Glarun Technology Alert:1H16NPAT +47%yoy;maintain Hold on fair valuation

1H16 result inline; solid fundamentals but fair valuation

    Glaruntech’s 1H16 earnings (+47% yoy) achieved 34% of our full-yearestimate, largely inline with the historical average. Strong growth momentumin the radar segment and sustained margin expansions are the key positivehighlights. With solid organic growth prospect and significant asset injectionpotential, we continue to take a constructive view on the company’sfundamentals. That said, current valuation appears to have priced in mostpositives, hence maintain Hold rating.

    Strong radar sales and sustained margin expansions

    Sales of radar segment surged 64% yoy in 1H16, driven by continueddemand strength in ATM and weather radar. Rising involvement inintegrated projects also allows the company to expand its blended GPmargin by 4.2ppt yoy and 3.5ppt hoh to 38.6% in 1H16.

    Military radar component sales also rose 20% yoy in 1H16.

    On the other hand, Rail segment was slow in 1H, with sales down 20%likely driven by slower project delivery.

    2Q16 NPAT came in at Rmb60mn, up 39% yoy on a 20% top-line growth.

    Margin further increased by 6ppt yoy and 2.3ppt qoq to 39.4% in 2Q16.

    Preferred A-share play for the asset injection theme

    We highlighted in our recent sector note (click here) that Glaruntech will likelybe the key beneficiary of the upcoming research institute reform in China’sdefense sector as such reform, if materializes, would enable sizable assetinjections from its parentco – CETC No.14 Research Institute, which is 10xbigger than the listco in terms of both revenue and profit. On a relative basis,we prefer Glaruntech over AVIC Avionics (both Hold rated, HKD20.33) to playthe research institute reform theme given Glaruntech’s stronger organicgrowth profile.