1Q17 results in line with expectations

1Q17 revenue fell 16.2% YoY to Rmb130mn and net profit attributable to shareholders fell 22.3% YoY to Rmb21.56mn,implying EPS of Rmb0.02. Results were line with expectations.

Revenue and gross margin fell. Due to a high base caused by demand for replacements in 1Q16, revenue in 1Q17fell 16.2% YoY. Gross margin fell 2.2ppt YoY due to reduced economies of scale and rising raw material costs.

Expense ratios rose; net margin fell. Due to rising R&D expenses and new subsidiary salaries, G&A expense ratiorose 7.4ppt YoY. Due to reduced economies of scale, the selling expense ratio rose 1.2ppt YoY. The financial expenseratio fell 1.3ppt. Thanks to earnings growth of associate companies and better returns on wealth managementproducts, the company’s investment income rose 213% YoY. As government subsidies and tax rebates rose, itsnon-operating revenue rose 123% YoY. Overall net margin fell 1.3ppt YoY to 17.1%.

Operating cash recorded net outflows. As of end-1Q17, inventory rose by Rmb8.88mn and accounts receivablerose by 13.98mn since the start of this year. Accounts payable fell by Rmb4.27mn since the start of this year. Operatingcash recorded a Rmb33.87mn net outflow （+Rmb40.29mn YoY）。

Trends to watch

Penetration of smart meters rose; IoT meter penetration may further improve. The company’s smart watermeter penetration gradually rose and the market share reached 43.4% in 2016. IoT commercialization may start thisyear. The company already has a presence in NB-IoT meters and it could be a beneficiary in the future.

Earnings forecast

We maintain our earnings forecast for 2017 & 2018.

Valuation and recommendation

The stock is trading at 30x 2017e P/E. As the average valuation moved downward, we maintain our BUY rating, but lower our target price by 14.47% to Rmb6.50 （35x 2017e P/E）。

Risks

Expansion of IoT meter business disappoints.