Results miss expectations

In 1H15, revenue rose 30% YoY to Rmb467mn and gross profit increased 7% YoY to Rmb215mn, with toll road’s GP down 32% to Rmb126mn and PV’s up 390% YoY to Rmb98.71mn. Toll road’ s GP fell because:1) procurement of maintenance materials in 2Q15 cost ~Rmb27mn; 2) construction of the Tianjin section reduced traffic flow; and, 3) PV plants’ power volume missed expectations. Also, financial expenses rose ~Rmb41mn. Net profit fell 7% YoY to Rmb150mn or Rmb0.14/sh, lower than both our and the market’s expectations.

Trends to watch

Toll road business to resume growth in 2H15 thanks to: 1) low base from renovation of Beijing- Tianjin- Tangshan expressway (even after including subsidies); 2) no major maintenance expenditure in 2H15; and, 3) HBE will be compensated for the unexpected traffic losses and these funds may be recorded in 3Q15.

PV power plants’ power volume missed expectations, but power volume guaranteed to ensure earnings.In 1H15, on-grid power volume was 20% lower than estimates due to curtailment in Xinjiang and defective elimination at some projects. However, HBE obtained on-grid volume guarantees upon acquisition and it could be compensated if the PV plants fail to deliver; thus, its impact on full year 2015 earnings should be limited.

Investment logic remains intact, with PV plant operation & expressway to drive growth. 1) HBE said it would continue acquiring PV plants going forwards. And, 2) HBE has an SOE background and has formed a PV investment platform with Zhongli Science & Technology, bringing bright prospects for the PV power plant business. The PV power plant and expressway businesses will be its two engines.

Earnings revisions

Considering rising maintenance costs, we cut our 2015/16e EPS forecast by 6.2%/1.9% to Rmb0.35/Rmb0.43, implying 66.3%/23.1% YoY growth.

Valuation and recommendation

Cut TP by 25% to Rmb7.3 (based on SOTP: Rmb3.2/sh for toll road + Rmb4.1/sh for PV), implying 21x 2015e P/E.Maintain BUY.

Risks

Traffic flow and on-grid power volume miss expectations.