1Q17 results in line with expectation

Center Power Tech announced 1Q17 results: Revenue was Rmb560mn, up 3% YoY; net profit attributable toshareholders was Rmb21.95mn, up 3% YoY, or Rmb0.06 per share, largely in line with expectation.

Trends to watch

Gross margin improved QoQ. In 1Q17, sales revenue was Rmb560mn, up 3% YoY and down 22% QoQ. Grossmargin was 15.4%, up 0.8ppt YoY and 3.6ppt QoQ thanks to falling lead prices and optimizing product mix. The salesexpense ratio was 4.8% （+1.5ppt YoY and +0.7ppt QoQ）， and G&A expense ratio was 5.3% （+0.6ppt YoY and +1.7pptQoQ）。 Operating profit margin was 3.8% （-0.9ppt YoY and +1.0ppt QoQ）。

1H17 earnings guided to rise -15~+15% YoY. The firm guided that 1H17 earnings would rise -15~+15% YoY toRmb48.38~65.46mn, implying that 2Q17 net profit would rise -26~+22% YoY to Rmb26.43~43.51mn.

Earnings forecast

To factor in rising sales expense in 1Q17, we lower our earnings forecasts 9% from Rmb0.51 to Rmb0.46 pershare for 2017 and 8% from Rmb0.65 to Rmb0.59 per share for 2018.

Valuation and recommendation

The stock is trading at 37x 2017e P/E. We maintain our BUY rating, but lower our target price 7.41% toRmb25.00 （54x 2017e P/E）， implying 47.58% upside room from the current price.

Risks

Fluctuation in raw material prices beats expectation.