平高电气(600312)

1H results disappoint; retaining Hold

Pinggao’s 1H17 results came in below expectation. A 35% net profit dropdespite revenue growth (+18%) manifests continued margin pressure. Whilethe valuation multiple looks undemanding at 13x FY17E PE, we stay cautiouson Pinggao since its margin is yet to bottom out and UHVAC project outlooklacks visibility. A potential UHV order contraction along with margincontraction would drag earnings CAGR down from 30% in FY15-17 to amediocre 5% in FY17-19, on our forecasts. Hold.

Still on a margin downward trend; difficult to achieve full-year growth

In 1H17, total revenue rose 18%, primarily driven by higher UHVAC GISshipment volume (18 vs. 14 in 1H16). However, NP dropped 35% yoy, with aworse-than-expected GPM contraction by 10ppt to 21%. This is mainlysqueezed by falling ASP (by c.10% for both UHV and EHV products) and risingraw materials (primarily aluminum, steel, copper, etc.). We believe the margincontraction trend is yet to reverse, considering: 1) a further raw material pricespike in 1H yet to be reflected on the books, 2) continued pricing pressureamid shrinking tender size, 3) sales mix shifting to low-margin mid-low voltageproducts. We recognize it could be challenging to catch up in 2H and achieve aNP growth this year (consensus/DBe: +16%/12%).

1H order update: UHV/EHV (-), distribution grid (+)

For UHVAC projects, there was only one equipment tender opened in 1H,namely Suzhou-Nantong 1000kV UHVAC GIL (Gas-insulated transmission line),from which Pinggao received orders of Rmb861m. This represents a 50%market share, with the rest going to Shandong Electrical Engineering &Equipment Co. In addition, West Beijing �C Shijiazhuang 1000kV AC line wasapproved in July. However, since it is only a Rmb3.5bn size expansion project(vs. >Rmb20bn for others), order contribution to Pinggao, if any, would beinsignificant. Mid-low voltage distribution grid equipment order is the silverline, with order intake up >40% yoy to >Rmb1bn, in line with industry trends.

UHVAC project outlook lacks visibility

As we argued in Emerging UHV risks, shrinking upside; dg Pinggao and XJElectric (8 June), China’s UHV transmission project approval outlook is turningless visible going forward, in light of large-scale power capacity delays and thegovernment’s promotion of distributed energy. It is in particular uncertain forcross-region UHVAC projects, whose safety issue remains controversial. Thehigh-margin UHVAC GIS has already contributed as much as 40%/>50% ofPinggao’s GP/NP, which is critical for its profitability. A potential high-marginUHV order contraction along with fierce competition may turn the product mixless favorable. This would likely more than offset rising distribution gridproducts sales as well as exports in the near term.