Action

Zhongheng Electric announced 1-3Q17 results: Revenue declined4.8% YoY to Rmb549mn and net profit attributable to shareholdersfell 39.1% to Rmb80mn. The firm expects full-year net profit todecline 20–40% YoY to Rmb95–127mn. We cut our earnings forecast,lower our TP to Rmb15 and downgrade the company to HOLD, as itsearnings were much lower than expected and are unlikely to improvein the near term. Valuation is also demanding, in our view .

What’s changed?

EV charger orders are lower than expected; delivery delayed.

Revenue recognition of power software projects postponed.

The progress of energy Internet business is slow and profitmodel is not clear. Energy Internet cloud platform is one of theprojects that the company planned.

How do we differ from the market?We consider our earningsforecast conservative, and we are cautious about the company’senergy Internet business. Although the EV charger industrydisappoints in the near term, we are optimistic about the growthprospects of the firm’s EV charger business.

Potential catalysts: Increases in EV charger and HVDC power supplyorders and profit contributions; significant progress of energyInternet business.

Financials and valuation

We cut our 2017 and 2018 net profit forecasts 32% and 20% toRmb121mn and Rmb174mn or Rmb0.21 and Rmb0.31 per share,given the disappointing EV charger and software businesses and thegross margin decline. The stock is now trading at 65x/45x 2017/18eP/E, relatively demanding, in our view. We cut our TP 11.8% toRmb15 and downgrade the stock to HOLD.

Risks

Slow progress in energy Internet; disappointing EV chargerprocurement; delay in introduction of national standards for HVDC.