1
Yum Cha 飲 茶 May 7, 2014
CHINA HIGH SPEED TRANSMISSION EQUIPMENT (CHSTE) [0658.HK, HK$5.37; BUY] - We initiate
coverage with a BUY rating, as we believe domestic and US demand will provide several drivers for a strong
revenue and earnings recovery this year. Projected new wind power installation in China is projected at 20GW
this year and 22GW in 2015, while a 40% increase in orders from General Electric (GE) reflects a resurgent
US windpower sector. Three key domestic factors are improving grid curtailment; increased grid-connected
windpower capacity in Q1 2014; and a surge in windpower turbine generator tenders so far this year. On
valuation, CHSTE is trading at a deep discount to other windpower generating equipment makers, and our
target price of HK$7.50 (+40% upside) infers a mid-point between the mid—cycle and peak valuation for the
company.
TALKING POINTS
CHART OF THE DAY— CITIES TAKE ACTION TO HEAD OFF PROPERTY CRASH
Analyst: John Mulcahy, Managing Director
Source: Bloomberg
DIARY NOTES FOR THIS WEEK
May 8 Export/import YoY (April)
May 9 PPI YoY (April)
May 9 CPI YoY (April)
Nanning in Guangxi Province launched the latest round of HPR relaxation, by allowing non-
residents (but only from neighbouring cities) to buy homes in the city. Since then, Ningbo in
Zhejiang Province and Tongling in Anhui Province have eased restrictions, reducing down-
payments to 20% from 30%, in defiance of central government guidelines. But the cities are
responding to a real problem, as property agent Centaline reported that sales of new homes
in 54 cities during the key May 1-3 holiday period were 47% lower than the equivalent 2013
period. The chart at the top of the page shows the slowdown in year-on-year (YoY) house
price increases for 100 cities monitored by the National Bureau of Statistics (NBR). The low-
er chart shows that the market has been discounting a weaker property market for some
time, and if anything the question now is where to find the new entry point. As with China’s
banks, the real estate sector has priced in a severe slump, and there may be a capitulation
point, but we expect some central government measures to avoid a crash that would have
much wider implications for the economy than volatile stock prices.
INDICES Closing DoD%
Hang Seng Index
21,976.3
(1.3)
HSCEI
9,743.3
(0.6)
Shanghai COMP
2,027.4
0.0
Shenzhen COMP
1,037.0
0.9
Gold
1,311.9
0.9
BDIY
1,017.0
2.4
Crude Oil, WTI(US$/BBL)
100.3
0.5
Crude Oil, BRENT(US$/BBL)
108.7
0.1
HIBOR, 3-M
0.4
0.8
SHIBOR, 3-M
5.5
(0.3)
RMB/USD
6.2
(0.2)
China’s property sector is once
again under the spotlight, as more
cities move to relax home pur-
chase restrictions (HPR), to prop
up a sector that has seen extreme
volatility, hitting a recent low in
2012, although prices and vol-
umes recovered throughout 2013.
The stock prices have remained
sluggish, and are typically trading
at low single-digit PERs, although
it is generally a warning sign
when analysts start quoting PERs
rather than net asset value (NAV)
as a measure for valuing property
developers. The risk is now not so
much the deviation from NAV, but
the ability to service debt at a time
of slowing cash flow from sales.
2
China High Speed Transmission Equipment [0658.HK]
We see more signs of accelerating wind power installation growth in China and the US this year, which we believe will translate into several earnings drivers for China High Speed Transmission Equipment (CHSTE), including sales volume growth, margin expansion and reduction of finance costs. Most importantly, we believe the market has yet to adjust to CHSTE’s strong recovery. Our earnings estimates for 2014E/2015E are 30%+ above consensus. CHSTE is trading at a large discount to other wind equipment makers. We set our target price at HK$7.50 based on 17.5x 2014E PER, mid-point between mid-cycle (13x) and peak valuation (22x), to reflect the on-track earnings recovery. Initiate with BUY.
China wind power installation addition projected at 20GW/22GW in 2014E/2015E from 16GW in 2013—five factors: (1) Grid curtailment contin-ues to improve; (2) grid-connected capacity in Q1 14 increased by 18% sug-gesting on-track installation growth; (3) China wind turbine generator (WTG) tenders jumped 80%+ YoY in Q1 14; (4) strong project pipeline released by NEA; (5) strong government determination to improve air quality.
