Weisheng Group's 2017 results are in line with our and market expectations, confirming our forecast that the company's operating results will pick up month-on-month and year-on-year in the second half of 2017. At first glance, Weisheng's 2017 performance was not strong because: a) increased costs during the period (spin-off related costs and R & D expenses); b) uncontrolled equity rise (related to the spin-off). We agree that potential changes in smart meter standards have led to a reduction in meter procurement by State Grid, which has led to market concern about Weisheng. This limited Weisheng's growth in 2017 and 2018. However, the company has successfully identified other areas of growth, such as exports, ADO and other meter products, offsetting the decline in State Grid procurement in 2017. We also believe that energy Internet and power reform will bring medium-and long-term growth momentum to Weisheng. The potential spin-off of the company's communications and fluid AMI business is a stock price catalyst, but the actual spin-off time has not yet been determined. We remain optimistic about Weisheng because we believe that the company can still grow in a challenging environment, and the upgrade of power transmission standards should be the driving force for the next round of growth. Weisheng declared a 2017 final dividend of HK $0.24 per share, equivalent to a dividend yield of 5.8 per cent, which should support the share price. We maintain our buy rating with a target price of HK $5.05, based on 13.5 times 2018 earnings.

Investment highlight

Steady recovery in the second half of the year. Weisheng's net profit in 2017 was 301.6 million yuan, down 18.5% from the same period last year, in line with our expectation of 307 million yuan. The turnover in 2017 was 2.928 billion yuan, an increase of 12% over the same period last year and higher than our expected 2.8727 billion yuan. Weisheng reclassifies its business units. Revenue from the communications and fluid AMI business, which is expected to be spun off, rose 51 per cent year-on-year to Rmb755.8 million, driving overall revenue growth. The company's gross profit margin in 2017 was 29%, down 2 percentage points from 31% in 2016 and below our forecast of 30%. Lower sales expenses and financing costs partially offset the decline in gross profit margin. Due to the company's good management of working capital, the company's net cash position increased to 676 million yuan in 2017, up from 590 million yuan in 2016. Weisheng declared a final dividend of HK $0.24, unchanged from a year earlier, equivalent to a dividend yield of 5.8 per cent. Excluding the sale proceeds of Rmb100m in the first half of 2017 and the impact of spin-off related projects (professional fees and non-controlling interests), Weisheng's performance was strong in the second half of 2017. In the second half of 2017, Weisheng achieved a turnover of 1.5004 billion yuan, an increase of 5% over the previous year and a year-on-year increase of 37.5%. Excluding the impact of sales earnings in the first half of 2017, the company's net profit in the second half of 2017 was 130.9 million yuan, up 29.7 per cent from a year earlier and more than 40 per cent month-on-month. Given the decline in grid investment in 2017 compared with the same period last year, Weisheng's 2017 performance was good. The company has successfully identified growth drivers to offset the impact of reduced procurement by State Grid. By optimizing sales and marketing strategies, Weisheng also gained market share in the Chinese market in 2017.

The long-term growth momentum is still there. We believe that the development of the energy Internet will lead to demand for high-end power distribution and transmission equipment (hardware and software). Power reform is another major development of State Grid and Southern Power Grid, which will bring demand for upgrading distribution equipment. We believe that the market is unlikely to revalue Weisheng under the unclear scale of energy Internet investment and the upgrading of grid demand.

As the company announces its operating results for 2017 and penetrates into new market segments, it should lay the foundation for investors to re-evaluate Weisheng.