2H16 Power Equipment Sector Outlook

Transcription

1 Equity Research Industrials 2H16 Power Equipment Sector Outlook Opportunities in power grid construction Dominic Chan, CFA, FRM SFC CE No. APP GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Sector View Neutral China continues to increase investment in power grid construction, including in the modernization of rural power grids, as a way of solving the imbalance in its power supply. The government will also focus on developing the distribution grid, with plans to invest Rmb2trn in this area during There are currently 13 UHV transmission lines under construction, and the SGCC plans to build Five Vertical and Five Horizontal UHV transmission lines by the end of This should push up demand for power cables. However, the industry faces two main problems: 1) a slowdown in power equipment purchases, including purchases of power meters; 2) high account receivables. Key themes over next 3-6 months SGCC usually offer tenders 6-7 times each year. Investors should pay attention to tender offer results in 2H16. New UHV transmission line approvals. Valuation analysis Low valuation as investor concerns linger The power equipment sector is currently trading at 7x FY16E P/E, which is significantly lower than its historical average of 12x, indicating that downside risk from bad debts and poor interim results may have been largely priced in. Any further de-rating will depend on upcoming interim results. Investment strategy Cherry picking based on companies financial situations Investors are cautious about the financial situations at specific companies. We suggest choosing companies that are seeing improvements in their financial situations. Top picks Jiangnan Group (1366 HK, Buy) The company will benefit from steady growth in demand for power cables, its key product, and is attractively valued. Risks Upside risks: China speeds up power grid construction. Downside risks: Receivable turnover may increase, leading to tight cash flow or even bad debts.

2 Opportunities in power grid construction SGCC and CSG investment to remain stable in 2016 Total investment by the State Grid Corporation of China (SGCC) came in at Rmb450bn in 2015, up 18.5% on the previous year. This year, the corporation targets to invest Rmb439bn. China Southern Power Grid (CSG) aims to increase investment from Rmb70bn in 2015 to around Rmb96bn this year, meaning a potential combined investment from the two corporations of about Rmb535bn, up 2.5% YoY. Figure 1: SGCC investment ( ) Figure 2: CSG investment ( ) Sources: SGCC, CSG, GF Securities (HK) Over the longer term, SGCC plans to invest around Rmb2.3trn during the 13 th Five Year Plan period, which would be a 28% increase on the amount invested during the 12 th Five Year Plan period, and mean investment of Rmb460bn per annum. Although CSG has not given a target, we believe its investment will also increase significantly due to the rise in investment in smart grids, rural power grid modernization and distribution network upgrades. However, the automation rate for China s distribution network is much lower than in developed countries. In order to support smart grid construction, we believe power distribution network construction will grow more rapidly over the next five years. According to the National Energy Administration, China will invest Rmb2trn in power distribution network construction during (it invested Rmb300bn in 2015). The plan will help to enhance power supply stability in China, with the aim being to increase the power supply stability rate to 99.99% in cities in central China and 99.88% in urban areas by Figure 3: China s distribution automation rate is much lower than in developed countries China Korea Germany Japan Distribution automation rate (%) In addition, SGCC and CSG will invest Rmb700bn in rural power grid modernization during the 13 th Five Year Plan period, much higher than the Rmb500bn invested during the 12 th Five Year Plan period and the Rmb300bn during the 11 th Five Year Plan period. 2

3 Rapid UHV transmission line construction in China Thanks to the rise in investment in power grid construction in China, the total length of 110kv-andabove power transmission lines in China increased at a CAGR of 7.7% during Frost & Sullivan expects this to continue to grow at a CAGR of 8.1% during given rapid ultrahigh-voltage (UHV) network construction. There will be rapid development of UHV transmission grids during in order to combat air pollution and resolve curtailment issues caused by the unbalanced geographic distribution of new energy power generators across China. There were six UHV transmission lines in operation at the end of 2015, and eight further lines were approved during that year (two AC and six DC). Altogether, there are currently 13 UHV transmission lines under construction. Frost & Sullivan expects the total length of UHV transmission lines to grow at a CAGR of 23.4% during According to SGCC, China targets to build Five Vertical and Five Horizontal UHV transmission lines by the end of 2020, meaning 27 UHV transmission lines will be in operation. We believe this rapid growth in UHV transmission grids will drive growth for the power cables sector. Figure 4: Total length of power transmission lines (110kv and above) Figure 5: Total length of UHV transmission lines 1,800 1,600 1,400 1,200 1, CAGR of 8.1% 1,614 1,488 1,372 1,268 1,175 1, ,015 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, CAGR of 23.4% E 2016E 2017E 2018E 2019E 2020E Total length of power transmission lines (thousand km) 1000KV AC 800KV DC Sources: China Electricity Council, Frost & Sullivan, GF Securities (HK) Exponential growth ahead for the EV charging station market The rise in demand for new energy vehicles in China will mean a substantial increase in the number of charging stations needed over the next five years. By the end of 2020, China targets to install 12,000 charging stations and 4.8m individual charging posts, which will provide the charging infrastructure needed for around 5m new energy vehicles. The charging post market is therefore expected to remain strong. Titans Energy (2188 HK, NR) is one of very few HK-listed companies involved in the charging post business. High accounts receivable in the industry Due to the economic downturn, many small and medium-sized enterprises are facing funding problems, meaning most power equipment companies are seeing deteriorating account receivables. Figure 6: Working capital comparison Ticker Company FY14 AR FY15 AR FY14 AP FY15 AP FY14 inventory FY15 inventory 1685 HK Boer Power HK Jiangnan GP HK Wasion GP HK Technovator HK Titans Energy HK China Energy eng