Impressive order growth of 40% YoY from General Electric [GE] in 2014E. We believe US wind power installation will recover strongly in 2014E after the extension of the production tax credit (PTC). We estimate substan-tial orders from GE will help drive CHSTE’s wind gear export volume to its historical high this year.
Earnings drivers for CHSTE: Volume growth + margin expansion + de-cline in finance expenses. We expect total wind gear sales volume to reach 9.5GW/10.8GW in 2014E/2015E, up from 7.3GW in 2013. With higher utiliza-tion rate, stabilized average selling price (ASP) and less impairment, we ex-pect margin to expand 2ppt+ to 27% in 2014E and we see further upside if the non-wind segments grow faster than our expectation. Besides, we expect the peak of the capex cycle to drive finance expenses down.
Major subsidiary of CHSTE reported 166% YoY revenue growth in Q1 14; Returning to profit (PRC GAAP). Nanjing High Speed Gear Manufac-turing Group is the major wind gear subsidiary of CHSTE. The strong growth reaffirmed our confidence on CHSTE’s recovery story.
Key risk factors: (1) Technology shift; (2) Policy risk; (3) Increase in raw
material costs; (4) New business risk.
(For details, please refer to the full report.)
Wayne Fung, CFA —Analyst
(852) 3698-6319
John Mulcahy—Head of Research
(852) 3698-6889
Wind Power Sector Re-rating on installation acceleration; three earnings drivers;
Initiate with BUY
BUY
Close: HK$5.37 (May 5, 2014)
Target Price: HK$7.50 (+40%)
Share Price Performance
Market Cap US$1,133m
Shares Outstanding 1,635m
Auditor Deloitte
Free Float 63%
52W range HK$3.15-6.75
3M average daily T/O US$2.8m
Major Shareholding Fortune Apex
(21.3%)
Ji Changqun
(15.7%)
May 7, 2014
Key financials (RMB m) 2011 2012 2013 2014E 2015E
Revenue 7,121 6,369 6,539 7,935 8,721
Change (YoY) -3.7% -10.6% 2.7% 21.4% 9.9%
EBIT 1,063 761 701 1,155 1,316
Change (YoY) -35.4% -28.4% -7.9% 64.8% 13.9%
Core net profit 807 256 478 553 717
Change (YoY) -42.2% -68.2% 86.3% 15.8% 29.6%
ROE 10.9% 3.4% 6.0% 6.3% 7.6%
Net debt/equity 55.0% 57.3% 53.6% 46.1% 36.0%
PER (core earnings) (x) 7.5 23.2 12.3 12.7 9.7
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
PBR (x) 0.8 0.8 0.8 0.8 0.7
EV/EBITDA (x) 10.0 12.2 12.2 8.9 8.0
Sources: Company, CGIHK Research estimates
3
We initiate coverage of CHSTE with a BUY rating. Our target price of HK$7.50 is based on 17.5x PER, mid-point between the peak level of 22x and average of 13x. We believe an above-average valuation is justified as CHSTE is entering a recovery stage with further strong earnings growth in 2015E.
Cross checking, we believe Xinjiang Goldwind [2208.HK; Not rated] is the best comparable to CHSTE in the Hong Kong market. While Goldwind and CHSTE represent different technologies and are not in the same value chain, earnings of both companies are driven by the same industry factor (i.e. acceler-ating installation). CHSTE is now trading at 49%/38% discount to Goldwind in terms 2014E PER/PBR. Even our target price of HK$7.50 implies 29%/15%
discount to the current valuation of Goldwind.
By comparison with major international wind equipment players, CHSTE is trad-ing at 41%/66% discount in terms of 2014E PER/PBR (figure 1).
Valuation
We believe CHSTE’s large dis-count to Goldwind and interna-tional wind equipment players is unjustified.
