The company released its mid-2017 report, with a total operating income of 970 million yuan in the first half of the year, down 19.1% from the same period last year; net profit belonging to shareholders of listed companies was 40 million yuan, down 29.2% from the same period last year; and earnings per share was 0.09 yuan, which was lower than we expected. Revenue and profits declined in the first half of the year, mainly due to the decline in sales of headquarter and Dongan-Mitsubishi engines due to sluggish vehicle sales downstream. The company's new product M-series engine technology is at the domestic advanced level, is expected to achieve better sales in the future, and promote the company's profitability to improve. Dongan Mitsubishi 6AT automatic gearbox matching Zhongtai model has been mass produced in the middle of the year, and will also be equipped with seahorse and other car companies, which is expected to increase in sales next year and contribute greater performance flexibility to the company. Affected by the sluggish engine sales and other factors, we lowered our profit forecast and expected the company to earn 0.20,0.40 and 0.59 yuan per share respectively from 2017 to 2019, giving the company 25 times 2019 price-to-earnings ratio and a reasonable target price of 15.00 yuan to maintain the buy rating.

Support the main points of rating

Engine sales were sluggish and the reported performance was lower than expected. Affected by the downturn in vehicle sales downstream and other factors, sales of 125000 and 193000 Dongan-Mitsubishi engines respectively fell by 16.8% and 18.1% in the first half of the year, so China reported revenue and profits declined. With the gradual launch of M-series new products in the future, the profitability of our engine business is expected to be improved.

Dongan Mitsubishi 6AT automatic transmission has been mass produced and is expected to contribute to greater performance flexibility in the future. Under the influence of factors such as the upgrading of consumption, the rejuvenation of car buyers and the rise of independent brands, the demand for automatic gearboxes for domestic passenger cars is expected to grow at a high speed, but domestic automatic transmissions are in short supply. Dongan Mitsubishi 6AT gearbox matching Zhongtai model has been mass production line in the middle of the year, followed by supporting seahorse and other car companies.

The unit price of automatic gearbox is as high as ten thousand yuan, and the gross profit level is relatively high. The sales volume of 6AT automatic gearbox is expected to grow in the year after next, and contribute greater performance flexibility for the company.

The object of benefit from the reform of state-owned enterprises. The controlling shareholder of the company is Changan Group, and the actual controller is China Arms equipment Group Corporation. With the continuous progress of the reform of military uniformed state-owned enterprises, the company is expected to benefit from it.

Main risks faced by rating

1) the sales of automatic gearbox are not as expected; 2) the engine business is not as expected.

Valuation

We expect the company to earn 0.20,0.40 and 0.59 yuan per share respectively from 2017 to 2019. Considering the broad market prospect of 6AT gearbox, it is expected to bring greater profit flexibility to the company, giving the company a price-to-earnings ratio of 25 times 2019 and a reasonable target price of 15.00yuan. Maintain the buy rating.