Foreign exchange losses have dragged down earnings growth. Public utilities recorded revenue of RMB 4.742 billion in 2017, an increase of 3.8% over the previous year. The main business remained steady. Revenue growth was mainly driven by a 3.4% increase in revenue from the pipeline gas business. At the same time, significant increases in water treatment business volume and treatment prices led to a 16.2% year-on-year increase in water treatment business revenue. Gas supply continues to be the main source of revenue, accounting for 97.9% of total revenue. Other than management expenses, the company's main operating expenses are in line with expectations. In 2017, the company confirmed that foreign exchange losses of RMB 113 million were included in management expenses. Management explained that the RMB appreciated by more than 7% during the year, and capital raised in Hong Kong dollars after listing caused large foreign exchange losses as a result. Investment income rose 231.2% year over year to 368 million yuan in 2017, offsetting the impact of foreign exchange, while profit sharing by associated companies fell 16.7% year over year to 418 million yuan. In 2017, Volkswagen achieved net profit of RMB 474 million, a year-on-year decrease of 13.4%. Excluding foreign exchange losses, we estimate core profit to be RMB 587 million, an increase of 7.2% over the previous year.

Changes in accounting standards have accelerated the disposal of financial assets. Volkswagen Public Utility and its main affiliate, Public Transport (600611 CH), both confirmed significant increases in investment returns in 2017. Management explained that according to the requirements of the Ministry of Finance, changes in accounting standards for confirming the value of financial assets will be implemented for A+H shares starting in 2018, and for A-share companies in 2019. Changes in relevant accounting standards will have a clear impact on the valuation of some of the company's financial assets. At the same time, changes in the assessed value of financial assets will also bring significant profit fluctuations. Based on this, the company began speeding up the disposal of some financial assets on both mass public and mass transportation platforms. The sale of financial assets enabled the company to obtain significant investment income and profit growth for some of its associated companies in 2017. Looking ahead to 2018, we expect that investment returns for mass transportation will be maintained, while investment returns for mass transit will return to normal levels.

Increase your level of leverage and find more investment opportunities. The company made several notable investments in 2017, including 1) participation in Grand Gaming's A-share listing restructuring project, and 2) consumer electronics unicorn DJI Innovation. We believe that the return on investment in the relevant projects will be released over the next 2-3 years. In addition to short-term equity projects, the company has been actively seeking opportunities for long-term utility projects in countries along the way. Management revealed that the company has received approval for an overseas investment quota of 37.5 million US dollars and invested the first 5 million US dollars in gas utility projects in southern Vietnam near Ho Chi Minh City. Furthermore, in 2017, the company raised the level of leverage by issuing a portfolio of short-term and long-term bonds to raise capital for potential investments. Volkswagen's net debt ratio rose from 11.4% in 2016 to 33.5% in 2017. We believe it will remain healthy. The moderate increase in the debt ratio enabled the company to hold RMB 4.9 billion in cash at the end of 2017, which is enough to handle large-scale investments or acquisitions.

Maintain holding ratings. Based on significant fluctuations in investment income and equity earnings, we lowered our 2018/2019 forecast earnings by 22.6/ 17.0%, respectively, to RMB 49/53 million. Our segment valuation plus total target price was also reduced from HK$3.84 to HK$3.37 based on the peer valuation situation of each segment. We hold a rating for public utility maintenance.