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雷达卡
March 11, 2009
China Capital Goods
Cycle Has Peaked; Long
Way to the Bottom
Downgrading sector view from In-line to Cautious:
After our trip to Beijing in February and channel checks
with industry contacts, we have become more bearish:
the cycle peaked in 2008 and the bottom is still not in
sight. We previously expected a recovery in 2010. We
are downgrading Harbin Power from OW to UW,
reiterating our UW on Shanghai Electric, and
maintaining EW on Dongfang Electric. We are cutting
our 2010 earnings forecasts by 35-62% to reflect lower
output and gross margin assumption. We believe
Dongfang Electric is the best player given its excellent
position in the booming wind power business and
expected continued earnings growth in 2009 & 2010.
Shanghai Electric is likely to suffer the most in the
coming cycle downturn as it has the highest exposure to
thermal power and overseas market.
Expect drop of >50% YoY in new order inflow in 09
due to overcapacity of power generation sector,
stringent government controls, and high base in 08.
Power equipment makers have largely traded on
expectations for new order inflow. Expectations for weak
order inflow in 09 will likely lead to de-rating of power
equipment sector and the stocks trading at historical
trough valuation in this gloomy macro environment.
Output volume of industry expected to decline 25%
YoY in 09 as a result of order deferrals. We expect more
and more order deferrals because of overproduction in
08 and less new capacity addition in 09. Especially, we
expect the output volume of thermal power equipment to
drop ~40% and ~24% YoY in 09 and 2010, respectively.
We see downside risk of power equipment makers’
current output guidance: 10-20% YoY decline in 09.
Expect gross margin to remain under pressure
through 2010. The widely expected gross margin
recovery in 2010 is unlikely to materialize due to
worsening economies of scale following much lower
output volume, the recent decline in ASPs of new order
inflow, and the strengthening of special steel price.
Contents
Investment Case............................................................................................................................................................. 3
Summary & Conclusions.....................................................................................................................................................................3
Negative Growth in Electricity Demand since 4Q08, First Time in 10 Years ........................................................................................................... 3
Weak Growth in Electricity Demand Expected: 2% in 2009 and 7.4% in 2010........................................................................................................ 3
Loss-making IPPs expected to suffer severe overcapacity in 09 and 2010, with utilization hours of thermal power plants down to only ~4400 hours
................................................................................................................................................................................................................................ 4
Power Equipment Demand Forecast for 2010 and 2011 Cut by 22% and 33%, respectively ................................................................................ 5
Expect >50% YoY Drop in New Order Inflow in 09, which could lead to whole sector de-rating ............................................................................. 5
Huge orders on hand with low cancellation risk ...................................................................................................................................................... 6
However, Order Deferrals Could Be Significant: ~30%........................................................................................................................................... 7
Thermal Power Equipment Expected to Suffer 40% and 24% YoY Output Volume Drop in 09 and 2010, Respectively........................................ 7
ASP of New Orders since Fourth Quarter of 08 under Pressure ............................................................................................................................. 8
No longer expect gross margin to recover in 2010.................................................................................................................................................. 8
Cut Earnings Forecast for 09 and 2010 by 9%-62% on Lower Output Volume and Gross Margin Assumptions.................................................... 8
Highlights of Meeting with Industry Association ................................................................................................................................12
Valuation Comparison and Historical Trading Range.........................................................................................................................14
Company Analysis ....................................................................................................................................................... 27
Harbin Power (1133.HK)............................................................................................................................................... 28
Harbin Power: Financial Summary............................................................................................................................. 31
Risk-Reward Snapshot: Harbin Power (1133.HK, HK$4.32, UW, PT HK$3.45)........................................................ 32
Dongfang Electric (1072.HK)....................................................................................................................................... 33
Thermal Power Equipment: sharp YoY decline in new orders and more order deferrals ahead ........................................................33
Wind Power Equipment: high growth ahead .....................................................................................................................................34
Nuclear Power Equipment: no meaningful revenue before 2011 .......................................................................................................34
Hydro Power Equipment: stable revenue expected ...........................................................................................................................34
Capex Plan and Financing Plan: Capex saving expected ..................................................................................................................34
DF Electric: Financial Summary (Pro Forma Data).................................................................................................... 36
Risk-Reward Snapshot: DF Electric (1072.HK, HK$14.06, EW, PT HK$14.9) .......................................................... 37
Shanghai Electric (2727.HK) ....................................................................................................................................... 38
Key Takeaways from Meeting with Management..............................................................................................................................38
Management’s Guidance Might Be Too Bullish.................................................................................................................................39
Shanghai Electric: Financial Summary....................................................................................................................... 42
Risk-Reward Snapshot: Shanghai Electric (2727.HK, HK$2.00, UW, PT HK$1.5)................................................... 43
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