Despite the difficult market environment, Weisheng Group showed solid revenue growth and improved profit margins in the first half of 2018. The year-on-year decline in overall net profit was due to a sale gain of 110 million yuan in the first half of 2017. For some investors, the company's overall 2018 interim results may not be satisfactory, but we believe that the results remain robust due to delays in export shipments and changes in State Grid rules for the recognition of ADO product revenue during the period. We believe that the market is worried about the future of Weisheng because State Grid reduced the purchase of electricity meters in 2017 and 2018 and limited the growth of Weisheng. However, the company's operating performance continues to recover. We also believe that energy and power reforms will provide growth momentum for Weisheng in the medium to long term. The potential spin-off of the company's communications and fluid AMI businesses is the catalyst for the stock price, but the timing has not yet been determined at this stage. We speculate that Weisheng may choose to list its communications and fluid AMI business on the HKEx. Our view of Weisheng Holdings is still positive because we believe that the company can continue to maintain steady growth in the face of adversity, and the upgrading of transmission standards should drive the next phase of growth. We maintain our buy rating with the latest target price of HK $4.82, lower than the previous target price of HK $5.05, based on 14 times 2018 price-to-earnings ratio, mainly due to post-earnings adjustments.

Investment highlight

Net profit rose sharply in the first half of 2018 compared with the same period last year. Weisheng's net profit in the first half of 2018 fell 19.5 per cent to 137.4 million yuan from a year earlier, thanks to a sale gain of 110 million yuan in the first half of 2017. Excluding the impact of the proceeds from sales, Weisheng's recovery continues to make progress. Turnover in the first half of 2018 was 1.6549 billion yuan, an increase of 16% over the same period last year, which is about 49% of our previous full-year forecast. In the first half of 2018, electric power AMI revenue rose 29 per cent year-on-year to 896.3 million yuan, while communications and fluid AMI revenue rose 35 per cent to 503.2 million yuan in the first half of 2018. However, ADO revenue fell 28 per cent year-on-year to 258.2 million yuan. The company's gross profit margin for the first half of 2018 was 30%, up from 29.3% in the first half of 2017 and higher than our previous forecast of 29.7% for the whole of 2018. The company's net debt is RMB 142.5 million, which is only a seasonal problem, and the company will enter the cash recovery cycle in the second half of the year. The year-on-year improvement in gross margin was due to a year-on-year increase of 3 percentage points in the communications and fluid AMI business (expected to be spun off) and ADO business. Weisheng's operating results in the first half of 2018 were affected by a) delays in export shipments and b) changes in State Grid's revenue recognition rules for ADO products. According to our understanding, the influence of these factors is fading. Weisheng's orders-on-hand are RMB 2 billion, which will support turnover growth in the second half of 2018. The company has successfully identified growth drivers to offset the impact of reduced procurement by State Grid. We expect Weisheng to continue to maintain steady growth in the next few years.

The momentum for long-term growth is still there. We believe that the development of the energy Internet will create a demand for high-end power distribution and transmission equipment (hardware and software). Power reform is another key development of State Grid and Southern Power Grid, which will bring upgrading demand for distribution equipment. Weisheng launched NB-IoT water metering products in some cities in the first half of 2018. We believe that if State Grid does not specify the scale of investment in the energy Internet and the upgrading of electricity demand, the market is unlikely to revalue Weisheng. However, since the power grid is one of China's major infrastructure areas, we do not rule out the possibility that the Chinese government will accelerate grid investment to boost economic growth, which will be a catalyst for power equipment manufacturers such as Weisheng.