Q3 earnings disappointed, GM dragged by new products.

9M16 revenue was Rmb4.99bn, up 17.2% YoY; net profit (NP) was Rmb630m, up3.5% YoY. This included Q3 revenue of Rmb1.87bn, up 9.1% YoY, with NP ofRmb230m, down 21% YoY. Q3 NP undershot UBS-S/consensus estimates, which wemainly attribute to a gross margin (GM) decline during the Q3 high season. This year,GM was 38.9% in Q1, 41.2% in Q2 & 38.3% in Q3. However, quarterly GM peaked inQ3 in each of the four years since 2012. Management stated overall GM was draggedby recognition of low-margin sales of new products (eg, automatic testing lines) duringQ3; the new products were priced inexpensively to help build market share.

Improving industry presence via M&A; stronger growth in high-powered lasers.

Domestically, penetration of high-powered laser equipment lags far behind that of lowpoweredlasers. This year, the company acquired Setwin Industry Equipment andSpain''s Aritex, aiming to leverage their accumulated technical know-how and customerresources to accelerate market development and seize market share from foreignbrands. Laser-cutting and welding products developed by Han''s have launched and aregradually consolidating market share. Helped by recovering downstream demand, highpoweredlaser product revenue rose 38% YoY to Rmb680m in H116, along with astrong order backlog. We forecast revenue from high-powered products to grow 29%in 2016 (2014/2015: 21%/10%).

Focusing on key technologies; robotics investments likely to boost earnings.

In 2015, the company started building a presence in robotics and automation.

Subsidiary Han''s Motor has key technologies related to robot components. Thecompany has also: 1) set up robotics industry investment funds as platforms forinvesting in UAVs and firefighting robots; and 2) set up three subsidiaries focused onkey robotics technologies to conduct R&D into robotics sensor systems, harmonicreducers and laser sensors to complement its automation production offerings. Byimproving its R&D and production capabilities, we believe the company will havestronger bargaining power when it comes to automation system integration orders,ultimately driving stronger profitability. In the long run, these investments could createnew opportunities and growth potential for Han''s.

Valuation: Rmb29.0 price target; Buy rating.

We base our price target on 26x 2017E PE. We are positive on the company''s longterm(LT) growth in the automation segment. 中国最大钣金展-锻压展-2017第十八届广州国际钣金、锻压工业展览会-巨浪展览- The 18th China（Guangzhou）Int’l Sheet metal machinery,Forging, Stamping and Setting Equipment Exhibition