20130924-高盛-Dongfang_Electric_Corporation_Limited__H__New_trough_P_B_may_not_have_fully_reflected_industry_concerns_12页_527kb

Dongfang Electric Corporation Limited (H) Summary

Core Content

Dongfang Electric Corporation Limited (H) (1072.HK) is a diversified power equipment manufacturer. The report maintains a Neutral rating on the company, reflecting ongoing concerns about its financial performance and market conditions.

Main Points

1. Investment Thesis

• Revenue Growth: Expected to remain challenging in 2015 due to weak new orders and declining product prices.
• Operating Costs: May decrease due to lower receivable impairments and efficiency gains, but gross margin remains under pressure from intense market competition.
• Financing Costs: Increased financing costs could hinder earnings recovery.
• EPS Estimates: Cut by an average of 4% for 2013–2015.
• Price Target: Reduced by 4% for H-shares and 5% for A-shares to HK$11.7/Rmb12.3.
• P/E Multiples: Target P/E multiples remain at 9X for H-shares and 12X for A-shares.

2. Implications

• New Orders: Continued weak performance, with a 10% YoY decline in 1H13.
• Power Capacity Growth: Coal-fired power capacity growth in China is projected to be 4% from 2012–2015 and 1% from 2015–2020, as the country reduces its carbon footprint.
• Gas-Fired Power: Modest growth due to limited affordable gas supply.
• Wind Turbine Business: Faces further market share loss.
• Nuclear Power: May partially offset declines, but not significantly.
• Profit Margins: At risk due to weak demand, price competition, and cost inflation.
• Receivable Collection: Expected to improve, reducing impairments.
• Dividends: Likely to decline slightly in 2013, with a 10% payout ratio assumed.
• Export Prospects: Curbed by the depreciated Indian Rupee, increasing currency risk.

3. Valuation

• 2014 Estimates:
  • P/E: 9X for H-shares, 12X for A-shares.
  • P/B: 1.0X for H-shares, 0.9X for A-shares.
  • EV/EBITDA: 13.3X for H-shares, 12.1X for A-shares.
• P/B Analysis: The P/B ratio is expected to continue to decline, to 0.8X by 2015.
• ROE: Projected to decrease from 14.9% in 2012 to 10.4% in 2015.
• CROCI: Expected to fall from 6.5% in 2012 to 6.2% in 2015.

4. Financial Highlights

5. Key Risks

• Sales and New Orders: May not meet forecasts due to weak demand.
• Gross Margins: At risk due to market competition and cost pressures.
• Impairments: May vary from estimates, affecting profitability.
• Currency Risk: Export prospects are limited due to the depreciated Indian Rupee.

Summary Table

Key Insights

• The company is expected to face continued challenges in revenue growth, profit margins, and earnings recovery.
• Export performance is negatively impacted by the depreciation of the Indian Rupee.
• Dividends are expected to fall modestly in 2013 due to lower earnings.
• Valuation metrics such as P/E and P/B are expected to continue to decline.
• Gross margin is a key factor in earnings sensitivity, with a 100-bp change potentially affecting EPS by 17%.
• ROE is projected to decline over time, indicating lower returns for shareholders.

Investment Context

• Peer Comparison: The company trades at a lower P/B compared to its peers, suggesting potential undervaluation.
• Market Position: Despite some growth in certain segments, the company's overall performance remains under pressure.
• Share Price Performance:
  • 3-month: +5.5%
  • 6-month: -23.3%
  • 12-month: +0.7%
• Relative to MSCI China:
  • 3-month: -10.6%
  • 6-month: -26.6%
  • 12-month: -10.9%

Conclusion

Dongfang Electric (H) is currently facing multiple challenges in its business environment, including weak new orders, intense competition, and cost pressures. The company is undervalued in terms of P/B, but high valuation risks persist. Investors should be cautious and consider the low growth expectations and potential for margin compression before making investment decisions.