The Company’s revenue in the first three quarters fell 15.5% YoY while net profitdropped 56.9% YoY. Results fell short of expectations. The Company reportedrevenue of RMB3.98bn in the first three quarters, down 15.5% YoY and net profit ofRMB232mn, down 56.9% YoY with EPS at RMB0.17, lower than estimates by 40%.

The main reason is because the Company did not achieve earnings in 3Q11. FromJul-Sep, it posted revenue of RMB1.07bn, down 23.5% YoY and net profit ofRMB2.22mn, down 98.2% YoY. During the same period of last year, it earned netprofit of RMB108mn.

Investment loss is the major reason for the considerable slide in profit in 3Q11. FromJul-Sep, the Company reported fair value loss of RMB185mn caused by share pricecorrection of Juli Sling (002342) held by the Company (investment income ofRMB38mn at the same period of last year), and investment return of RMB107mn(investment income of RMB25mn at the same period of last year). As a result, in totalthe Company experienced a decrease of RMB141mn in investment income in 3Q11on a YoY basis, which becomes the main reason for the significant fall in earnings.

Mounting expense rate is one of the reasons for net profit margin slide. While itsrevenue dropped 15.5% in the first three quarters, marketing expenses jumped 19.3%YoY to RMB105mn. Financial costs climbed 12.9% YoY to RMB323mn. Managementexpenses slightly fell 1.9% to RMB213mn. The sum of three major expense ratesreached 16.1%, significantly higher than the 12.6% level of the same period of lastyear.

Gross margin of transformers stabilized. New energy business faces short termpressure. As the bottoming of biding prices for primary equipments appeared in 2H10,there was a 6-12 months lag effect in performance. As a result, overall gross margin in1H11 was only 17.0%. Invitation-to-bidding price has gradually rebounded since thebeginning of the year. From Jul-Sep, its overall gross margin was 25.7%. Mainlybecause gross margin of transformers stabilized while gross margin of new energybusiness increased. With the rebound of invitation-to-bidding price, profitability oftransformer business is expected to improve in future. However, polysilicon prices innew energy business fell considerably in October. In 4Q11, new energy business isexpected to face relatively large pressure and gross margin may slightly narrow,imposing a negative impact on full year performance.

Adjusting earnings forecast but maintain “Neutral” rating. We have revised down ourearnings forecast and now expect 2011-2013 operating income to be RMB5.5bn,RMB6.3bn and RMB7.29bn with EPS at RMB0.26, RMB0.39 and RMB0.50. PErelative to current share price is 53x for 2011 and 35x for 2012. A “Neutral” rating ismaintained.