Earnings in line

In 1~3Q15, revenue rose 48.2% YoY to Rmb227mn while net profit attributable to shareholders surged 206.4% YoY toRmb41.55mn; in 3Q15, revenue/net profit climbed 189.5%/205.7% YoY respectively. As 1~3Q usually takes up20~30% of full year net earnings, 4Q15 still merits attention.

In 1~3Q15, gross margin edged up 2.8ppt to 49.5% due to higher share of high-margin products (railways andtelecommunications) and lower share of low-margin businesses (security surveillance and medical sector). Theexpense ratio fell 5.3ppt thanks to the economy of scale; rising tax rebate drove up net margin by 9.4ppt.

As of end-September 2015, inventory/AR/AP balance rose Rmb94.66mn/Rmb13.73mn/Rmb14.04mn from start-2015.In 1~3Q15, net operating cash outflow increased Rmb26.11mn from 1~3Q14 to Rmb70.17mn.

Trends to watch

ESOP indicates confidence. In end-September, the company announced its ESOP draft, which will involve 267employees (13 senior managers) and invest up to Rmb50mn to acquire shares in the secondary market (Rmb6.567mnfrom employees and Rmb43.433mn from shareholder loans). The ESOP has duration of three years with 1-yr lock-up.

Ample backlog. As of end-3Q15, the backlog of orders grew 3% YoY to Rmb310mn, posting a slowdown from 1H15,mainly due to seasonal volatility in 3Q15. We expect the company to secure railway orders in 4Q15.

Rosy outlook of external expansion in railway operation & maintenance as it acquired stake in Ruiqi Haodi(telecom power), Tianhe Dongfang (passenger service), Yicheng Huaqin (station operation & maintenance) and EEVIA(station operation & maintenance) last year and it suspended trading for the restructuring early this July.

Earnings forecast

We forecast 2015/16e EPS to be Rmb0.31/Rmb0.41.

Valuation and recommendation

It is trading at 38.0x/29.0x 2015/16e P/E. Keep TP at Rmb16.46 (40x 2016e target

P/E). Reiterate BUY. Risks: weaker sector demand; corporate integration misses expectation.