IA ahead of expectations; passenger NEV has started to make progress。    Inovance's 1H result (NP up 10% YoY) tracks behind our full-year estimates,dragged by surging opex associated with the passenger NEV business. However,underlying operations and management's comments at the analyst call broughtup two positive surprises: 1) stronger-than-expected IA growth in 1H andsustainable 30-50% growth guided by management going forward, and 2) anencouraging breakthrough in the passenger NEV business with 6-7customerssecured in 1H. With continuing strength in IA, an NEV bus recovery, opexnormalization and rising contributions from passenger NEV and industrial robots,we believe earnings growth is set to accelerate. We maintain Buy.。    Strong 1H top-line growth partially offset by margin contraction。    1H net profit of Rmb429m (+10% YoY) achieved 36% of our full-year estimate,which tracks behind the 5-year average of 43%. GP margin contracted 3.3ppt to45.8%, driven mainly by the new energy segment (down 18.2ppt YoY). This, alongwith higher-than-expected opex (R&D expense +75% YoY and selling expense+41% YoY), partially offset strong top-line growth in 1H (+32% YoY). In 2Q alone,sales growth moderated to 29% YoY from 38% YoY in 1Q, while NP growth visiblyslowed to 3% YoY (from 24% YoY in 1Q), largely due to surging opex.。    Stronger-than-expected IA growth a key positive。    Sales of general IA products (servos and inverters) soared 90%+ YoY in 1H, wayahead of China’s overall market growth (15% for inverters and 23% for servosin 1H), management's full-year guidance (30-50%) and our full-year estimates(50-60%). Inovance's "vertical-based" strategy continued to facilitate its marketgains in traditional verticals like textile machinery and air compressors.。    GPM contracted while opex surged。    GPM contraction was mainly because of 1) ASP cuts (10-20% by Yutong), lowsales volume and higher sales rebates in the NEV segment and 2) an unfavorableproduct mix in the inverter segment (i.e. rising contributions from low-marginauxillary elevator products and high-voltage inverters). The big jump in opex wasmainly due to a passenger NEV business expansion, with the R&D expense ratio(as a percentage of sales) rising to a historical high of 14% in 1H. Such a surge,however, is likely to be a one-time event as management expects the ratio tonormalize to 8-10% starting in 2018.。

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