1Q17 results in line with expectations

1Q17 revenue was Rmb230mn, down 6.0% YoY; shareholder net profit was Rmb11.40mn (Rmb0.01/sh), down 81.0%YoY due to Rmb43mn investment income from equity disposal in 1Q16 and weak sales of AFV powertrains in 1Q17.

Gross margin fell 8.1ppt due to sharp depreciation for Changdee’s fleet and falling prices and GM for powertrains.

Sales, G&A and financial expense ratios rose 3.1ppt, 4.7ppt and 3.1ppt due to falling revenue, rising R&Dspending and more borrowing. Hiconics guided a possible YoY decline in attributable net profit for 1H.

Trends to watch

Sales of AFV powertrains likely to maintain fast growth. In 2016, Hiconics Power Technology’s revenue jumped255% YoY to Rmb498mn. With review of the AFV promotion catalogue, new orders tumbled 67% YoY to Rmb50.74mnin 1Q17. Backlog reached ~Rmb350mn. However, AFV output and sales volumes started to bounce back from Marchwith the introduction of the third promotion catalogue. We expect strong cost performance to boost logistics vehicledemand and sales. It has started mass production of logistics vehicle powertrains and demand from Changdee shouldboost sales. We see fast earnings growth in 2017.

Stable progress in EV leasing and charging business. Changdee will focus on promoting logistics vehicles in2017, and targets 10,000 vehicles. It signed an agreement with CRLG in early 2017 to provide the latter with logistics EVleasing services and EV charging solutions in the next three years (3,000 vehicles and 3,000 EV chargers), which shouldgenerate Rmb80~100mn net profit. We expect high revenue growth in 2017 driven by this project.

Steady growth in energy saving & environmental protection business: Rmb201mn revenue in 2016. HuataiRunda beat its earnings promise. New EPC orders reached Rmb71.19mn in 1Q17. The company could acquire acoal-fired power generation company soon, from which we expect synergies and better earnings growth. The Luanpingsolar farm was connected to the grid and could make a stable contribution to profit growth.

Earnings forecast

We maintain our earnings forecasts for 2017 & 2018.

Valuation and recommendation

Currently 31x 2017e, 25x 2018e P/E. Maintain BUY and Rmb11.10 target, for 41.4% upside.

Risks

AFV sales disappoint; slow progress in vehicle leasing business; GM of VFDs falls.