1H19 performance is in line with our expectations

The company announced 1H19 results: revenue of 4.75 billion yuan, an increase of 12.1% over the same period last year; net profit of 270 million yuan, an increase of 146.8%, corresponding to 0.12 yuan per share, an increase of 140.0% over the same period last year. Deduction of non-return net profit of 52.904 million yuan, in line with expectations.

Trend of development

The increase in net profit from homing comes mainly from the sale of shares in joint ventures. The net profit of company 2Q is 290 million yuan in a single quarter, and 79.24 million yuan after deducting the net profit in a single quarter. The main non-recurrent profit and loss comes from the investment income of 250 million yuan obtained from the transfer of its 50% stake in the associated enterprise PateLai.

The cash flow of operating activities fluctuates greatly in a single quarter, and the operating capacity needs to be improved. Company 1Q recorded a net loss of 26.33 million yuan and operating cash flow of 330 million yuan, which was due to the increase in cash received corresponding to the expansion of sales scale. 2Q under the condition of deducting the non-return net profit, the operating cash flow dropped sharply to-170 million yuan, which was due to the fact that the cash spent on the purchase of goods did not change significantly, but the cash received by sales decreased by 20.6% month-on-month. And the increase in employees' wages (the company's 2Q management expenses increased by 60.6% compared with the same period last year). There is a big difference between the cash flow of operating activities and the net profit of deducting non-return, and the company also needs to strengthen the matching of upstream and downstream account periods and cost control.

It is not a blessing to stop the acquisition of Shanghai reshaping. The company plans to use 260 million yuan in cash to acquire a total of 14.6% of the hydrogen fuel-related enterprise reshaping group held by affiliated enterprises. Regulators are highly concerned and have twice high standards required for relevant disclosure. As the reshaping group requires confidentiality of raw material prices, costs, fees and customer transactions, the company decided to terminate the transaction. Previously, Shanghai Electric Drive and Beijing Petra, which were acquired by the company, respectively set aside 2.15 billion yuan for goodwill impairment in 2018, while reshaping Group had a revenue of 390 million yuan and a net loss of 5.363 million yuan in 2018, which also lacked profitability. We believe that the termination of the acquisition of the reshaping Group by listed companies may be more beneficial to the majority of shareholders.

Profit forecast and valuation

As a result of the investment gain of 250 million yuan from the transfer of 50 per cent of its stake in the associated company Pat call driver by 1H19 Beijing Petra, we raised our 2019 net profit by 60.0% to 392 million yuan; we simultaneously lowered our 2020 net profit by 8.5 per cent to 253 million yuan out of concern about the continued decline in motor's gross profit margin. The current stock price corresponds to the price-to-earnings ratio of 24.0 times / 37.2 times in 2019 / 2020. Maintain a neutral rating and a list price of 3.10 yuan, corresponding to 18.7 times 2019 price-to-earnings ratio and 29.0 times 2020 price-to-earnings ratio, which is 21.9% lower than the current stock price.

Risk

The development of new energy vehicles is not as expected, and the landing of hydrogen energy technology is slow.