1H inline; solid EMS orders to drive growth acceleration ahead
1H result largely inline; strong top-line partially offset by surging finance cost
Net profit rose 19% YoY to Rmb101m, on a 36% YoY top-line growth. 1H net profitachieved 19% of our full-year forecast (vs. 1H16: 21%), which was largely inline.Historically, FPI's earnings have been heavily skewed toward 2H, especially in thefirst two years during a five-year-plan period. Strong top-line growth was partiallyoffset by surging finance cost (+174% YoY) as net gearing increased to 27% asof end-1H17 from 9% as of end-2016 likely due to investment associated withPPP projects. For 2Q alone, sales sustained a 36% YoY growth (vs. +34% YoY in1Q), while NP growth visibly moderated to 15% YoY (from 48% YoY in 1Q), largelydriven by a big jump in finance cost.
1H17 review by segment
Environmental monitoring system (EMS): Since 2H16, installation haswitnessed visible acceleration from the customer side, after a slow 1H16(down 2% YoY). In 1H17, sales growth further accelerated to 17% YoY,from 15% YoY in 2H16. According to management, initial feedback fromsales department suggests order flow for EMS was robust in 1H (30%+YoY), which means revenue recognition is likely to further accelerate in2H when installation is completed. This, along with the contribution fromHuangshan PPP projects (NP of Rmb40-50m guided by management) in2H, should drive a strong 2H for EMS segment.
Laboratory analysis equipment: Sales surged 103% YoY in 1H, mainlydriven by the consolidation of Anpel's accounts in 1H17. Addingback Anpel's revenue for 1H16, sales of laboratory analysis equipmentincreased 7% YoY on a like-for-like basis.
Highlights for other segments: Sales of industrial process analysiswere down 3% YoY in 1H, as downstream verticals are mainlytraditional heavy industries (mainly metallurgy, petrochemical, etc.).Water conservancy water intelligent system was up 16% YoY while otherbusiness (environment governance, etc.) were up 57% YoY.
Maintaining Buy; risks
We retain our estimates post 1H results. We keep our DCF-based target price ofRmb45 (WACC: 8.5% and TGR: 2%) unchanged and maintain Buy. The valuationlooks compelling at 20x 2018E P/E, against 30% EPS CAGR over 2017-19. Keyrisks: slower-than-expected EMS growth and poor execution of investments.
