Tianneng Power`s 2018H1 revenue and net profit increased by 28% and 16%, respectively, but the gross profit margin declined slightly. The lead battery business was better than expected, but the correction of the lithium battery business dragged down the company`s net profit growth slightly lower than expected. We adjust our EPS forecast for 2018/2019 to 1.13/1.33 yuan. We believe that the current market is too pessimistic about the company, after its stock price retraced more than half from the high point. The current valuation does not reflect the company`s leading position in domestic lead-acid battery market. For valuation we cut our target price to HK$8.4 to reflect the possible challenge of the company, but maintain a Buy rating. (Closing price as at 26 Sept 2018)
16% More Revenue in the Middle of the Period
Tianneng Power recorded a revenue of RMB14,507 million in the first half of 2018 with a net profit of RMB534 million, an increase of 27.7% and 15.8%, respectively, compared with those of 2017. The operational cash flow was around RMB1,159 million. The EPS was RMB0.44. The gross profit was RMB1,709 million with a gross margin of 11.8% during the period. Compared with that of the same period of 2017, there was an increase of 18.8% and a fall of around 0.9 percentage point, respectively. The main reason why the gross margin dropped was the rise of the price of lead, a main raw material.