Earnings Slightly Worse than Expected
The company reported a revenue of RMB2.18 billion, which was down 5% yoy while its gross margin was up by 3.2% yoy to RMB508 million. Net profit attributable to shareholders increased by 7.7% to RMB223 million. EPS was RMB0.32, which was slightly lower than our expectation mainly due to a sharp decline in the revenue from the curtain wall business.
A Significant Decline in the Curtain Wall Business
The reported revenue from the traditional curtain wall business shrank by 34.2% yoy to RMB600 million, of which contribution from commercial and industrial buildings sharply fell by 47.2% yoy to RMB327 million. The main reason was that the lackluster outlook of the commercial and industrial sector led to a significant decline in the scale of construction of this type of projects. The gross margin of the curtain wall business was stable at 15.9%, vs 16.1% achieved in the same period of last year. The company has already developed overseas markets for this business to reduce the risks associated with a slowing domestic economy.
Strong Growth for the Solar EPC Business
The reported revenue of the company's solar EPC business grew by 39% yoy to RMB1.03 billion, which almost offset the decline in the curtain wall business. Its profitability was stable, with gross margin being up by 0.4%-point yoy to 28.7%. On 29 June, the company announced that it obtained approximately 470MW of permits from the Chinese government, from which approximately 350MW of solar EPC order could be brought to the company in H2. Currently, solar operators are competing to expand their business. It is expected that solar EPC order will continue to grow in future.
Valuation
Since 2015, the share price of the company has dropped significantly, which has mainly reflected over pessimism of the market towards the company's curtain wall business as well as issues related to the solar EPC industry, such as a possible increase in grid curtailment and uncertainties over subsidy of solar energy. We have downgraded our target price to HKD8, which is equivalent to a prospective 2016 P/E ratio of 8x. We recommend a ¡§BUY¡¨ rating. (Closing price as at 5 Oct 2015)
Financials
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