2013 results miss expectations

In 2013, revenue increased 6% to Rmb1.48bn and net profit fell 32% to Rmb100mn, or Rmb0.4/sh, lower than expected. The company proposed to distribute a cash dividend of Rmb0.5 for each ten shares.

Slower-than-expected progress of key projects and elevated expenses are the main culprits of earnings declines: 1) The revenue settlement was lower than expected due to the delays of coal-chemical projects and Dongguan's IGCC project; 2) R&D spending and provisions for accounts receivable increased Rmb24mn YoY, and the consolidation of Raschka's financial statements also increased expenses.

Trends to watch

Visible earnings growth for 2014 on strong order backlog. Order backlog totaled Rmb2.1bn as of end-2013. In addition, Hailu is expected to make great progress in 2Q14 in projects for Ningxia Coal and Lu'an Environmental Energy after the winter has ended. Revenue from numerous high-margin gasifier and nuclear power projects is likely to be recognized in 2014. In addition, the manufacturing of the first samples for ships has been completed and this business is likely to become new earnings growth driver this year.

Industrial waste treatment EPS business merits attention. Hailu consolidated Raschka's financial statement in 3Q13 and Raschka is likely to make earnings contribution in 2014. We are optimistic about the long-term outlook of this business thanks to the increasingly stringent regulations on industrial environmental protection.

Earnings forecast revisions

We cut our 2014 revenue forecast by 10% to Rmb2bn and earnings forecast by 31% to Rmb160mn or Rmb0.6/sh to reflect the slower-than-expected progress and settlement of key projects, and introduce 2015 earnings forecast at Rmb200mn or Rmb0.76/sh.

Valuation and recommendation

The stock now trades at 23x/18x 2014/15e P/E. We set a TP of Rmb17, implying 28x 2014e P/E.

Risks

Markedly lower revenue recognition for major orders; failure to expand into environmental protection EPC business.