Tough times in global agrochemical market, but glimmers of hope emerging.
   
Conditions deteriorated across the global agrochemical market in H116, with leadingproducers posting revenue declines in the 10-20% range. Globally, we expect costeffectiveness of agricultural products to stay flat in the near term amid more balancedsupply-demand for agricultural products. As a result, balance should return to theagrochemical market, accompanied by falling channel inventories. A recovery inagrochemicals would likely drive higher orders for Lianhe's pesticide intermediates.
   
Solid organic growth in pharmaceutical segment.
   
We believe Lianhe's pharmaceutical business remains driven by organic growth.
   
Following the launch of the Taizhou and Yancheng facilities, its products have receivedrecognition from international pharmaceutical makers. In the future, this business islikely to achieve profit growth by developing new products and expanding production.
   
In addition, the company has also been actively seeking out M&A opportunities sincemid-2015, which could drive inorganic growth.
   
Downgrading earnings forecast.
   
We are lowering our 2016-18E EPS 9%/9.9%/7.8% to Rmb0.81/1.03/1.17 fromRmb0.89/1.14/1.27, as: 1) we are lowering our agrochemical earnings growth andgross profit estimates, reflecting earnings declines due to the industry downcycle; and2) we are cutting our pharmaceutical revenue growth estimates given the company'sslow progress in M&A.
   
Valuation: Lowering price target; maintain Buy rating.
   
On the back of our EPS changes, we are lowering our price target to Rmb21.16 (basedon applying 23x PE on average 2016-17E EPS; old PT based on 26x 2016E PE). Webelieve the market is now expecting full-year earnings to decline following the interimresults. Potential upside catalysts include: 1) Lianhe making acquisitions in thepharmaceutical sector; and 2) a recovery in the pesticide market driving improvement inorders and profit. We maintain our Buy rating.