Incident: Earlier this week, we had a conversation with the management of Harbin Electric. Among them, we discussed the company's profit prospects and corporate strategy for Harbin Electric. Overall, management believes that the core thermal power equipment business (accounting for 40% of total revenue) is still at risk of decline, so management is cautious and anticipates that there is a risk that its profit will decline further after 2018. During the “13th Five-Year Plan” period, one of the central government's goals is to reduce coal-fired power plants and promote clean energy, thereby reducing air pollution. Although the country's investment in natural gas and nuclear power generation continues to increase, it can only partially offset the impact of the company's declining demand for coal-fired power equipment business. If one simply considers the company's poor profit prospects, stocks seem unattractive, but since the net market ratio is only 0.4 times, from the perspective of state-owned enterprise reform, stocks seem worth paying attention to. In particular, state-owned enterprise reform has accelerated in recent months. Good performance in the first half of 2017: the company's total revenue for the first half of 2017 increased 13.4% year over year (year over year increase of 23.1% in 2016). With the exception of the hydropower equipment business and ancillary equipment business, all other businesses recorded revenue growth. Exceeding market expectations, the thermal power equipment business, which is the core business, continued to record revenue growth in the first half of '17, up 15.0% year on year (2016: up 30.4% year on year). Net profit for the first half of the year was basically the same. The company's gross margin increased by 0.4 percentage points year-on-year during the period, mainly due to improvements in operating leverage, while operating profit margins remained stable. The company's sales, general and management costs declined during the period, offsetting the impact of asset impairment and other increases in non-operating expenses. As financing costs rose and actual tax rates declined, net profit for the first half of '17 was basically the same. The thermal power equipment business, which is the core business, is at risk of decline: even if revenue growth in the thermal power equipment business rebounds in 2016 and the first half of 2017, there is a risk of further decline. In the long run, the number of new thermal power installations in China will maintain a downward trend. During the “13th Five-Year Plan” period, one of the central government's goals is to reduce coal-fired power plants and promote clean energy. The goal of the central government's “13th Five-Year Plan” is to achieve a compound annual growth rate of 5.5% in power generation, compared to 9.5% during the “12th Five-Year Plan” period. Furthermore, the central government aims for non-fossil fuel energy consumption to account for 15% of China's total energy consumption by 2020 and 20% by 2030. In 2015, China's non-fossil fuel energy consumption accounted for 12% of total energy consumption. Harbin Electric is expected to benefit from the central government's promotion of natural gas and nuclear power generation during the “13th Five-Year Plan” period. Although the country's investment in natural gas and nuclear power generation continues to increase, it can only partially offset the impact of the company's declining demand for coal-fired power equipment business. The gas turbine and nuclear power equipment business accounts for less than 10% of the company's total revenue. Moreover, even if the central government promotes investment in nuclear power, the progress of approving new projects will depend on the maturity of third-generation nuclear power technology, which is likely to happen after 2017. As there will be a time lag between starting a new project and purchasing equipment, the increase in equipment demand will occur even later. The reform of state-owned enterprises brings hope: given that the coal-fired power generation industry is in short supply, the market has always expected that the National Development and Reform Commission or the State Assets Administration Commission may carry out state-owned enterprise reforms on three national power generation equipment companies: these three are Shanghai Electric, Dongfang Electric, and Harbin Electric. Up to now, the National Development and Reform Commission has listed the power generation industry as one of the first batch of mixed reform pilot industries, and the parent company of Harbin Electric is one of the state-owned enterprises in this pilot program. Given the acceleration of state-owned enterprise reforms in the railway and telecommunications industries in recent months, the National Development and Reform Commission and the State Assets Administration Commission are likely to speed up state-owned enterprise reform in the power generation industry in the fourth quarter of 2017. We have noticed that Harbin Electric recently announced the issuance of additional domestic shares to the parent company. The total subscription cost is approximately RMB 1.27 billion, or HK$1.51 billion, or 30% of the current market value. According to the initially determined subscription price, after the additional issuance is completed, the parent company's shareholding will increase from the current 50.9% to over 60%. The capital raised from this additional issue will be used to 1) invest in a joint venture with GE in the gas turbine business; and 2) develop the nuclear power equipment business. Valuation: The stock price of Harbin Electric rose to a high level in mid-April, boosted by better-than-expected performance in 2016. Since then, the company's stock price has been on a downward trend, as the market is cautious about the company's medium- to long-term profit growth prospects. The long-term downward trend in the company's core thermal power generation equipment business may put pressure on the company's profit growth. If additional shares are taken into account, the current price-earnings ratio of the stock in 2017 is 8.3 times, the price-earnings ratio in 2018 is 9.9 times, and the historical average price-earnings ratio is 15.0 times. The company's net market ratio in 2017 and 2018 was 0.4 times, while the historical average net market ratio was 0.9 times. Considering earnings growth and poor prospects for return on equity in 2018, its stock price is likely to continue to be pressured. If its parent company makes more moves to reform state-owned enterprises, the company is likely to be revalued.