3Q16 results slightly missed

Shanghai STEP Electric Corp announced 3Q16 results: revenue was Rmb1.868bn, up 82.19% YoY; net profitattributable to shareholders was Rmb159mn, up 2.76% YoY, or Rmb0.26 per share.

Income statement: operating cost rose significantly and GM dropped, mainly due to financial consolidation of Bitpass.

Balance sheet: goodwill rose 164.03% YoY, due to financial consolidation of Bitpass. Cash flow statement:

operating cash flow turned positive YoY （up 752.43%） due to decreasing proportion of operating assets （such asinventory）。

Trends to watch

Elevator industry downturn and rising financial expenses to drag profit. 1） Cash consideration paid to Bypassand STEP Automation is from bank loans, as the private placement is not completed. The company faces increasingshort-term loans, and rising financial expense is to hurt profit expansion. 2） Elevator industry downturn drags sales ofelevator-control systems. We expect revenue decline to be controlled on recovery of new real estate construction.

Motion control system and robot business to maintain robust growth. The company has completeddeployment along the entire value chain ranging from key components, systems to system integration. The company isthe world's largest server seller, China's No.1 robot motion-control system maker and the top body welding systemproducer. We expect the company's motion control and robot business to maintain robust growth in the next two years.

We like its external expansion in the field of automobiles, food producing and 3C sector.

Earnings forecast

We cut 2016/17e forecast net profit 5.5%/9.5% to Rmb201mn/Rmb226mn on rising financialexpenses.

Valuation and recommendation

The stock is trading at 46.8x/41.8x 2016/17e P/E. Maintain BUY and TP at Rmb18, implying 49x 2017e P/E. Wegive the company valuation premium given its deployment along the entire whole value chain;comparable companies are valued at an average of 48x 2017e P/E on.）Risks

Integration of M&A targets disappoints; negative impacts of output declines beat expectations.