1H18 results are in line with expectations Dinghan Technology announced 1H18 results: operating income of 593 million yuan, an increase of 25.1% year on year; net profit attributable to the parent company was 29 million yuan, up 283.2% year on year, corresponding to earnings of 0.05 yuan per share. 2Q18 revenue was 340 million yuan, up 34.1% year on year; net profit to mother was 31 million yuan, up 590.3% year on year. Revenue picked up and gross margin declined. 1H18 vehicle/ground/information technology and safety inspection revenue was 298/1.90/101 million yuan, an increase of 8.7%/2.2%/784.85% over the previous year. The sharp increase in informatization and safety inspection revenue was mainly due to the merger of consolidated reports into subsidiaries SMA and Qihui Electronics. The company's overall gross profit margin was 30.2%, down 3.7 ppt year on year, mainly because the gross profit of Qihui Electronics and SMA products was lower than the company's original products, and the gross profit of vehicle equipment fell 7.4ppt. Expenses increased, and the net profit margin reversed at a low base. Due to the merger of SMA and Qihui Electronics, the company's sales/management expenses increased by 1.1/1.6ppt; the company's financial expenses ratio increased by 0.8ppt due to the tightening of the financing environment in the first half of 2018; 2Q/1H18 net profit increased 7.5/3.0ppt. The 2Q18 company's three-rate rate decreased by 7.1ppt month-on-month, and efficiency improved significantly. The development trend policy supports the downturn in the rail transit industry. At the beginning of 2018, the Railway Administration set a national railway fixed asset investment of 732 billion yuan. Recently, the National Assembly and the Political Bureau of the Central Committee revisited infrastructure investment. Increasing railway investment is expected to become an important focus for “stabilizing the economy” in the second half of the year. Railway investment will exceed 800 billion yuan throughout the year, directly benefiting the company's vehicles and ground products. Collaboration with acquired subsidiaries has deepened, and there are plenty of orders in hand. The company's integration is deepening: the localization of the subsidiary SMA power supply technology is progressing smoothly and is expected to achieve break-even in 2018; Qihui Electronics' smart station project is rapidly expanding, covering more than 5 stations, and is expected to contribute 60 million yuan in profits. In the first half of the year, the company's on-hand orders amounted to 2,248 billion yuan, an increase of 36.4% over the previous year, providing a guarantee for 18-year results. The profit forecast was affected by the reduction in railway equipment procurement prices and the merger of subsidiaries. We lowered our 2018/19e profit forecast by 23%/13% from 0.48/0.51 yuan to 0.32/0.42 yuan. Valuation and recommendations The company's current stock price corresponds to 25.0/19.5 times P/E in 18/19. We maintain recommended ratings. Considering the reduction in profit forecasts, we lowered our target price by 20% from 11.89 yuan to 9.55 yuan, corresponding to 30/23 times P/E in 18/19, with 18% room compared to the current stock price. The consolidation of venture subsidiaries fell short of expectations.