Action

1Q14 revenue slid 1% to Rmb250mn and earnings fell 49% to Rmb13mn or Rmb0.05/sh, well below expectations. The company also preannounced a possible 30%~50% decline in 1H14 earnings. We downgrade the stock to HOLD and cut our TP to Rmb11.

Slower-than-expected project progress and elevated costs the main culprits of the earnings decline: 1) Recognized revenue was lower than expected due to delays in the delivery of large orders such as coal chemicals and Dongguan IGCC projects. 2) Gross margin narrowed 2% due to higher costs, with administrative expense ratio up ~4%.

Reasoning

Projects progressing much more slowly than expected, main operations unlikely to recover. Affected by the poor downstream business climate, the company's projects have been progressing at a much slower pace than expected. The delivery of the Dongguan IGCC project in 2014 now faces uncertainty and the progress in coal chemical projects is also slow. This makes it very difficult for waste heat boilers and pressure vessels to see a recovery in 2014.

Industrial waste treatment EPC business disappointed. The company failed to generate synergies from the acquisition of Raschka in 3Q13 due to the lack of focus and support for this business because of the poor conditions of main operations. This has led to a slower-than-expected progress in its industrial waste treatment EPC business.

Earnings forecast and valuation

Considering the much slower-than-expected project progress, we trim 2014~15 revenue by 21%/30% to Rmb1.6bn/Rmb1.7bn and cut earnings by 34%/46% to Rmb103mn/Rmb106mn or Rmb0.40/Rmb0.41 per share. The stock is trading at 31x/30x 2014/15e P/E. We downgrade the stock to HOLD and cut TP to Rmb11, implying ~28x 2014e P/E.

Risks

Sharp deteriorations in macro economy; disappointing performance of main operations.