According to the 2017 report and the first quarterly report of 2018, the company achieved a total operating income of 1.32 billion yuan in 2017, an increase of 25.6% over the same period last year; the net profit belonging to shareholders of listed companies was 130 million yuan, up 11.8% from the same period last year; net profit after deduction was 70 million yuan, down 18.8% from the same period last year; earnings per share are 0.29 yuan, and it is proposed to pay a cash dividend of 0.5 yuan (including tax) for every 10 shares. In the first quarter of 2018, operating income totaled 330 million yuan, an increase of 29.5 percent over the same period last year; net profit belonging to shareholders of listed companies was 20 million yuan, down 14.7 percent from the same period last year; and earnings per share was 0.04 yuan. Due to the decline in gross profit margin, impairment of goodwill and increased R & D costs and other factors, the company's performance was lower than expected. Sales of new energy vehicles continue to grow, and the company's supporting Wuling Geely is expected to continue to benefit. The company has invested heavily in the research, development and manufacture of motor for new energy vehicles, and the thick product is expected to be thin. Affected by factors such as the increase in R & D expenses and the decline in gross profit margin, we downgrade the company's profit forecast and expect earnings per share from 2018 to 2020 to be 0.34,0.41 and 0.54 yuan respectively.

Support the main points of rating

Gross profit margin has fallen, R & D costs have increased, and short-term performance is under pressure. The increase in R & D expenses, impairment of goodwill and foreign exchange losses led to the company's lower-than-expected performance in 2017. Affected by the increase in the price of raw materials and other factors, the overall gross profit margin of the company decreased by 2.0% and 2.7% respectively in 2017 and 2018Q1, and the expense rate was relatively stable during the period. Gross profit margin fell, R & D costs increased, the company's short-term performance is under pressure.

Sales of new energy vehicles continue to grow, and supporting Wuling Geely is expected to continue to benefit. The company's new energy vehicle motor products cover a full range of electric vehicles, such as low-speed cars, logistics vehicles, passenger cars and buses, and have entered the supply systems of Wuling, Geely, Zhongtai, Yuchai and Yutong. The company previously announced Geely orders, supporting Wuling, Geely and other models have been mass production, is expected to promote sustained growth.

Large-scale investment in research and development and manufacturing, new energy vehicle motor accumulation waiting for thin hair. The company plans to raise no more than 410 million yuan to put into the annual production of 350000 new energy vehicle drive motor and electric drive integrated system project, new energy vehicle electric drive system and energy-saving motor research project. On the R & D side, the company has set up a research institute in Shanghai to actively introduce high-end talents to develop high value-added products such as flat copper wire motors and integrated drive systems. On the manufacturing side, the company increases investment in automation equipment to improve production efficiency and product quality. With the rapid growth of new energy vehicle sales, the company has invested heavily in the research and manufacture of new energy vehicle motor, which is expected to be thin and promising.

Main risks faced by rating

1) the development of new energy vehicle business is not as expected; 2) the development of diesel engine electronic control business is not as expected.

Valuation

We expect the company to earn 0.34 yuan, 0.41 yuan and 0.54 yuan per share respectively from 2018 to 2020, taking into account the company's good prospects in areas such as new energy vehicles and motors.