Wasion Group (3393 HK)

Transcription

1 Equity Research Smart Grid/ China Bruce Yeung, CFA Company Update HOLD UPGRADE Close price: HK$4.52 Target Price: HK$4.10 (-9%) Prior TP: Key Data HK$3.60 HKEx code Months High (HK$) Month Low (HK$) M Avg Dail Vol. (mn) 3.82 Issue Share (mn) 1, Market Cap (HK$mn) 4, Fiscal Year 12/2015 Major shareholder (s) Ji Wei (50.93%) Source: Company data, Bloomberg, OP Research Closing price are as of 19/08/2016 Price Chart Aug/15 Nov/15 Feb/16 May/16 1mth 3mth 6mth Absolute % Rel. MSCI CHINA % PE HK MSCI CHINA Compan y Profile Forward P/E Ratio The Group is principally engaged in the R&D, manufacture and sale of smart meters, designed of advanced metering infrastructure (AMI) and advanced distribution operation (ADO). HK$ std. avg. -1std. 0 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 1H16 profit decline as lower demand from power grid 1H16 net profit dropped 19%, 3% below consensus estimate Slightly revised up 6E/17E EPS by 5%/8% due to rebound in GPM Upgrade to HOLD with TP revised up to HK$4.1 or 9% downside Profit dropped without warnings Wasion announced 1H16 results with revenue and net profit dropping 5% and 19% yoy to RMB1,516mn and RMB206mn respectively, while the share price dropped 8.5% after the announcement of profit decline as the market was disappointed by the no profit warning issued in advance. Segment revenue of smart meter and AMI dropped 23% and 3% yoy to RMB442mn and RMB809mn as revenue from power grid clients dropped 17% yoy in 1H16 to RMB936mn. With the help from one-household-one-meter and RMB depreciation, water, gas & heat meter and export sales increased by 37% and 38% respectively, offsetting decline in AMI. ADO maintained robust growth of 35% to RMB265mn given state grid focus on investing power distribution system. Despite 1H16 GPM dropped 1.0 ppt to 30.1%, which rebounded 0.9ppt hoh from 2H15. However, market was still concerned over the GPM of ADO segment, which dropped 5.0ppt yoy and 2.9ppt hoh since the company sacrificed margin for better payment schedule terms. By cutting over 150 employees, Wasion had well controlled the opex in 1H16. However, financing costs increased 123% yoy due to higher costs of RMB borrowings. Receivable days increased 63 days to 373 days in 1H16 since ADO segment required longer settlement period and higher retention receivables. Earning revisions With lower demand from state grid, we revised down 6E/17E revenue by 7%/9%. Given GPM rebounded in SM and AMI, we revised up 6E/17E GPM by 1.6ppt/1.6ppt. With opex control but higher financing costs, we revised up 6E/17E EPS by 5%/8%. Upgrade to HOLD with TP HK$4.1 We remain conservative on the company's outlook given slower demand from state grid, lower ASP in rural areas and longer payback period for ADO segment. After the profit decline in 1H16 was announced we saw the market beginning to revise down the earnings forecast in recent months. By rolling forward to 7E, we upgrade our rating to HOLD with TP of HK$4.1 based on 7E 8x PE, representing 9% downside. Exhibit 1: Forecast and Valuation Year to Dec (RMB mn) 4A 5A 6E 7E 8E Revenue 2, , , , ,565.6 Growth Net Profit Growth 20.3 (12.2) (8.4) Diluted EPS (HK$) EPS growth 15.3 (20.5) (9.6) Change to previous EPS Consensus EPS (HK$) ROE P/E P/B Yield DPS (HK$) Source: Bloomberg, OP Research

