2016 results in line with expectation

STEP Electric announced 2016 results: revenue was Rmb2.727bn, up 80.9% YoY; net profit attributable to shareholderswas Rmb171mn, down 9.8% YoY, or Rmb0.28 per share.

Income statement: Financial expense grew rapidly, as related funds were not put in place and there was a largeamount of interest expense.

Balance sheet: Goodwill increased due to the company’s acquisition of Huitong Technology. Short term borrowingincreased due to the borrowing from banks to pay for the acquisition.

Cash flow statement: Operating cash flow increased significantly YoY, mainly due to the consolidation of HuitongTechnology and payment recovery for elevator products.

Trends to watch

Elevator products reaching bottom. With the recovery of new-starts GFA (8.1% YoY) in 2016, we believe theelevator industry will reach bottom in 2017. The company’s elevator clients include Otis and Kone and it may benefitfrom the bottoming out of the elevator industry. We expect the elevator control business, energy saving and industrialtransmission business will stabilize in 2017, and the gross margin will remain stable.

Robot and sport control business will maintain high growth. Xiao’ao exceeded its earnings promise by232.16% in 2016. The company has ample orders on hand and may maintain rapid growth in 2017. Growth in robotbodies is expected to double in 2017, with sales volume to exceed 1,600 units.

Earnings forecast

We adjust our 2017 & 2018 earnings forecasts by -2.9% & -3.6% to Rmb195mn & Rmb229mn.

Valuation and recommendation

The stock is trading at 40x 2017e, 34.2x 2018e P/E. Maintain BUY with TP of Rmb16, or 50x 2017e P/E (the company isa robot activity control bellwether and enjoys a valuation premium).

Risks

Ineffective integration of acquired assets; extent of negative impact from the decline of elevator industry output.