1H18's performance is in line with expectations. Taiyo Electric announced its 2018 half-year results: operating income of 4.232 billion yuan, up 6.71% year on year; net profit attributable to the parent company was 111 million yuan, down -23.60% year on year, corresponding to earnings of 0.05 yuan per share. The margin of change in net profit attributable to mother is in line with the range announced during the company's previous 1Q results report. At the same time, the company announced that the estimated change in net profit to mother for the first three quarters was -35% to +15%, corresponding to 140 to 250 million yuan. Development trends The growth rate of the main business lags behind the market. According to data from CICC Home Appliance Group and the China Automobile Association, retail sales of 1H18 air conditioners and cumulative sales of new energy vehicles increased +12%/111.5% year on year, while the company's air conditioning motor revenue fell -2.01% year on year, and new energy powertrain system revenue increased +59.08% year on year, both outperforming the market. The gross margin of various businesses declined, and the profitability of new energy products declined. The company's 2Q18 gross profit margin was 16.2%, a 15-year low. Among them, the 1H gross profit margin of new energy power systems was 16.67%, down 3.27ppt from the same period last year due to factors such as declining subsidies for new energy, significant demand for price reduction from downstream enterprises, and rising bulk prices such as copper. Without considering the positive fluctuations brought about by 2Q exchange gains and losses, the company's 2Q net profit declined by about -43.2% year on year. Complete the layout of the weak mixed industrial chain, and focus on both weak mix/strong mix. Looking ahead, customers such as SAIC Roewe, Great Wall Motor, and Dongfeng Renault that the company actively developed during the reporting period will help to consolidate strong mixed market share other than existing customers such as Chery and Zhidou. The 500,000 48V BSG system production line has been built to further improve the industrial chain layout in the weakly mixed sector and is expected to become a pillar of future growth. Profit forecast Due to the company's revenue in the field of air conditioning fans and new energy vehicles falling behind the market growth rate, the profitability of various businesses declined. We lowered the 2018/19e profit forecast per share from 0.22/0.31 yuan to -43.6%/-45.2% to 0.13/0.17 yuan. Valuation and recommendations The company's current stock price corresponds to 34.6/26 times P/E in 18/19, maintaining the recommended rating, but due to the expected drastic reduction in earnings per share, we lowered the target price by 38% from 8.6 yuan to 5.3 yuan, which corresponds to 41.9/31.5 times P/E in 18/19, with 21% room compared to the current stock price. The risky fuel cell and new energy operating platform business fell short of expectations; the 48V light hybrid project fell short of expectations.