2 Exhibit 2: Earnings revision 6E 7E 8E (RMB mn) New Old % Chg New Old % Chg New Old % Chg OP Comments Revenue 3,024 3,264 (7.3) 3,321 3,644 (8.9) 3,566 4,101 (13.1) Longer time for state grid order delivery Gross profit (2.1) 1,010 1,051 (3.9) 1,086 1,184 (8.3) Gross margin 30.4% 28.8% % 28.9% % 28.9% 1.6 GPM rebound in SM and AMI, but dropped in ADO Opex (536) (581) (7.7) (559) (641) (12.8) (590) (692) (14.8) Better control in admin cost EBIT Net Profit (1.0) Higher financing cost by RMB borrowings Diluted EPS (HK$) Share buyback Exhibit 3: Key assumptions 6E 7E 8E (RMB mn) New Old % Chg New Old % Chg New Old % Chg OP Comments State grid tender 1,071 1, ,017 1,124 (9.5) 966 1,180 (18.1) Lower ASP in rural area Southern grid tender Years for tender delivery Slower demand from state grid AMI (Power grid) (20.0) (23.8) 741 1,022 (27.4) Slower demand from state grid AMI (Non power grid) Strong demand for water, gas & heat meter AMI (Export) (8.0) ADO (Power grid) State grid investment on distribution network Page 2 of 7

3 Exhibit 4: Result summary (RMB mn) 1H16 YOY 2H16E YOY 1H16 as % of 6E OP Comment Revenue 1,603 1,366 1,516 1,508-5% 10% 46% Revenue from power grid clients declined 17% yoy COGS (1,106) (967) (1,061) (1,045) -4% 8% 46% Gross profit % 16% 49% GPM rebounded in SM and AMI Other income & gains % -53% 69% Selling exp (117) (128) (127) (129) 9% 1% 47% Admin exp (68) (69) (74) (79) 9% 14% 41% Better control in staff cost by cutting over 150 staff Other opex (70) (74) (65) (62) -7% -16% 50% Operating profit (EBIT) % 15% 56% Provisions or other items Finance costs (11) (15) (24) (20) 123% 36% 68% Higher finance cost due to RMB borrowing Profit after financing % 13% 55% costs Associated cos (2) (1) 3 (6) -209% 601% -81% Jointly controlled cos Pre-tax profit % 11% 56% Tax (38) (9) (30) (14) -23% 48% 71% Minority interests 2 (0) 1 (3) -61% 17459% -35% Net profit % 7% 55% Slightly higher than our estimate Key ratios GPM 31.0% 29.2% 30.1% 30.7% (1.0) Selling expenses 7.3% 9.3% 8.4% 8.6% 1.1 (0.8) 0.1 Admin expenses 4.2% 5.0% 4.9% 5.2% (0.7) Other opex 4.3% 5.4% 4.3% 4.1% (0.1) (1.3) 0.3 OPM 18.9% 14.2% 16.9% 14.9% (2.0) Finance exp to EBIT 3.5% 7.5% 9.3% 8.9% Asso & JV -0.9% -0.5% 1.2% -3.0% 2.1 (2.5) 2.1 Effective tax rate 13.1% 5.2% 12.8% 6.8% (0.4) Segment revenue Smart meter % 25% 49% AMI % 2% 45% ADO % 24% 47% Exhibit 5: Result summary GPM 5A 6E 1H15 2H15 1H16 2H16E Smart meter 21.2% 21.0% 23.0% 17.5% 21.0% 21.0% AMI 34.4% 35.9% 36.0% 32.9% 36.0% 35.8% ADO 31.3% 27.0% 33.0% 29.9% 27.0% 27.0% Total 30.2% 30.4% 31.0% 29.2% 30.1% 30.7% Page 3 of 7

