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雷达卡
• The Big Three thermal power equipment producers face prolonged overcapacity issues.
• Investment in nuclear and renewable energy will grow quickly but will not fully offset the decline in the thermal segment.
• Reiterate BUY rating on CHST; initiate coverage on Dongfang Electric with HOLD, and on Shanghai Electric with REDUCE.
Thermal freeze
Order deferrals likely to be permanent
Weak power demand and a policy shift to nuclear and renewable energy
are likely to result in severe overcapacity of thermal power equipment,
which contributes 80% and 60% of Dongfang Electric (DEC) and
Shanghai Electric (SEG) earnings. Order deferrals are already prevalent
and SEG has already announced a profit warning because of this.
New energy and exports: BUY CHST
We expect new energy and exports to be the future drivers of order
growth, but not necessarily earnings growth. It will be difficult to regain
the high profit level during the boom years of thermal equipment sales
and meaningful earnings contribution from nuclear business should not
be expected until 2012. Niche players with strong R&D like China High
Speed Transmission (CHST) are better placed than the Big Three SOEs
to benefit from the shift in domestic energy policy and to gain market
share outside of China.
Earnings growth hard to find
Profits at the Big Three are likely to decline in both 2009 and 2010 due to
deferred thermal power equipment orders. Only power equipment
producers with a focus on growth areas like nuclear and renewable
energy will be able to increase earnings over this period. The main risk
to our view is a backward shift in government policy to allow more
thermal-fired power plants to be built, even though we do not believe
these are needed.
Finding the trough: REDUCE SEG and HOLD DEC
Our top pick for the sector remains CHST due to its strong global
competitiveness and visible earnings growth. Among the Big Three
SOEs we prefer DEC for its stronger position in nuclear equipment and
renewable energy and its cheaper valuation. SEG’s premium valuation
looks difficult to sustain. Although it is a conglomerate, most of its nonpower
businesses are highly cyclical.
Contents
Thermal oversupply beats new energy growth .............................................................. 3
Oversupply looms.......................................................................................................... 5
Power demand: lower growth trajectory 5
Power equipment sector: off-peak cycle 5
Structural shift to nuclear and renewable energy 7
Three companies don’t dominate clean-energy market 8
Thermal orders dry up ................................................................................................. 10
Coal-fired units subject to the policy of Energy Bureau 10
Profitability on wind turbines has been capped 12
Nuclear will not contribute until 2011 13
Export grows fast, but still doesn’t help 13
Trading in the trough.................................................................................................... 15
Defining trough valuation 15
BUY CHST, HOLD DEC, REDUCE SEG 16
Devil’s advocate: Risks to our investment case........................................................... 18
Company updates........................................................................................................ 19
China High Speed Transmission 20
Dongfang Electric 22
Shanghai Electric 28
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