1Q17 results miss expectation

EGing Photovoltaic Technology announced 1Q17 results: revenue was Rmb780mn, down 35% YoY; net profitattributable to shareholders was Rmb9.38mn, down 90% YoY, or Rmb0.01 per share. Earnings missed expectation dueto YoY fall in gross margin and rising assets impairment loss.

Trends to watch

1Q17 results missed expectation. In 1Q17, sales revenue was Rmb780mn, down 35% YoY and down 19% QoQpossibly due to a high base in 1H16 created by rush installation. Gross margin was 16.5%, down 3.9ppt YoY and up0.4ppt QoQ because of sharp YoY decline in module prices. The sales expense ratio was 2.9% （-0.4ppt YoY and -2.0pptQoQ） and the G&A expense ratio was 6.7% （+1.3ppt YoY and +1.5ppt QoQ）。 A Rmb45.78mn impairment provision ledto a Rmb390,000 operating loss.

Power generation business remained stable. In 1Q17, EGing recorded 33.50mn KWh power generation volumefrom its 130MW solar farm, largely flat YoY. In January, it received registration document for its 200MW solar farmproject in Changji and 20MW floating solar farm project in Zhixi. Construction may be completed in 2017, conducive todriving steady revenue growth.

Earnings forecast

To factor in falling gross margin in 1Q17, we lower our earnings forecasts 9% from Rmb0.36 to Rmb0.33 pershare for 2017 and 9% from Rmb0.43 to Rmb0.4 per share for 2018.

Valuation and recommendation

The stock is trading at 20x 2017e P/E, close to 1x s.d. below its 4-year historical average. With the upcoming powertariff adjustment in June, we expect domestic installation to start rebounding from 2Q17, driving sequential earningsimprovement. We maintain our BUY rating, but lower our target price 9.09% to Rmb9.00 （28x 2017e P/E），implying 36.99% upside room from the current price.

Risks

Solar farm construction misses expectation.