1H16 results are in line with expectations Century Riel announced 1H16 results: operating income of 120 million yuan, a year-on-year decrease of 4.9%; net profit attributable to the parent company was 895,000 yuan, a year-on-year decrease of 94.4%, corresponding to a profit of 0.002 yuan per share. The results for the first half of the year were unrepresentative due to the obvious seasonality of revenue recognition. Revenue and gross margin both declined. Revenue in the 1H16 railway sector fell by 19.75%, with integrated surveillance/video surveillance systems growing 268%/64%, and disaster prevention and safety monitoring/communication systems falling 66%/100%. Medical/operational communications increased by 12.2%/640% year over year, and security products declined 96%. The gross margin of the railway sector declined by 12.7ppt, with the gross margin of integrated monitoring systems falling by 38.7ppt, and the gross margin of integrated video surveillance systems and disaster prevention and safety monitoring systems rising by 18.1ppt and 0.6ppt. Consolidated gross margin declined 4.3ppt to 41.8% year over year. Expenses increased during the period, non-operating income fell sharply, and the net profit margin decreased by 11.7ppt. Due to the reduction in the scale effect, the company's sales expense ratio, management expense ratio, and financial expense ratio increased by 1.3 ppt/3.1 ppt, respectively, over the same period last year. Non-operating income fell 96.4% year over year due to reduced government subsidies. Net profit margin fell 11.7ppt to 0.7%. Net operating cash outflow increased. By the end of the year, the company's inventory balance had increased by 25.58 million yuan compared to the beginning of the year, and the accounts receivable/payable balance decreased by 59.39 million yuan/11.04 million yuan. The net cash flow from operating activities was 66.3 million yuan, an increase of 22.42 million yuan over the previous year. The development trend is putting pressure on the railway business, and eWeixun is still likely to fulfill its performance promises. As of mid-year, the company had orders of 170 million yuan, a year-on-year decrease of 40.4%, mainly due to a decrease in railway completion mileage this year and a decrease in bidding projects in the first half of the year. Railway business revenue for the whole year is expected to remain flat and drop slightly year-on-year. The subsidiary E-Weixun lost a small amount in the first half of the year, mainly due to seasonal revenue recognition. It is estimated that the annual performance promise of 50 million yuan will probably be completed. Profit forecast As the company's main business development fell short of expectations, we lowered the company's 2016/17e profit forecast by 17% and 11% to 0.22/0.27 yuan, respectively. Valuation and recommendations Currently, the company's stock price corresponding to 2016/17e P/E is 48.2x/39.3x, respectively, and the valuation level is reasonable. We slightly lowered the company's target price by 5% to 12.0 yuan, corresponding to 45x 2017e target p/e. Remain neutral. Demand for a comprehensive monitoring system for risky railways fell short of expectations.