1H18 performance is lower than expected.

Aotejia announced its mid-2018 results: operating income was 2.22 billion, down 17.4% from the same period last year; net profit attributable to the parent company was 240 million, up 27.2% from the same period last year; net profit from non-parent was 75.573 million yuan, down 58.2% from the same period last year; corresponding to earnings per share of 0.08 yuan. Due to the decline in revenue and profits in the main business of compressors, the company's performance was lower than expected.

Trend of development

The performance of 2Q18 improved slightly compared with the previous month, and the performance of demolition subsidies increased. 2Q18 achieved revenue of 1.17 billion,-10.4% quarter-on-month and 11.3% year-on-year, respectively. The single-quarter gross profit margin reached 18.5%, an improvement compared with 1Q. We believe that the improvement in month-on-month comes from BYD and BAIC supporting projects, but the improvement is lower than expected. The net profit of 2Q18 belonging to the parent company was 150 million, an increase of 61.3% over the same period last year. The increase in profit mainly came from part of the demolition payment of the Nanjing factory, deducting the non-parent net profit of 43.399 million yuan, down 53.3% from the same period last year.

The volume and profit of the main business of compressors have fallen, and the international air-conditioning industry is at a low ebb. Since the beginning of this year, the overall sales of low-displacement models have been under pressure, which is a drag on the company's compressor business. 1H18 compressor sales are 3.4 million units, down 15.8% from the same period last year; compressor revenue was 1.44 billion yuan, down 16% from the same period last year. In terms of profitability, 1H18, the gross profit margin of the compressor business is 20%, a year-on-year decline of 5.3ppt, which we believe is caused by the increase in the price of raw materials, the decline in the company's capacity utilization and the reduction in the price of products. Affected by the replacement of downstream vehicle models, the international revenue of 1H18 air conditioners continued to decline by 32.9% to 490 million.

A number of major supporting projects will be put into production in 2019. In 2017, the company successively won a number of projects such as European MQB project, PSA Europe and Jaguar Land Rover air-conditioning system. Starting from 19 years, these projects will be put into production one after another to help the company out of the trough.

Profit forecast

We raised the 2018 net profit by 34.8% (the income from demolition subsidies, which affects the net profit for the whole year by about 350 million) to 518 million yuan, and lowered the 2019 net profit forecast by 33.7% to 259 million yuan.

Valuation and suggestion

The company's latest closing price is 3.62 yuan, corresponding to 21.9x and 43.7xP/E in 2018 and 2019, respectively. We maintain a neutral rating, with the target price downgraded by 17% from 4.2 yuan to 3.5 yuan, corresponding to 20.6 picks in 19 years and 43.8 times Pmax E respectively, which is 3.3% lower than the current share price.

Risk

The pledged shares of major shareholders have been frozen; industry sales have fallen.