4 Figure 7: Peer valuation comparison EPS P/E ratio P/B ratio Tricker Name Currency Price E 2017E E 2017E E 2017E HK peers 1685 hk equity BOER POWER HOLDINGS LTD HKD hk equity WASION GROUP HOLDINGS LTD HKD hk equity JIANGNAN GROUP LTD HKD HK equity TECHNOVATOR INTERNATIONAL LT HKD HK equity CHINA TITANS ENERGY TECHNOLO HKD HK equity CHINA ENERGY ENGINEERING COR HKD Average A shares peers ch equity NARI TECHNOLOGY CO LTD-A CNY ch equity XJ ELECTRIC CO LTD-A CNY ch equity GUODIAN NANJING AUTOMATION-A CNY ch equity ZHEJIANG CHINT ELECTRICS-A CNY ch equity JIANGSU LINYANG ENERGY CO -A CNY ch equity NINGBO SANXING ELECTRIC CO-A CNY ch equity QINGDAO TGOOD ELECTRIC-A CNY ch equity SHENZHEN CLOU ELECTRONICS-A CNY ch equity SIEYUAN ELECTRIC CO LTD-A CNY ch equity FAR EAST SMARTER ENERGY CO-A CNY ch equity QINGDAO HANHE CABLE CO LTD-A CNY ch equity BAOSHENG SCIENCE AND TECH-A CNY ch equity HENAN TONG-DA CABLE CO LTD-A CNY ch equity TONGDING INTERCONNECTION I-A CNY ch equity ZHEJIANG WANMA CO LTD -A CNY Average International peers Abbn eu equity ABB LTD-REG CHF bmi us equity BADGER METER INC USD itri us equity ITRON INC USD su fp equity SCHNEIDER ELECTRIC SE EUR sie gy equity SIEMENS AG-REG EUR jp equity OSAKI ELECTRIC CO LTD JPY Average Sources: Company data, Bloomberg, GF Securities (HK) Market cap (USD m)

5 Jiangnan Group (1366 HK, Buy) Buy (maintained) Target price: HK$1.50 Steady increase in power cable demand; attractive valuation Leading Chinese cable supplier Jiangnan Group is the third largest electrical wire and power cable supplier in China, with a 1.4% market share based on 2010 revenue. The company has four main product categories. Power cables are its main product, accounting for 69.7% of FY15 revenue. Its second biggest revenue contributor is wires and cables for electrical equipment, which accounted for 18.6% of revenue during the year. Bare wires and special cables accounted for 5.5% and 6.2% of revenue respectively. Strong demand from UHV cables Demand for UHV cables is rising amid accelerating power grid development in China. According to a report by Frost & Sullivan, the total length of power transmission lines in China is expected to grow at a CAGR of 8.1% during , with growth in UHV transmission line construction to be particularly strong. Steady growth over the past five years During , the company maintained steady growth in both revenue and net profit. Revenue rose from Rmb4.9bn to Rmb9.1bn (CAGR of 16.8%), while net profit increased from Rmb735m to Rmb1,482m (CAGR of 19.2%). Management targeting 15-20% revenue growth in FY16 As the company has adopted a costplus pricing model, a rebound in the copper price may provide an extra boost to revenue growth this year. That said, we are somewhat conservative, forecasting 14% revenue growth in FY16. Stable margin Thanks to a changing product mix, GPM increased slightly from 15.6% in FY14 to 16.2% in FY15 despite plunging copper prices in 2015, while NPM remained flat at 7.7% due to an increase in distribution costs (the distribution cost to revenue ratio increased from 1.7% to 2.2%). The ability to maintain a stable margin is one of the company s key strengths. Maintain Buy China s accelerated construction of power grids, particular of UHV transmission lines, will mean an increase in demand for power cables. We maintain our positive view on the company and estimate FY16/17 EPS of Rmb0.2/0.23 respectively. The stock is currently trading at 5x 2016E P/E. We maintain our Buy rating and TP of HK$1.50, based on 6.5x 2016E P/E (its historical average P/E). Key risks 1) slower-than-expected recovery in the company s overseas business; 2) order volume could be affected by potential capex cuts at industrial customers. Figure 8: Stock performance (HK$) Figure 9: Key data Jun 30 close (HK$) 1.24 Share in issue (m) 4,079 Major shareholder Chu Hui (34.72%) Market cap (HK$m) 5, M avg. vol. (m) W high/low 0.96/2.32 Sources: Bloomberg Figure 10: Stock valuation Revenue (Rmb m) YoY (%) Net Profit (Rmb m) YoY (%) EPS (Rmb) YoY (%) P/E BPS (Rmb) P/B DPS Dividend (Rmb) yield (%) ,477 21% % % ,155 26% % % ,167 12% % % E 10,465 14% % % E 11,535 10% % % ROE (%) 5

