2016 results miss expectations

2016 revenue Rmb695mn (+7.4% YoY); net profit attributable toshareholders Rmb134mn (-4.1% YoY), or Rmb0.13/sh. 4Q16revenue Rmb200mn (+15.4%); profit was Rmb19.96mn(-35.3% YoY), below expectations.

Improvement in product mix contributed to larger GM. Expenseratio rose; net profit margin shrank 2.3ppt. Working capitalincreased; operating cash flow declined.

Trends to watch

1Q17 earnings to face high base. The companypreannounced 1Q17 net profit of Rmb16.65~25mn (-10~40%YoY) largely due to the high base in 1Q16 (a south China coldsnap led to a boom in demand to replace water pipes).

Await progress in new businesses. In 2016, the companywas dragged by iWater (losing Rmb11.31mn) and Younio(earnings plunging 65%). We expect improvement in the twosubsidiaries in 2017. Larger penetration of smart water metersand the promotion of NB-IoT might become the catalysts.

Earnings forecast

On disappointing 1Q17 results, we cut our 2017 earningsforecast by 2.9% to Rmb0.19. Our 2018 forecast is Rmb0.23.

Valuation and recommendation

The stock is at 34.6x 2017e, 27.9x 2018e P/E. Maintain BUY. TrimTP by 11.73% to Rmb7.60, or 40x 2017e target P/E.

Risks

Consolidation and new products disappoint.