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Dongfang Electric-Downgrade H to Reduce/Reduce on A:Turning around but valuation rich

发布时间:2017-03-29    研究机构:香港上海汇丰

Turnaround expected: As a traditional power equipment maker, Dongfang Electric(DEG) faced significant growth challenges last year in an oversupplied power market,reporting a net loss of RMB1.78bn (its first since listing in 1994) due to a lower overallGPM, a one-off inventory impairment, and wind turbine provisions. We think earningshave now bottomed and expect a turnaround in 2017e thanks to: 1) a 3.5ppt uptick inmargin (in line with management guidance) driven by wind, hydro and engineeringprojects; and 2) a new RMB456m p.a. profit contribution from a proposed injection ofassets by the parent (although that is still pending shareholder approval, hence notfactored into our earnings estimates).

But valuation rich. However, we downgrade the H-shares to Reduce (from Hold) inview of two issues. 1) We estimate that 2017e BVPS will decline by 7.2% as earningsaccretion from planned acquisitions is set to be offset by the proposed RMB6.9bnplacement of 767m new shares at RMB9.01 (which we estimate will result in 32%dilution). 2) The stock is trading at a 2017e PB of 0.8x, close to its historical average of0.9x since 2013, which looks rich given RoE is likely to contract to 1% in 2017e. Ourrevised H-share TP price implies a 2017e PB of 0.52x, which we believe fairly reflects itsROE prospects. We maintain Reduce on the A-share due to its rich valuation.

FY16 results: The company reported a net attributable loss of RMB1.78bn for FY16(vs an RMB439m profit in FY15). New orders were down 1.1% YoY to RMB36.6bn.

The overall GP margin was down 4.8 ppt YoY mainly due to weakness across allsegments. Management guides to maintain 2017 revenue and new orders at a 2016level and expects an improvement in the overall GPM from new wind, hydro andengineering projects which have a higher margin. The total order backlog wasRMB100.7bn at end-FY16, excluding the 11 cancelled thermal power projects.

Earnings revision: We lower our 2017-18e earnings by 52-61% as we reset the baseafter updating 2016 reported numbers and assume a lower GPM at 15.5% vs ourprevious forecast at 15.8%. Valuation and risks: Our H/A share TPs ofHKD5.2/RMB4.8 (from HKD5.8/RMB5.1) are based on an unchanged PB multiple of0.52x applied to our FY17e BVPS of RMB9.24 and RMB/HKD FX rate of 1.08. Upsiderisks: higher-than-expected improvement in GPM, faster-than-expected overseasorders, and higher-than-expected earnings contribution from proposed asset injection.

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