1H15 results missed expectations

In 1H15, Jiulian’s revenue edged up 0.31% YoY to Rmb1.87bn and net profit attributable to shareholders fell 9.21% YoY to Rmb92mn or Rmb0.28/share, at the lower end of its preannounced range and missed our expectations. Revenue from civil explosives dropped 33.81% YoY to Rmb529mn and their gross margin fell 1.19ppt, due to lower market demand amid the soft economy. Prices fell due to the intense competition that followed price deregulations. Revenue from blast engineering rose 26.86% YoY to Rmb1.27bn.

Trends to watch

Asset acquisition by Poly Group and more SOE reforms.

Jiulian’s subsidiary , Xinlian Blasting, will pay Rmb35.65mn toacquire a 51% stake in Liupanshui Jiuxiang and its associates. The deal will enable Xinlian Blasting to further boost its competitiveness in the local market and its integrated blasting services.

Jiulian plans to issue up to 182mn shares via a private placement to 10 investors at Rmb16.34/share with a 3-year lockup period. The deal is pending the approval of regulators.

Earnings revisions

Jiulian expects net profit in 1~3Q15 to slide 10~40% YoY , due to lower prices and demand as well as shrinking profit contributionsby a number of blasting projects, which will be completed in 2H15. Cut 2015/16e EPS forecast by 45%/22% to Rmb0.53/0.84 (or Rmb0.34/0.54 if placement is factored in).

Valuation and recommendation

The stock is trading at 47x/30x 2015/16e P/E. We are optimistic on the Poly Group’s further acquisition of assets in civil explosives. Lift TP by 4% to Rmb30, implying 36x 2016e P/E. Maintain BUY.

Risks

Slower-than-expected progress in asset injection by Poly Group; further decline in demand for civil explosives.