Harbin Electric Group, the parent company, offered to acquire all the issued H shares of Harbin Electric at HK $4.56 per share. Harbin Electric Group and Harbin Electric jointly announced that Harbin Electric Group has made a voluntary conditional cash offer and will acquire all issued Harbin H shares at HK $4.56 per share. The offer price of HK $4.56 per share represents a premium of about 82.40 per cent to Harbin Electric's closing price of HK $2.50 per share on December 17, 2018, the last trading day before the suspension. The maximum consideration for the H-share offer is about HK $3.0806 billion, which will be paid in cash.

Harbin Electric in the face of the downward impact of China's thermal power industry, the proposed merger with the parent company or its best way out. Due to the change of domestic energy development strategy, the proportion of new installed capacity of local thermal power has decreased year by year. Harbin Electric is mainly engaged in the production of domestic thermal power and hydropower equipment, which is greatly impacted by the current market environment and is facing more and more pressure. Net profit in the first half of 2018 and 2017 fell by 75.3% and 53.0% respectively compared with the same period last year.

We maintain our investment rating on the company's "collection" and raise our target price to HK $4.56. In view of the large acquisition premium given to the market by Harbin Electric Group, we expect that the tender offer for H shares of Harbin Electric, the delisting of Harbin Electric and the merger of Harbin Electric and Harbin Electric Group will be successfully completed in the first half of 2019. The target price of HK $4.56 is equivalent to 14.3 per cent of the company's closing price on December 31, 2018 and equivalent to 0.5x / 0.4x / 0.4x 2018 to 2020.