Net profit fell 75.3% in the first half of 2018 compared with the same period last year, in line with the profit warning. Revenue, gross profit and net profit fell 24.1%, 28.1% and 75.3% respectively in the first half of 2018 compared with the same period last year. The main reasons for the decline in earnings during the period were lower income and lower gross profit margin. Gross profit margin fell 0.7 percentage points year-on-year to 11.9% during the period, mainly due to a decline in gross margin in the core business segment. Overseas income contributed 29.9% of the revenue during the period and reached RMB 3.8 billion, down 42.8% from the same period last year.

We expect more reforms to be introduced to revitalize Harbin Electric. The decline in profits in recent years has been mainly affected by the domestic downward trend in thermal power. We expect the company's transformation and more reforms to be launched to reverse the company's downward trend.

We adjusted our profit forecast after disappointing interim results. We expect the company's revenue to decline 22% year-on-year in 2018, but will remain stable in 2019 and 2020. Gross profit margins are expected to reach 13.7 per cent / 13.9 per cent / 14.1 per cent respectively between 2018 and 2020. Our adjusted net income per share from 2018 to 2020 is RMB 0.071, RMB 0.109 and RMB 0.120 respectively.

We lowered the company's target price to HK $3.00 but maintained the "collection" investment rating. Our new target price is equivalent to 0.3 times 2018 / 2019 market-to-book ratio.