Tuopu:1H17slightly above;maintaining Buy on strong momentum

44% profit growth on strong demand from local brand customers。

    Tuopu released its 1H17results after market close. The company’s 1H17grossrevenue edged up by 40.1% YoY to RMB2.3bn, achieving 46% of our originalFY17E revenue forecast. The revenue growth was mainly driven by strong ordersfrom local brands OEM customers, such as Geely, SAIC Roewe, and GACTrumpchi, according to the company. By product, revenue for shock absorber anddecorative parts increased by 20.0%/71.0% YoY to RMB1.0bn/1.1bn, respectively.1H17gross profit grew 34.4% YoY to RMB683.1m with 1.2ppt YoY grossprofit margin contraction mainly due to product mix deterioration with lesscontribution from shock absorber and intelligent braking segments. Gross marginfor shock absorber and decorative parts remained flat, improving 9/90bps YoY to35.0%/25.4%, respectively.。

    Together with a slower-than-revenue growth in SG&A expenses (+25.6% YoY)and 1.1x YoY jump in other income, 1H17net profit increased by 44.1% YoY toRMB387.0m, achieving 52% of our original FY17E profit estimate and 48% ofconsensus.。

    On a quarterly basis, 2Q17revenue increased by 33.3% YoY (flattish QoQ) toRMB1.2bn. Gross margin deteriorated 1.8ppt YoY (27bps QoQ) to 29.1%. 2Q17net profit increased by 50.0% YoY (24.2% QoQ) to RMB214.4m.。

    Deutsche Bank view – sales momentum to remain robust; Buy。

    We raise our FY17-19E revenue by 1.4-1.9% and FY17E net profit estimate by5.7% to reflect increase in government subsidy in 1H17, partly offset by weakergross margin. However, our FY18-19E earnings forecast is revised down by1.4-2.2% mainly due to more conservative gross margin assumptions. Our targetprice is set at a target 26x FY18E P/E (unchanged), on par with its mid-cycle P/E of 28x. This is justified, in our view, considering we expect the company todeliver a 23.5% three-year earnings CAGR in FY16-19E and reflects our optimisticview on the growth potential of Intelligent Braking System (IBS) and ElectricVacuum Pump (EVP) products. Key downside risks: weaker-than-expected autosales volume; failure to record new order awards for IBS/EVP products; any marketshare loss at Tuopu's key customers; and unexpected increase in raw materialprices.。