Net profit for the first half of 2019 was flat year-on-year to RMB 31 million. The company's revenue, gross profit and net profit in the first half of 2019 decreased by 21.8%, 9.9% and increased by 2.2%, respectively. The performance during the period fell short of our expectations. Revenue from thermal power equipment and power plant projects, which accounted for 73% of total revenue, fell 29.2% and 25.7% year-on-year. The consolidated gross margin increased 1.8 percentage points to 13.7% year-on-year during the period, mainly due to a recovery in gross margin in the thermal power equipment sector. New orders during the period reached RMB 6.133 billion, a year-on-year decrease of 29.1%. New overseas orders contributed RMB 340 million during the period, an increase of 39.9% over the previous year.

The company's privatization plan officially failed after not obtaining the required acceptance letter from the shareholders for the acquisition. At the end of the extended delivery date (that is, July 19, 2019), the Hardian Group still lacked 1.68% of valid acceptance letters to privatize Harbin Electric. We believe that the failure of this privatization is mainly due to the low tender purchase price of HK$4.56 per share, which is only equivalent to 0.5 times the company's net market ratio in 2018. We are hopeful that the company will re-launch an updated version of its privatization plan in the future.

We maintained our “collected” investment rating for the company but lowered its target price to HK$2.70. As the company's gross margin is recovering and in-depth reforms are expected to be introduced, our adjusted earnings per share forecast for 2019 to 2021 is RMB 0.057 /RMB 0.133 /RMB 0.218 respectively. The new target price of HK$2.70 is equivalent to 18.0 times/10.9 times the price-earnings ratio of 2020 to 2021 or 0.3 times/0.3 times/0.3 times the net price-earnings ratio from 2019 to 2021.