1H17 results boosted by non-recurring items 1H17 revenue was Rmb1,428m (49%of our FY17 estimate), down 6% YoY, and net profit came in at Rmb171m, a decline of17% YoY (47% of our FY17 estimate). However, if we exclude the Rmb110m gain fromits subsidiary disposal, operating profit declined 44% YoY. This is attributable to: 1)weak orders from State Grid Corporation of China (SGCC), resulting in a 21% revenuedecline in its power Advanced Metering Infrastructure (power AMI) segment. 2) The0.8pp YoY decline in GPM, from 30.1% to 29.3%, mainly due to its weak power AMIsegment. 3) An Rmb60m increase in operating expenses, including marketing expensesfor overseas market expansion, and R&D expenses for new product development.
Main business yet to turnaround Its power AMI segment, which accounted for 49% oftotal revenue, saw revenue decline 21% YoY. Meanwhile, its communication and fluidAMI segment, which accounted for 26% of total revenue, saw revenue rise by just 1%YoY. This weak performance was largely due to sluggish orders from domestic gridclients, including SGCC.
ADO segment maintained momentum The company’s Advanced DistributionOperations (ADO) segment, which accounted for 25% of total revenue, saw revenuerise 36% YoY growth, driven by demand from grid companies and rail and transportationrelated companies.
Overseas markets post faster growth Thanks to increasing co-operation withinternational giants, such as Siemens, Itron, and Cisco, the company’s overseasbusiness posted faster growth, as expected. Revenue from overseas customersaccounted for 20% of total revenue and was up 63% YoY during the period.
Rmb1.8bn in orders on hand During the analyst briefing, management stated that thecompany currently has around Rmb1.8bn in orders on hand. Among these, Rmb800m isin its power AMI segment (including smart meter & terminal orders, and orders fromoverseas customers), Rmb600m is in its communication & fluid AMI segment, and finallyRmb400m is in its ADO segment.
Mixed outlook for 2017 Even though the ADO segment performed well in 1H17, andshould see >20% YoY growth in 2H17 and next year, the market is still concerned aboutthe recovery of its AMI segment and the timetable for the second generation of smartmeters. We continue to see a mixed outlook for 2017. We cut our 2017/18 net profitforecasts by 3.3%/6.6%, to reflect its one-time disposal gain, the weaker-than-expectedAMI segment but stronger-than-expected ADO segment. The company is trading at 8.2x2017E P/E. We maintain our Hold rating but cut our target price from HK$4.50 toHK$3.60, based on 9x 2017E P/E.
Key risks 1) Delays in AMI and ADO orders; 2) greater-than-expected downwardpressure on GPM; 3) less-than-expected overseas market expansion.