Action

We downgrade Anjubao to HOLD and cut our target priceby 35% to Rmb10, considering its earnings have fallen and itsInternet investment may still increase.

What’s changed

In 2016, overall revenue +1.74% YoY to Rmb798mn, butrevenue declined for its video door phone product, smarthome control system, and parking lot system. Consideringproperty tightening is still escalating in China, growth in thecompany’s related product revenue could decelerate, henceputting presssure on its overall revenue growth.

Net profit attributable to shareholders plunged 50% toRmb17.60mn due to increased investment in mobileInternet and city cloud parking projects. The investment isunlikely to shrink in the years ahead, as the company willstill accelerate its Internet transformation; hence, itsexpense rate could continue rising.

How do we differ from the marketMany have highexpectations for the company’s transformation towards Internetbusinesses; however, these businesses – such as cloud parking –cannot contribute earnings in the short term.

Potential catalysts: net profit may decline further due toincreased investment for its business transformation; fasterpromotion of smart home control products could make its relatedrevenue beat expectations.

Financials and valuation

We expect 2017/18 revenue to rise 13.1%/18.6% YoYto Rmb902mn/1.07bn, net profit attributable toshareholders to grow 83.7%/62.0% YoY to

Rmb32.33mn/52.37mn with EPS of Rmb0.06/0.10,respectively. We cut our TP by 35% to Rmb10, consideringits earnings have been declining and its Internet investment maystill increase in the years ahead. Downgrade to HOLD.

Risks

Plunge in property completion and new starts; negative surprisein transformation towards Internet & cloud parking; systemicpullback of sector valuation.