Chengfa Tech:3Q16Results,Positive GP Expansion Offset by Impairment Losses and Financial Expenses

Bottom-line weakness: Chengfa Tech’s 3Q16 net profit dropped by 20.8% YoY toRmb8mn, weakening from -1.4% YoY in 2Q16. Thanks to strong 1Q16 turnaround,the aggregate profit for 1-3Q16 still improved 22.1% YoY to Rmb40mn,accounting for 62.3% of our full-year estimate. The 3Q16 profit decline wasmainly led by 1) Rmb19mn inventory impairment provision and 2) a surge infinancial expenses (+261.5% YoY) to Rmb19mn due to less forex gains from USDappreciation, we think.

    Strong GP growth: Despite slowing revenue growth at 7.7% YoY in 3Q16 toRmb547mn, vs. 11.0%/10.7% YoY in 1Q/2Q16, gross profit rose significantly, by34.7% YoY, with 3.9ppt GP margin expansion, courtesy of limited cost increase atonly 2.8% YoY.

    Positive outlook with uncertainties: While we are positive on better GP marginbrought by the new engines (WS-18), net earnings remain vulnerable to the highfinancial expenses and the risk of inventory impairment. Without any superearnings recovery or meaningful asset injections, it is difficult to justify the highvaluation at 104x 2017e P/E, we think.