Figure 1: Peer comparison
Sources: Bloomberg, Company, CGIHK Research estimates for covered stocks
Ticker Company Rating Price Market cap PB (x) EV/EBITDA (x)
(local currency) (US$ m) 2013A 2014E 2015E 2013A 2014E 2015E 2013A 2014E 2015E
Wind gearbox manufacturers
658 HK Equity CHSTE BUY 5.37 1,133 12.3 12.7 9.7 0.8 0.8 0.7 12.2 8.9 8.0
Chinese WTG manufacturers
2727 HK Equity SHANGHAI ELECTRIC - 3.07 7,030 13.3 12.3 11.7 1.0 0.9 0.9 7.9 7.1 6.8
1072 HK Equity DONGFANG ELECTRIC - 11.90 3,682 8.2 9.2 8.9 1.1 1.0 0.9 5.7 5.7 5.5
2208 HK Equity XINJIANG GOLDWIND - 8.41 3,744 42.7 24.9 17.6 1.4 1.3 1.2 48.8 22.1 16.0
Average 21.4 15.5 12.7 1.1 1.1 1.0 20.8 11.7 9.5
Chinese wind farm operators
916 HK Equity China Longyuan BUY 8.02 8,314 21.3 16.3 14.0 1.7 1.5 1.4 10.9 8.9 7.8
958 HK Equity Huaneng Renewables HOLD 2.47 2,877 17.4 20.2 13.0 1.3 1.2 1.1 9.9 8.0 5.9
1798 HK Equity Datang Renewable HOLD 1.08 1,013 34.8 20.2 13.7 0.7 0.7 0.6 9.7 9.3 8.2
956 H Equity China Suntien BUY 2.59 1,241 13.9 13.2 11.3 1.1 1.0 0.9 8.4 6.9 6.0
735 HK Equity China Power New Energy - 0.42 622 14.9 9.4 5.4 0.5 0.5 0.5 7.7 4.6 2.8
182 HK Equity China Windpower - 0.55 635 27.1 9.6 7.2 0.9 0.9 0.8 n/a 5.5 3.4
Average 21.6 14.8 10.8 1.0 1.0 0.9 9.3 7.2 5.7
Overseas WTG manufacturers
GE US Equity GENERAL ELECTRIC - 26.68 267,467 16.1 15.7 14.6 2.0 2.0 1.8 22.0 23.1 21.4
SIE GR Equity SIEMENS AG-REG - 92.78 113,429 18.2 13.7 12.2 2.6 2.6 2.3 10.9 8.9 8.1
VWS DC Equity VESTAS - 244.50 10,186 n/a 30.3 24.2 4.3 3.3 2.9 11.8 9.1 8.4
SUEL IN Equity SUZLON ENERGY - 14.15 585 n/a n/a n/a 2.8 n/a n/a n/a 149.0 10.2
GAM SM Equity GAMESA - 7.42 1,357 39.1 20.3 14.6 1.8 1.6 1.4 7.8 7.4 6.3
NDX1 GR equity NORDEX AG - 12.02 1,349 85.8 27.9 20.3 2.6 2.4 2.2 8.7 7.4 6.1
Average 39.8 21.6 17.2 2.7 2.4 2.1 12.3 34.1 10.1
PE (x)
4
Figure 2: PER band
Sources: Bloomberg, Company, CGIHK Research estimates
Note: The calculation of EPS excludes the exceptional items
0
2
4
6
8
10
12
14
16
18
20Oct-09
Feb-10
May-10
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Nov-10
Mar-11
Jun-11
Sep-11
Dec-11
Apr-12
Jul-12
Oct-12
Jan-13
May-13
Aug-13
Nov-13
Mar-14
HKD
22x
18x
14x
10x
6x
Figure 3: PBR band
Sources: Bloomberg, Company, CGIHK Research estimates
0
2
4
6
8
10
12
14
16
18
20
Oct-09
Feb-10
May-10
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Apr-12
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Oct-12
Jan-13
May-13
Aug-13
Nov-13
Mar-14
HKD
2.70x
2.10x
1.50x
0.90x
0.30x
5
Earnings Projection
Income Statement (Year end 31 Dec)
(RMB m, except for per share data) 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E
Revenue 3,439 5,647 7,393 7,121 6,369 6,539 7,935 8,721
COGS (2,447) (3,786) (5,180) (5,302) (4,815) (4,908) (5,782) (6,289)
Gross profit 992 1,861 2,213 1,819 1,553 1,631 2,153 2,432
Other income/(expenses) 26 56 143 108 127 104 145 123
Distribution and selling exp (107) (139) (200) (254) (279) (281) (349) (384)
Administrative exp (284) (318) (460) (527) (502) (613) (635) (680)
Research and development cost (55) (70) (50) (83) (138) (139) (159) (174)
