1H18 results miss expectations

COMEC announced its 1H18 results with revenue falling 21.10% YoYto Rmb8.22bn and net profit attributable to shareholders dropping770.84% YoY to –Rmb295mn （or -Rmb0.21 per share）， lower than ourestimates.

Revenue drops and GM plunges; new orders growth strong. In 1H18,revenue fell 21% YoY due to insufficient orders on hand and Nanshafactory removal. The overall GM slumped 7ppt to 0.97% on highersteel plate prices, though new orders growth was solid （up 215% YoYto Rmb16.9bn）。

Provision for contract and bad debt losses and RMB depreciationweigh on profits. In 1H18, provision for contract losses soared toRmb80mn, and that for bad debt losses was Rmb10mn. To mitigateFX risks, the firm held large FXAs （future FX settlement）， FX swaps,and FX option transaction portfolio contracts in 1H18 （the balance oftrading financial liabilities rose to Rmb230mn）； but net losses fromfair value changes reached Rmb220mn amid renminbi depreciation.

Net losses at Huangpu Wenchong; net profit from GSI. In 1H18,Huangpu Wenchong recorded -Rmb310mn net losses due tounderproduction of military orders and the recognition of Rmb57mnlosses from the KCM construction contract, while GSI generatedRmb17mn net profit.

Trends to watch

We expect earnings to improve in 2H18. The firm has advantages inmanufacturing regional containers and high value-added civil ships.We expect it to benefit more from the cyclical recovery of the civilshipbuilding industry than its competitors.

Earnings forecast, valuation and recommendation

We adjust our forecasts for revenue, GM, and gains or losses from fairvalue changes, and accordingly cut 2018/19e net profit by 65%/24%to Rmb49mn/Rmb184mn. COMEC-H now trades at 0.8x 2018e P/Band 0.8x 2019e P/B. We maintain our BUY rating, but cut our TPs forA-/H-share by 43%/29% to Rmb16 （2x 2019e P/B）/HK$10 （1x 2019eP/B）。 Our TPs offer 29%/33% upside from the current share prices.

Risks: uncertainty in renminbi depreciation & steel plate price