20130924-高盛-New_trough_P_B_may_not_have_fully_reflected_industry_concerns_12页_437kb

Dongfang Electric Corporation Limited (H) Summary

Core Content

Dongfang Electric Corporation Limited (H) (1072.HK) is a diversified power equipment manufacturer, with its financials and market performance analyzed in this report. The company is part of the Asia Pacific Alternative Energy Peer Group, and the report provides an updated investment thesis and valuation analysis for the company.

Main Points

• Investment Rating: The rating remains Neutral, with a focus on three key concerns.
• Revenue Growth: Revenue growth may continue to face challenges in 2015 due to weak new orders and declining product prices.
• Operating Costs and Margins: Operating costs could decrease due to lower receivable impairments and efficiency gains, but gross margins remain at risk due to intense market competition.
• Financing Costs: Higher financing costs may hinder earnings recovery.
• EPS Estimates: The 2013-2015 EPS estimates have been cut by an average of 4%.
• Target Prices: The 12-month P/E-based target prices for H- and A-shares have been reduced by 4% and 5%, respectively.
• Valuation Metrics:
  • P/E (analyst): 9X for H-shares and 12X for A-shares.
  • P/B: 1.0X for H-shares and 1.3X for A-shares.
  • EV/EBITDA: 13.3X for H-shares and 14X for A-shares.
• Dividend Yield: Expected to remain around 1.2% for both H- and A-shares.
• ROE: Expected to decline from 14.9% in 2012 to 10.4% in 2015.
• Key Risks: Sales, new orders, gross margins, and impairments may vary from forecasts.

Key Concerns

1. New Orders and Revenue Growth: New orders declined by 10% YoY in 1H13, and coal-fired power capacity growth is expected to slow to 4% from 2012-2015 and 1% from 2015-2020 as China reduces its carbon footprint.
2. Market Competition: Weak product demand and intense price competition may pressure profit margins.
3. Export Prospects: The depreciated Indian Rupee may reduce export revenue and increase currency risk.
4. Dividend: The dividend is expected to fall modestly in 2013 due to lower earnings, with a payout ratio assumed to remain at 10.1%.
5. Receivable Management: While receivable collection may improve, the impact on impairments is still uncertain.

Valuation Summary

• 2014 Estimates:
  • P/E: 9X for H-shares and 12X for A-shares.
  • P/B: 1.0X for H-shares and 1.3X for A-shares.
  • EV/EBITDA: 13.3X for H-shares and 14X for A-shares.
• P/B Trends: The P/B ratio is expected to decline further from 1.7 in 2012 to 0.8 in 2015, indicating a potential undervaluation based on the company's historical performance.

Financial Highlights

• Revenue and Net Income:
  • Revenue is expected to grow slightly in 2013 and 2014, with a 12% increase in 2013 and 1% in 2014.
  • Net income is projected to decline slightly in 2013 and 2014, with a 3.4% and 2.8% decrease, respectively.
• EPS: The basic EPS is expected to decrease by 3.4% in 2013 and 2.8% in 2014, with a slight increase of 3.3% in 2015.
• Operating Expenses: SG&A and other operating expenses are expected to vary slightly, with a decrease in SG&A as a percentage of revenue from 11.6% in 2013 to 10.0% in 2015.
• Gross Margin: The gross margin is expected to decline from 24.6% in 2012 to 21.9% in 2014, with a slight recovery in 2015.

Peer Comparison

• P/B Ratio: Dongfang Electric is trading below its historical averages in P/E and P/B, which may suggest a potential undervaluation.
• Valuation Relative to Peers: The company trades in line with Chinese peers on P/B, but at a premium on EV/GCI compared to global peers.

Key Risks and Assumptions

• Sales and New Orders: May not meet expectations due to weak demand and competition.
• Gross Margins: At risk due to declining prices and cost inflation.
• Impairments: May vary based on receivable collection and market conditions.
• Currency Risk: The depreciation of the Indian Rupee may affect export performance.
• Earnings Sensitivity: A 100-bp change in gross margin could impact EPS by 17%.

Investment Profile

• Price (HK$): 11.20
• 12-month price target (HK$): 11.70
• Market Cap (HK$ mn / US$ mn): 22,443.2 / 2,894.7
• Dividend Yield (%): 1.2%
• ROE (%): Expected to decline from 14.9% to 10.4% by 2015.

Summary Table

Key Financial Statements

• Income Statement:
  • Total revenue: Expected to remain relatively stable.
  • Net income: Expected to decline in 2013 and 2014 before slight recovery in 2015.
• Balance Sheet:
  • Cash and equivalents: Expected to increase.
  • Accounts receivable: May decline due to improved collection.
  • Inventory: Expected to decrease slightly.
• Cash Flow:
  • Operating cash flow: Expected to fluctuate, with a positive outlook in 2014.
  • Capital expenditures: Expected to decrease over time.
  • Dividends: Expected to remain stable, with a slight decrease in 2013.

Conclusion

Dongfang Electric is facing multiple challenges, including weak revenue growth, margin pressures, and financing costs, which have led to a revised investment thesis and lower target prices. While the company is trading below its historical averages in P/E and P/B, the valuation remains in line with Chinese peers. The report highlights the importance of monitoring key financial metrics and market conditions for the company's future performance.