EBIT 572 1,390 1,645 1,063 761 701 1,155 1,316
D&A 161 216 369 555 574 631 675 701
EBITDA 732 1,606 2,014 1,618 1,335 1,332 1,831 2,018
Other non recurring gain/(loss) 212 (140) 111 (70) (2) 13 0 0
Shares of results of Associates/JCE 10 16 41 26 (27) (62) 13 13
Finance costs (29) (100) (147) (323) (524) (564) (550) (480)
Pretax profit 764 1,166 1,651 695 208 88 619 849
Taxation (72) (200) (257) (147) (79) (57) (62) (127)
After tax profit 693 966 1,394 548 128 31 557 722
Minority interests (0) 1 (10) 9 10 33 (4) (5)
Net profit 692 966 1,384 557 138 65 553 717
EPS (RMB/shr) 0.556 0.776 1.080 0.407 0.102 0.047 0.338 0.438
Recurring net profit 450 1,134 1,309 807 256 478 553 717
Recurring EPS (RMB) 0.362 0.911 1.021 0.590 0.188 0.348 0.338 0.438
Dividend 274 329 382 0 0 0 0 0
DPS (RMB) 0.220 0.264 0.298 0.000 0.000 0.000 0.000 0.000
Growth rates 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E
Revenue 80.6% 64.2% 30.9% -3.7% -10.6% 2.7% 21.4% 9.9%
Gross profit 79.4% 87.6% 18.9% -17.8% -14.6% 5.0% 32.0% 12.9%
EBITDA 121.5% 119.3% 25.4% -19.7% -17.5% -0.2% 37.5% 10.2%
EBIT 140.8% 143.2% 18.3% -35.4% -28.4% -7.9% 64.8% 13.9%
Net profit 125.8% 39.6% 43.3% -59.8% -75.1% -53.4% 756.4% 29.6%
Recurring net profit 43.2% 152.0% 15.4% -38.3% -68.2% 86.3% 15.8% 29.6%
EPS 93.3% 39.6% 39.2% -62.3% -75.1% -53.7% 618.8% 29.6%
Recurring EPS 22.6% 152.0% 12.1% -42.2% -68.1% 85.0% -2.8% 29.6%
M argins 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E
Gross margin 28.8% 33.0% 29.9% 25.5% 24.4% 24.9% 27.1% 27.9%
EBITDA margin 21.3% 28.4% 27.2% 22.7% 21.0% 20.4% 23.1% 23.1%
EBIT margin 16.6% 24.6% 22.2% 14.9% 12.0% 10.7% 14.6% 15.1%
Net margin 20.1% 17.1% 18.7% 7.8% 2.2% 1.0% 7.0% 8.2%
Recurring net margin 13.1% 20.1% 17.7% 11.3% 4.0% 7.3% 7.0% 8.2%
Sources: Company, CGIHK Research estimates
6
Sources: Company, CGIHK Research estimates
Balance Sheet (As of Dec)
(RMB m, except for per share data) 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E
Non current assets
PP&E 2,362 3,845 4,870 5,589 6,238 6,633 6,533 6,206
Interest in associates/JV 588 604 681 838 796 645 658 671
Others 667 749 1,239 1,721 2,035 2,059 1,984 1,909
3,617 5,198 6,789 8,148 9,069 9,337 9,175 8,787
Current assets
Inventories 1,336 1,313 1,258 1,799 1,781 2,390 2,521 2,821
Trade and other receivables 1,294 2,613 3,811 4,938 4,668 6,238 6,372 7,248
Pledged disposal & restricted cash 1,484 603 914 1,253 1,898 2,515 2,515 2,515
Cash 682 471 2,124 2,175 2,405 2,235 1,138 1,019
Others 65 37 36 89 63 256 256 256
4,861 5,037 8,142 10,253 10,813 13,633 12,801 13,858
Total assets 8,478 10,235 14,932 18,401 19,882 22,971 21,976 22,645
Current liabilities
Trade and other payables 2,049 1,566 2,613 2,826 2,945 3,986 3,934 4,681
Bank borrow ings 1,292 1,556 1,209 4,991 7,449 7,109 5,659 4,909
Others 54 166 1,405 181 250 414 414 414
3,395 3,288 5,226 7,998 10,645 11,509 10,007 10,004
Non current liabilities
Bank borrow ings 68 1,012 2,043 2,627 1,288 2,338 2,288 2,238
CB 932 1,369 0 0 0 0 0 0
Deferred income 32 67 62 91 180 74 74 74
