1H17 results down 38.8% YoY miss expectationHangzhou Zhongheng Electric announced 1H17 results: Revenuewas Rmb357mn, down 7.7% YoY; net profit attributable toshareholders was Rmb60.13mn, down 38.8% YoY, or Rmb0.11per share, below expectations. Gross margin slipped 11.7pptYoY, mainly on the decline of key products and lower portion ofhigh-GM EV chargers. Sales and G&A expense ratios rose1.5ppt and 4.2ppt, mainly due to incremental expense onenergy internet personnel and R&D. The financial expenseratio dropped 3.6ppt.

Trends to watch

1H17 earnings dragged by EV chargers; expectingrecovery in 2H17.

HVDC to become a bright spot.

Delivery of power information software projects toaccelerate in 2H17.

Earnings forecast

Given the disappointing EV charger and software business, andthe GM decline, we lower our 2017 and 2018 earningsforecasts 16% and 18% from Rmb0.37 and Rmb0.47per share to Rmb0.32 and Rmb0.39.

Valuation and recommendation

The stock is trading at 44x/36x 2017/18e P/E. We maintainour BUY rating, but lower our TP 5.56% to Rmb17.00,implying 21.6% upside from the current price. Rollover to44x 2018e P/E.

Risks

Slow progress in energy internet; tenders for EV chargersdisappoint; delay in the introduction of national standards forHVDC.