Earnings growth in line with expectations

Guangdong East Power announced 1H16 results: revenue was Rmb2.291bn, up 62.02% YoY; net profit attributable toshareholders was Rmb154mn, up 45.69% YoY, or Rmb0.31 per share, in line with expectations.Data centers maintained steady growth; high growth of PV system integration continued. Revenue fromUPS and IDC businesses rose 26.58% YoY; PV segment contributed Rmb1.755bn (+83.91% YoY). Administrativeexpenses surged 78.66% YoY as GEP intensively developed its product lines and managed its PV subsidiary.Administrative expense might decline going forward. Gross margin fell 2.6ppt YoY as contribution of purchased PVsupporting products further increased.

Trends to watch

PV system integration to continue high growth. In 1H16, a capacity of 170MW was connected to the grid. On July8, the CSRC approved GEP to privately issue 1.20mn new shares. GEP would add investments in solar farms, and 84MWpower station project had been approved. Investments in solar farms would boost sales growth of core PV modules.Stable growth of data center and high-end supply equipment. GEP’s integrated data center solution has beenapplied in the projects of Tencent, Baidu and other internet companies in Guangzhou. GEP also actively explores diversecooperation methods such as BT and BoT. GEP’s high-end equipment focuses on rail transit sector. GEP has won the bidof a driverless metro project in the US and the No.11 line of Shenzhen metro. Stable revenue growth has been secured.High growth of charging pole business can be expected in 2H. In 1H16, output of AFV and charging polesdisappointed due to weak sector climate. As the AFV subsidy fraud investigation ends and local charging facilities plansare introduced, growth of AFV output would accelerate construction of charging poles. China Southern Power Grid andState Grid are increasing investment in charging poles. Revenue from this segment would be impressive.

Earnings forecast

Maintain earnings forecast for FY2016/2017. We expect 2016/17e operating revenue would be Rmb6.028bn/7.781bn;net profit would be Rmb383mn/527mn. Fully diluted EPS would be Rmb0.68/0.95 factoring in future private placement.Valuation and recommendationThe stock is trading at 40x/29x 2016/17e P/E. We maintain our BUY rating and Rmb35.53 target price, implying 30.53%upside room from the current price. Risks: Sharp decline in charging pole prices; curtailments and delayed subsidies forPV sector.