Others 317 49 86 63 25 288 288 288
1,348 2,496 2,191 2,781 1,493 2,700 2,650 2,600
Equity
Share capital 95 95 103 103 103 119 119 119
Reserves 3,636 4,326 7,289 7,370 7,437 8,395 8,948 9,665
3,731 4,421 7,393 7,473 7,539 8,514 9,067 9,784
Minority interests 4 29 122 149 205 248 252 257
3,735 4,450 7,514 7,622 7,745 8,762 9,319 10,041
Total equity and liabilities 8,478 10,235 14,932 18,401 19,882 22,971 21,976 22,645
BVPS (RMB/shr) 2.72 3.22 5.39 5.45 5.53 5.21 5.54 5.98
7
Sources: Company, CGIHK Research estimates
Cash Flow Statement (Year end 31 Dec)
(RMB m, except for per share data) 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E
Pretax profit 764 1,166 1,651 695 208 88 619 849
D&A 161 216 369 555 574 631 675 701
Tax (20) (107) (200) (287) (153) (91) (62) (127)
Interest expenses/(income) (15) 74 116 278 462 479 505 457
Shares of results of JV/associates (10) (16) (41) (26) 27 62 (13) (13)
Change in w orking capital (556) (1,784) (185) (1,588) 319 (1,509) (317) (429)
Other non cash item (176) 169 (76) 254 105 333 0 0
Operating cash flow 149 (282) 1,634 (118) 1,542 (7) 1,408 1,438
PP&E (944) (1,499) (1,082) (1,002) (1,037) (883) (500) (300)
Investment/(disposal) in JV/Associate (561) 0 (44) (157) (9) 3 0 0
Interest received 44 26 31 45 62 85 45 23
Others (1,708) 698 (937) (1,086) (963) (840) 0 0
Investing cash flow (3,169) (775) (2,031) (2,174) (1,923) (1,602) (455) (277)
Issue/(repurchase) of CB 1,469 0 0 (1,254) 0 0 0 0
Issue/(repurchase) of shares 0 0 1,916 0 0 856 0 0
Net borrow ing 867 1,206 605 4,342 1,119 710 (1,500) (800)
Dividend paid (88) (274) (327) (375) 0 0 0 0
Interest paid (29) (100) (147) (389) (568) (611) (550) (480)
Others (35) 15 4 19 60 486 0 0
Financing cash flow 2,185 847 2,050 2,343 612 1,439 (2,050) (1,280)
Net change in cash (835) (210) 1,653 51 230 (169) (1,097) (119)
Ratios
Valuation
PER (recurring earnings) 13.3 5.2 4.6 7.5 23.2 12.3 12.7 9.7
Dividend yield 4.6% 5.6% 6.4% 0.0% 0.0% 0.0% 0.0% 0.0%
PBR 1.8 1.5 0.9 0.8 0.8 0.8 0.8 0.7
EV/EBITDA 22.2 10.1 8.1 10.0 12.2 12.2 8.9 8.0
Operational
Recurring net margin 13.1% 20.1% 17.7% 11.3% 4.0% 7.3% 7.0% 8.2%
Asset Turnover 0.52 0.60 0.59 0.43 0.33 0.31 0.35 0.39
Asset / Equity 1.9 2.3 2.1 2.2 2.6 2.7 2.6 2.4
Adjusted ROAE 13.2% 27.8% 22.2% 10.9% 3.4% 6.0% 6.3% 7.6%
Adjusted ROAA 6.8% 12.1% 10.4% 4.8% 1.3% 2.2% 2.5% 3.2%
Adjusted ROIC 9.4% 15.8% 13.8% 6.3% 1.6% 2.8% 3.2% 4.2%
Interest coverage 19.9 13.9 11.2 3.3 1.5 1.2 2.1 2.7
Net debt / Equity 3.4% 64.3% 2.9% 55.0% 57.3% 53.6% 46.1% 36.0%
Current ratio 1.4 1.5 1.6 1.3 1.0 1.2 1.3 1.4
Quick ratio 1.2 1.4 1.2 1.0 0.8 1.0 1.2 1.3
Days receivables 103 126 159 224 275 304 290 285
Days payables 239 174 147 187 219 258 250 250
Days inventories 148 128 91 105 136 155 155 155
Sources: Company, CGIHK Research estimates
8
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BUY share price will increase by >20% within 12 months in absolute terms :
SELL share price will decrease by >20% within 12 months in absolute terms :
HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :