Hongdu-1st Take:Loss Stemmed in 3Q16

Minor profit in 3Q16: Hongdu reported a profit of Rmb0.34mn, up from -Rmb4.08mn in 3Q15, and following an 87.8% YoY surge in 2Q16.

    Strength in revenues: The 51.5% YoY surge in 3Q16 was significantly higher thanthe 11.3%/23.1% in 2Q/1Q16, respectively, led mainly by expansion in otheroperating income. This amounted to Rmb1.99bn in 1-3Q16, implying 26.5% YoYgrowth.

    Lower margins: Given a 63.5% YoY cost increase, gross profit declined 27.2% toRmb44.7mn, with GP margin down 6.9ppt YoY to 6.4%. Despite lower G&Aexpenses (-28.3% YoY), operating profit tumbled 48.5% YoY, with OP margindown by 1.7ppt to 0.9%.

    Higher non-operating income: Non-operating income surged YoY to Rmb14.5mnin 3Q16, due mainly to government compensation for plant relocations, whichalso caused a hike in non-operating expense to Rmb19.7mn.

    Lower financial cost: Thanks to lower levels of debt, financial cost dropped by38.3% YoY, supporting the slight turnaround to net profit of Rmb0.34mn.