The 1H18 performance fell short of expectations, and Connie Mechatronics announced 1H18 results: operating income was 1.81 billion yuan, up 80.7% year on year, mainly due to the merger of Longxin Technology; net profit of 61 billion yuan, a year-on-year decrease of 628.5%; corresponding to EPS, was -0.61 yuan. The sharp shift in profit was mainly due to Liao Liangmao, the controller of Longxin Technology, in violation of external guarantees, which caused difficulties in cash flow. The parent company had already accumulated debts of 490 million yuan and prepared bad accounts receivable of $370 million. Gross margin declined; period expense ratio declined; operating cash flow deteriorated. The consolidated gross margin of the 1H18 company fell 4.3ppt to 32.5%, because the cost of the main rail transit business was higher than the same period last year. The company's expense ratio improved in the first half of the year, and the sales/management/finance expense ratio decreased by 0.8/1.9/0.9ppt year on year. However, due to large losses due to accrual of debt and bad debt provisions, the company's net interest rate was -6.3%. Cash outflow from operating activities was 590 million yuan, an increase of 430 million yuan over the same period last year, mainly due to the sharp increase in the balance receivable of Longxin Technology and large capital restrictions. Development trend The main business of the parent company has maintained a good growth trend. In the first half of 2018, the company's rail transit business increased 19% year on year, and new energy vehicle parts increased 160 percent year on year; with the exception of Longxin Technology, the company achieved net profit of 130 million yuan, an increase of 11.6% year on year. Furthermore, as of June 2018, the rail transit business had on-hand orders of 2.93 billion yuan, an increase of 31% over the previous year, and the growth of the company's main business is guaranteed throughout the year. Focus on the business risks of Longxin Technology and the risk of impairment of goodwill. Affected by the funding freeze, Longxin Technology achieved net profit of about 120 million yuan in the first half of the year (not considering asset impairment losses), and it is expected that it will be difficult to fulfill the annual performance promise of 308 million yuan. On June 26, we published the report “Shareholders' Illegal Guarantee Occupies Capital, and Longxin Technology's Operation Causes Uncertainty”, which downgraded the company's rating to neutral. Currently, the risk posed by the illegal guarantee has not been completely released. The company has formed a goodwill of 2.27 billion yuan due to the merger and acquisition of Longxin Technology, and there may be a risk of impairment at the end of the year. Profit forecast We lowered our 2018/19e profit forecast by 140%/14% to -0.23/0.60 yuan from $0.57 /0.70 due to the company's performance falling short of expectations and large debt and bad debt provisions. The valuation and current stock price of the proposed company correspond to 8.4 times P/E in 2019 (2018 profit is negative). Since we lowered our profit forecast for 2019 by 14%, and the company's potential risk of impairment of goodwill caused further downward pressure on valuation, we lowered our target price by 32.5% to 5.40 yuan from 8.00 yuan, corresponding to 9 times the P/E in 2019, with 6% room for improvement and remaining neutral. Risk significantly impairs goodwill.