Dahua Alert:1H17preliminary results in line

1H17 EPS of CNY0.34 in line; government grant accounting re-classification

    Dahua announced preliminary 1H17 EPS of CNY0.34, +36%YoY. 1H17 revenue growth momentum accelerated to CNY7.5bn, +51%YoY, driven by shipment growth with market share gains.1H17 operating profits were significantly higher than DB forecast at CNY1.1bn, as Dahua re-classify the recognition of government grant and impacts the operating profits, following the revision in #16 of the corporate accounting principal. 1H17 net profits of CNY983 mn, +39%YoY, was in line with DB forecast of CNY994mn. We maintain BUY on Dahua.

    Positive 2017 outlook with accelerated profit growth

    We expect the strong revenue growth momentum to sustain into 2H17 as the company continues expanding market share with the rising contribution of total solution projects while continuing to expand its overseas market share. We also expect opex ratio to decline given the increasing revenue scale. Currently, we expect 2017 profits to grow 45%, for EPS of CNY0.9, driven by revenue growth of 38% and operating margin expansions (without taking into account the impact of government grant re-classification).

    Receipt of bid-winning notice on the Shache PPP tender

    Dahua has issued an announcement in receipt of the bid-wining notice on the PPP tender by Shache country in Xinjiang with a total amount of CNY4.3bn. Following our report “Accelerating growth from AI” dated July 24, 2017, we have incorporated the potential contribution from this PPP project in our earnings forecast.

    Valuation and risks

    We maintain Buy on Dahua with target price of CNY27.3, based on 22x 2018E PE and supported by profit growth of 45%/36% and ROE of 28%/30% in 2017/18, respectively. Dahua share price has appreciated 77%YTD but we expect the share price outperformance to continue driven by its accelerated profit growth and ROE expansions. Risks: market share loss and weak orders from solution projects.