4 Financial Summary Year to Dec 4A 5A 6E 7E 8E Year to Dec 4A 5A 6E 7E 8E Income Statement (RMB mn) Ratios Smart meter Gross margin AMI 1,677 1,689 1,685 1,860 1,997 Operating margin ADO Net margin Turnover 2,812 2,969 3,024 3,321 3,566 Selling & dist'n exp/sales YoY% Admin exp/sales COGS (1,849) (2,073) (2,105) (2,311) (2,480) Payout ratio Gross profit ,010 1,086 Effective tax Gross margin 34.2% 30.2% 30.4% 30.4% 30.4% Total debt/equity Other income Net debt/equity 5.5 Net cash Net cash Net cash Net cash Selling & distribution (206) (245) (256) (273) (291) Current ratio Admin (168) (137) (153) (153) (157) Quick ratio Other opex (112) (143) (127) (133) (143) Inventory T/O (days) Total opex (486) (525) (536) (559) (590) AR T/O (days) Operating profit (EBIT) AP T/O (days) Operating margin 20.1% 16.6% 15.5% 16.1% 16.3% Cash conversion cycle (days) Provisions Asset turnover Interest Income Financial leverage Finance costs (29) (25) (44) (44) (44) EBIT margin Profit after financing costs Interest burden Associated companies & JVs (4) (3) (3) (3) (3) Tax burden Pre-tax profit Return on equity Tax (55) (48) (44) (50) (55) ROIC Minority interests (4) 2 (2) (2) (2) Net profit Year to Dec 4A 5A 6E 7E 8E YoY% 20 (12) (8) 16 9 Balance Sheet (RMB mn) Net margin 17.2% 14.3% 12.8% 13.5% 13.7% Fixed assets 1,001 1,182 1,288 1,407 1,536 EBITDA Investment properties EBITDA margin 23.2% 19.6% 18.4% 18.7% 18.7% Intangible assets & goodwill EPS (RMB) Associated companies & JVs 3 0 (3) (6) (9) YoY% 15 (20) (10) 16 9 Long-term investments DPS (HK$) Other non-current assets Non-current assets 2,104 2,463 2,520 2,596 2,685 Year to Dec 4A 5A 6E 7E 8E Cash Flow (RMB mn) Inventories EBITDA AR 2,112 2,521 2,900 3,184 3,419 Chg in working cap (515) 234 (256) (145) (120) Prepayments & deposits Others (40) Other current assets Operating cash Cash 327 1,172 1,031 1,078 1,167 Interests received Current assets 3,515 4,760 5,018 5,432 5,824 Tax (47) (51) (54) (44) (50) Net cash from operations AP 1,284 1,881 2,019 2,216 2,378 Tax Capex (297) (402) (151) (166) (178) Accruals & other payables Investments (78) (45) Bank loans & leases Dividends received CB & othe debts Sales of assets Other current liabilities Interests paid (29) (25) (44) (44) (44) Current liabilities 2,045 2,489 2,620 2,849 3,037 Others 4 (148) Investing cash (366) (620) (195) (210) (222) Bank loans & leases FCF (213) Trade and other payables-lt Issue of shares Deferred tax & others Buy-back MI Minority interests Non-current liabilities Dividends paid (158) (192) (206) (191) (198) Net change in bank loans Total net assets 3,246 4,101 4,283 4,541 4,832 Others 0 (52) Financing cash (13) 492 (206) (191) (198) Shareholder's equity 3,246 4,101 4,283 4,541 4,832 Share capital Net change in cash (226) 685 (140) Reserves 3,236 4,091 4,273 4,531 4,821 Exchange rate or other Adj Opening cash ,172 1,031 1,078 BVPS (HK$) Closing cash 327 1,172 1,031 1,078 1,167 Total debts CFPS (HK$) Net cash/(debts) (180) Page 4 of 7

5 Exhibit 6: Peer Group Comparison Company Ticker Price Mkt cap (US$m) 3-mth avg t/o PER (US$m) PER PER FY2 EPS YoY% EPS FY2 YoY% 3-Yr EPS Cagr PEG Div yld Div yld P/B P/B EV/ Ebitda EV/ Ebitda Cur Yr Net gearing Gross Net margin margin Wasion Group 3393 HK (9.6) Net cash (0.7) 24.9 HSI 22, (6.0) HSCEI 9, (8.0) CSI300 3, Adjusted sector avg* Boer Power Holdi 1685 HK (2.6) Xj Electric-A CH , (0.7) 12.8 Nari Technolog-A CH , Jiangsu Linyan-A CH , Ningbo Sanxing-A CH , N/A N/A (3.2) (1.2) Shenzhen Clou-A CH , (5.9) 12.5 Beijing Creat-A CH (0.5) 29.3 Changyuan Gro-A CH , (1.3) 9.3 Sieyuan Electr-A CH , N/A N/A (1.8) 11.3 Beijing Sifang-A CH , (1.9) 4.2 Dongfang Elect-A CH N/A N/A N/A N/A N/A N/A N/A N/A 3.49 N/A 48.1 N/A N/A Integrated Ele-A CH (2.2) 14.3 Zhejiang Chint-A CH , Zhejiang Goldc-A CH (18.1) (10.7) 30.4 Suntront Techo-A CH N/A N/A N/A N/A N/A N/A 0.2 N/A N/A (2.5) 18.5 Qingdao Tgood-A CH , N/A (7.2) 3.1 Osaki Electric 6644 JP Schneider Electr SU FP , Abb Ltd-Reg ABBN VX , Siemens Ag-Reg SIE GR , (20.5) 7.6 (2.7) N/A General Electric GE US ,039 1,052.1 N/A N/A 14.7 (247.4) N/A (5.3) (4.1) 5.7 Itron Inc ITRI US , N/A N/A Badger Meter Inc BMI US , N/A 4.07 N/A N/A (2.7) (4.6) * Outliners and "N/A" entries are in red and excl. from the calculation of averages Source: Bloomberg, OP Research ROE ROE Sh px 1-mth % Sh px 3-mth % Page 5 of 7

