Results in line

Splendor Science & Technology announced 1H16 results: revenue was Rmb210mn, up 11.7% YoY; net profitattributable to shareholders was Rmb38.82mn, up 25.1% YoY, or Rmb0.1 per share, in line with expectations.

Operating revenue rose 11.7%; gross margin fell 1.8ppt. In 1H16, revenue from equipment monitoringproducts, security products, informationization products for production control and transportation dispatching, signalcontrol products and power supply equipment rose 0.6%, 15.7%, 193.7%, 1,006.9% and 86.0% YoY; revenue fromsignal appliances and equipment fell 51.4% YoY. Gross margin declined 1.8ppt to 45.5%.

Expense ratios declined, shrinking investment income dragged operating revenue, non-business incomeincreased, net profit margin & OCF rose. 1H16 expense ratios: selling +0.8ppt, administrative -3.8ppt due to scale,financial -3.0ppt due to increasing interest income. Operating profit dropped 9.9% YoY due to Rmb6.61mn investmentlosses in 1H16. Ne profit margin rose 2.0ppt to 18.9%. Inventory, debt receivable, and debt payable balances downRmb14.05mn, Rmb6.89mn and Rmb42.14mn over 1H. OCF was Rmb41.56mn in 1H16, up Rmb31.15mn YoY.

Trends to watch

The company adjusted the funds raised by private placement to Rmb820mn (from Rmb1.02mn) with an issuingprice of Rmb14.86 (13% discount to the present price). The CEO and persons acting in concert will subscribe, showingconfidence about the transport WiFi strategy. The company holds stakes in Feitian (23.35%), Beijing Surf (33%), andBeijing Qicai Tongda (9.03%). Splendor will fund the construction of a WiFi R&D center with the proceedings.

Splendor expects earnings for 1~3Q will rise 30~60% YoY thanks to a received VAT refund.

Earnings forecast

We maintain our earnings forecast for FY2016/2017.

Valuation and recommendation

The stock is trading at 54.8x 2016e and 40.1x 2017e P/E. We maintain our BUY rating and Rmb19.2 target price,implying 12.48% upside room from the current price.

Risks

Progress of private placement disappoints.