1–3Q17 results miss expectation

1–3Q revenue was Rmb880mn, down 16.3% YoY; net profitattributable to shareholders was Rmb50.19mn, down 65.2% YoY.

Recurring net profit declined 55.2% YoY to Rmb46.46mn.

Trends to watch

Earnings missed expectations due to disappointing sales of AFVpowertrain products. Gross profit margin fell 15 percentage pointsYoY due to falling gross margin for powertrain and significantdepreciation for vehicles. Sales expense ratio and G&A expense ratiorose 1.3 and 4.2 percentage points YoY as AFV business’ revenuemissed expectations while expense was relatively fixed.

AFV business will likely rebound in 4Q17, but we expect thecompany to exit this business, speeding up cash inflow and allowing afocus on component manufacturing.

Industrial control board business will likely maintain fast growth.

Earnings forecast

Considering disappointing powertrain sales and falling gross profitmargin, we lower our 2017 EPS forecast by 16% from Rmb0.15 toRmb0.12, and 2018 by 3% from Rmb0.19 to Rmb0.18.

Valuation and recommendation

The stock is trading at 28x 2018e P/E. Maintain BUY and TP atRmb6.28, implying 22.18% upside room from the current price.

Risks

Disappointing AFV sales volume; falling gross profit margin forpowertrain and VFD products.