6 Our recent reports Date Company / Sector Stock Code Title Rating Analyst 18/08/ Degrees H16 muted, but dividend surprised BUY Walter Woo 18/08/2016 UMP 722 The worst has gone BUY Chloe Liu/Yuji Fung 18/08/2016 Best Pacific 2111 Better than expected sales and margins BUY Walter Woo 17/08/2016 Sunny Optical H16 results beat on ASP and non-core items SELL Yuji Fung 16/08/2016 Ju Teng Intl H16 results miss on delay in new product launch BUY Chloe Liu/Yuji Fung 15/08/2016 TCL COMM 2618 Road to privatization HOLD Chloe Liu/Yuji Fung 15/08/2016 TCL Multimedia Q16 results miss BUY Chloe Liu/Yuji Fung 15/08/2016 Pou Sheng 3813 Margins surprised and rosier outlook in 2H16 BUY Walter Woo 12/08/2016 Li Ning 2331 Re-rating begins, High potential winner BUY Walter Woo 11/08/ Degrees Q17 wholesales discount reduced BUY Walter Woo 11/08/2016 Sunny Optical 2382 High margin lens set shipment slowdown in Jul SELL Chloe Liu/Yuji Fung 09/08/2016 Tianyun Intl 6836 Unjustified depressed valuation NR Bruce Yeung 05/08/2016 On Time Logistics 6123 Fundamentals not involved in recent price streak HOLD Bruce Yeung 04/08/2016 China LotSynergy 1371 Losses pared, overseas expansion underway NR Yuji Fung 04/08/2016 IMAX China 1970 Box office growth still holds the key HOLD Walter Woo 04/08/2016 Canvest 1381 High 1H16E growth up to expectations BUY Bruce Yeung 04/08/2016 Chinasoft Intl 354 Upgrade on better than expected 1H16E BUY Yuji Fung 01/08/2016 Anta Sports 2020 Retail sales growth soaring on high single-digit BUY Walter Woo 29/07/2016 Xtep 1368 Margins are the focus for 1H16E BUY Walter Woo 29/07/2016 Shenzhen International 152 Weak 1H16E looming HOLD Bruce Yeung 27/07/2016 Dynagreen Environmental 1330 Big profit jump likely for 1H16E BUY Bruce Yeung 22/07/2016 IMAX China 1970 Installations target raised but valuation remains rich HOLD Walter Woo 22/07/2016 Sunny Optical 2382 Downgrade as competition intensifies SELL Chloe Liu/Yuji Fung 20/07/2016 Kingdom Holdings 528 Alert: 1H16E profit to take dive HOLD Bruce Yeung 18/07/2016 Lifetech SCI H16 results preview BUY Chloe Liu/Yuji Fung 18/07/2016 EGL 6882 Alert on profit expected HOLD Bruce Yeung 11/07/2016 Sunny Optical 2382 Recover in Jun. 1H16 shipments in-line HOLD Chloe Liu/Yuji Fung orical recommendations and target price: (as of 19/08/2016) (HK$) Oct 2015 BUY, Target price HK$ Feb 2016 BUY, Target price change HK$ Mar 2016 SELL, Target price change HK$3.6 Page 6 of 7

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