1Q17 results in line with expectations

1Q17 revenue was Rmb808mn, up 50.48% YoY; net profit attributable to shareholders was Rmb94mn, or Rmb0.16 pershare, up 182.35% YoY. The strong revenue and earnings growth was driven by consolidation of Union Mobile’s financialstatements. The company guided its 1H17 earnings at Rmb154~183mn, up 175~225% YoY.

Trends to watch

Recurring earnings soared 414% YoY and gross margin expanded moderately; new rules on provisions managementhad only limited impacts. In 1Q17, gross margin expanded 0.87ppt QoQ to 31.26%, and overall expense rate rose1.01ppt QoQ to 16.77%. Sales expense ratio slipped 1.52ppt QoQ to 3.31%, while administrative expense rate climbed2.92ppt to 13.86%. The balance of settlement provisions fell 39.22% from Rmb5.814bn at the beginning of 1Q17 toRmb3.534bn at end-1Q17 mainly because the company implemented the central bank’s new rules on provisionsmanagement. Net operating cash flow slumped 223.23% QoQ to –Rmb247mn because the company’s cash spendingon goods purchasing & service payments increased YoY due to inventory expansion, and cash payment for related/otheroperating activities grew Rmb15mn YoY because of the new rules.

Payment business has developed quickly and data business will benefit from strengthened regulation of the consumercredit market. The payment business continued to penetrate finance wealth management, airline tickets ande-commerce industries. Meanwhile, the company won clients in transportation and used car trading, and its bankcardbusiness grew quickly in terms of transaction value at physical stores. According to statistics from Analysys, thecompany’s Union Mobile held 1.04% of the third-party mobile payment market in 4Q16, ranking #4. The bankingregulator’s document on risk control has made consumer finance institutions take risk control systems more seriously,which will create tremendous opportunities for Union Mobile’s big data-based credit information investigation business.

Earnings forecast

We maintain our earnings forecast for 2017 & 2018 at Rmb456mn & Rmb580mn, or fully-diluted EPS ofRmb0.80 & Rmb1.02 and YoY growth of 95.0% & 27.0%.

Valuation and recommendation

The stock is trading at 35x 2017e P/E. We maintain our BUY rating and Rmb36.18 target price, or 30.24% upside.

Risks

Internet finance and parts business transformation disappoint.