG&A cost.
　　We trim our earnings forecast based on new assumptions. Earnings in2016 dropped sharply and the latest tender results from State Grid raise newconcerns on the outlook of Wasion. We thus trim our earnings forecasts forthe next few years. Our revised EPS for FY17 / FY18 / FY19 is RMB 0.331 /RMB 0.351 and RMB 0.373, respectively.
　　We cut our TP to HKD 3.80 and downgrade investment rating to"Neutral". Our new TP corresponds to 10.0x / 9.4x / 8.9x FY17 / FY18 / FY19PER or 0.8x FY17 / FY18 PBR, respectively.