Net profit fell 32.4% from a year earlier. Volkswagen announced that revenue in the first half of 17 fell 2.5 per cent year-on-year to 2.48 billion yuan. The decline in revenue was mainly due to the decline in sales revenue from the gas business, which accounted for 93.8% of the total revenue in the first half of the year. The gross margin trend was contrary to the revenue trend, rising 12.7% year-on-year to 450 million yuan. Gross profit margin rose 2.4 percentage points from 15.5% in the first half of 16 to the first half of 17, indicating that the company continued to improve its main business gross margin in the first half of the year. The profit sharing and investment income of the associated company fell by 29.6% and 16.2% respectively, mainly due to the short-term fluctuation of the company's non-main business portfolio compared with the same period last year. At the same time, management fees rose 28.6% due to the appreciation of the RMB and the exchange gains and losses brought about by large financing in the Hong Kong stock market last year. Overall, the company achieved a net profit of RMB 200 million in the first half of the year, down 32.4% from the same period last year.

The gas business is steadily improving. Although the sales revenue of gas is down 2.2% from the same period last year, we believe that the gas business unit is still on the track of steady improvement. The decline in sales revenue was mainly due to a decline in gas pipeline construction and sales of related products, while pipeline gas sales recorded a 3.5% year-on-year increase in the first half of the year.

In addition, the gas business segment achieved a gross margin of 12.7% in the first half, an increase of 2.7 percentage points over the same period last year, indicating that the operating efficiency of the business segment as a major part of sales revenue is improving. The company revealed that the gap between gas production and sales narrowed in the first half of the year, making the profit contribution of the gas sector to an all-time high. Compared with the difference between production and sales in the gas industry, we believe that Volkswagen's gas business sector still has the potential to continue to improve.

The return on investment has experienced short-term fluctuations. The company received less dividend distribution income and associated company profit sharing in the first half of the year, resulting in large fluctuations in this part of the earnings compared with the same period last year. The company revealed that the fluctuation was mainly due to the withdrawal of fewer direct investment projects in the first half of the year. According to the statistics of Qingke, the company's main venture capital consortium, Deep Venture Capital, obtained an IPO exit market value of RMB 2.69 billion in the first half of the year, which is 9 times higher than the initial project investment. Based on the fact that the acceleration of A-share IPO issuance can have more opportunities for project exit, we expect the profit volatility of the venture capital side to return to normal throughout the year.

Increase leverage for overseas acquisitions. In the first half of the year, the company increased short-term debt financing through overseas platforms. Management intends to gradually increase the company's leverage for potential overseas mergers and acquisitions in order to improve shareholder returns. With regard to the recent development of overseas mergers and acquisitions, the company announced in July that it would participate in the bidding of European utilities.

At present, the share price has reflected a reasonable valuation. Based on the optimistic expectation of a stable acceleration in China's IPO market, we expect full-year earnings to catch up with our full-year forecast for the company in the second half of the year. With reference to the latest peer valuation, we extend the segment plus valuation to 2018. Our target price for the company has been lowered from HK $3.84 per share, corresponding to 15.3 times the 2018 forecast price-to-earnings ratio. Based on the current valuation, we believe that the share price reflects the reasonable value of the company. Downgrade to hold.