6 Figure 11: Business model Figure 12: FY15 revenue breakdown Figure 13: Margin Trend 5% 6% 19% 70% Power cables Wires and cables for electrical equipment Bare wires Special cables Figure 14: Client list Key customers % of 2015 revenue SGCC, CSG 55% PetroChina, Sinopec 27% China Railway 8% Evergrande, Wanda 10% 6

7 Figure 15: Financial statements Income Statement Balance Sheet Year end Dec 31 (Rmb m ) E 2017E Year end Dec 31 (Rmb m ) E 2017E Revenue 6,477 8,155 9,167 10,465 11,535 Inventories 1,842 2,169 3,269 3,612 3,973 YoY 21% 26% 12% 14% 10% Trade receivables 2,006 2,396 3,122 3,154 3,476 Cost of Sales (5,477) (6,883) (7,685) (8,788) (9,667) Bill receivables Gross Profit 1,000 1,271 1,482 1,677 1,867 Other receivables GPM (%) Pledged bank deposits 808 1,305 1,893 2,093 2,307 Other Income Bank balances and cash 1,683 1,666 2,131 2,010 1,965 Selling expenses (110) (135) (203) (230) (254) Total current assets 6,661 7,848 10,885 11,642 12,575 Administrative expenses (133) (148) (179) (209) (231) PPP Other Cost (18) (23) (31) (31) (35) Land use rights Other losses (6) (21) (29) (31) (35) Goodwill Gain on bargain purchase Interests in associates Operating profits 804 1,002 1,114 1,289 1,441 Loan to an associate OPM (%) Available-for-sale investments Finance Cost (195) (242) (243) (290) (283) Deferred tax assets Share of loss of associates (3) (2) (1) (1) (1) Other non current assets Profit before taxation ,157 Total noncurrent assets ,234 1,258 1,288 Taxation (102) (132) (166) (190) (220) Total Assets 7,557 8,718 12,119 12,900 13,862 Effective tax rate NP Trade payables YoY 24.3% 12.4% 14.9% 15.9% Bill payables 1,137 1,512 1,756 1,926 2,119 Other payables Bank borrowings 2,922 2,922 3,770 3,770 3,770 Other current liabilites Total current liabilites 5,203 5,415 7,146 7,143 7,468 Long term borrowings Other non-current liabilites Cash Flow Statement Total non-current liabilities Year end Dec 31 (Rmb m ) E 2017E EBIT ,157 Equity Finance Costs Share capital Depreciation and Amortization Share premium ,449 1,489 1,529 Changes in working capital (518) (520) (1,140) (338) (403) Retained profits 1,916 2,397 3,414 4,161 4,758 Income tax paid (102) (132) (166) (190) (220) Non-controlling interests 2,286 3,230 4,896 5,680 6,317 Other operating activieites 364 (66) 923 (1) (1) Total Equity 7,557 8,718 12,119 12,900 13,862 Net Cash from operating activities Capex (18) (42) (64) (105) (115) Financial Ratio Acquisitions (412) (76) (106) E 2017E Changes in pledged bank deposits (53) (497) (588) (200) (214) EBITDA margin (%) Other financing activities EBIT margin (%) Net cash used in investing activities (305) (568) (568) (166) (204) NPM (%) Debt changes ROA (%) Interest paid (195) (242) (243) (290) (283) ROE (%) Dividend paid (88) (141) (176) (202) (234) Capital changes Gearing Ratio (%) Other (539) (30) (351) (306) (229) Interest Coverage ratio (%) Net cash from financing activities (799) (746) Current Ratio (%) Effect of foreign exchange rate (16) Net change in cash 545 (16) 465 (121) (45) AR turnover (day) Cash at beginning of year 1,138 1,683 1,666 2,131 2,010 Inventory Turnover (day) Cash at end of year 1,683 1,666 2,131 2,010 1,965 AP turnover (day)

8 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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