香港飞机工程(00044) 　　Significantly higher losses at HAECO Americas expected on exitfrom line service business and HKD280m impairment charges 　　US unit restructuring is a positive; however earnings remainvolatile due to slim gross profit margins 　　Maintain Hold, cut target price to HKD57 from HKD67 　　Significantly higher losses at HAECO Americas. The company has announced anestimated HKD280m of impairment charges, reflecting a review of the carrying valueof the cabin and seat business in HAECO America. It now expects significantly higherlosses at HAECO Americas in 2H16 because of losses on some seat contracts andthe costs of closing down HAECO Americas’ line service business. 　　HAECO Americas is making the right restructuring moves. The US unit willstrategically focus on its principal business of providing MRO services and cabinsolutions by shutting down the loss-making line services. This move should help theUS unit return to profitability in 2017e after an expected three-year consecutive loss.We believe the unit has chosen to close the line service business in the US becauseof low recognition and lack of scale. In addition, the cabin business did not performwell and prospects remain lacklustre; thus HAECO Americas will take an impairmentcharge of HKD280m against the goodwill, representing 20% of total goodwill as ofJanuary 2016. 　　Cut 2016-17 earnings forecasts. We factor in the special HKD280m impairmentcharge, restructuring expenses and worse-than-expected performance of cabinbusiness at HAECO Americas, and cut our 2016-17 reported EPS forecasts by 48%and 18%, respectively. 　　Maintain Hold, cut TP to HKD57 from HKD67. In our view the US unit is making the rightmoves toward profitability, although restructuring charges will impact near-term results.Valuation and risks: Based on a 2017e PB of 1.5x, from 1.7x 2016e PB previously toreflect 2017e ROE at 8.6% and also rolling forward our valuation a year, we derive ourfair value target price at HKD57, from HKD67 previously. Our target price implies 18x2017e PE, which is in line with 15-year average, and 10.7% upside from the currentmarket price, and we retain our Hold rating as we see high earnings volatility due to slimgross profit margins at low single digits. We also note the shares’ low liquidity may be aconcern. Upside risks include more-than-expected engine work at TEXL, and the groupwinning large contracts with a broad work scope. Downside risks include weaker-thanexpecteddemand, wage increase/labour shortages in Hong Kong and a continueddecline in the volume of Rolls-Royce engine overhaul work.