Societe Generale issued a profit warning that net profit in 2017 is expected to fall sharply, by more than 70%. We downgrade our EPS forecast as follows: from 0.32 yuan to 0.16 yuan in 2017 (down 75.8% from the same period last year), from 34 yuan to 0.21 yuan in 2018 (up 31% from the same period last year), and from 37 yuan to 0.28 yuan in 2019 (up 29% year on year). Taking into account the non-operating factors and the fact that the company redeemed most of the convertible bonds during 2017, we raised our target price from HK $2.29 to HK $2.60. The current price is still 18.8% downside from the target price, maintaining the reduction of holdings.
Profit warning. The company's net profit fell by more than 70% in 2017 mainly due to the following reasons: first, the company recorded an one-time disposal gain of 144 million yuan from the sale of its photovoltaic power station in 2016, compared with a year-on-year decline in the profit from the sale of 2017 photovoltaic power station. In addition, the company issued US $260 million of bonds and US $160 million of preferred notes in February and October 2017, respectively, resulting in additional interest expenses. At the same time, in order to hedge the exchange rate risk of RMB against the US dollar, the company has signed some cross-currency interest rate swap contracts with banks, while the appreciation of RMB against the US dollar has led to a decline in fair value and an increase in settlement losses. Finally, the decline in fair value income and the increase in accounting losses caused by the repurchase and redemption of convertible bonds led to a decline in profits to a certain extent.
The main business is growing steadily. Considering the steady growth of several major business sectors of the company, including photovoltaic power station EPC, traditional curtain walls and green buildings, we believe that the company's revenue will continue to grow steadily in 2017. We forecast a gross margin of about 20.7% in 2017 (21.7% in 2016), and we expect revenue to grow by 4% year-on-year in 2017.
Maintain the reduction of holdings. We downgrade our EPS forecast as follows: from 0.32 yuan to 0.16 yuan in 2017 (down 75.8% from the same period last year), from 34 yuan to 0.21 yuan in 2018 (up 31% from the same period last year), and from 37 yuan to 0.28 yuan in 2019 (up 29% year on year). We raised our target price from HK $2.29 to HK $2.60 (corresponding to 10.7 times 18-year PE,0.4 and 18-year PB). The current price is still 18.8% downside from the target price, maintaining the reduction of holdings.
