Guidance on 2016 wind gearbox sales looks very challenging; Hold
CHSTE’s 2015 result is a non-even,t given profit alert issued earlier. However,management sounds less confident on sales and gross margin for 2016, ascompared with this time last year. Thus, we stick to our 2016 wind gearboxdelivery assumption of 15GW (flat yoy), despite management soft guidance of17GW. We expect a lower domestic wind power installation outlook in Chinato cap CHSTE’s wind gearbox sales growth, even with a likely increase inexports. Maintain Hold for neutral risk-reward.
Strong recovery in 2015 as we expected; DPS better than expected
Reported earnings increased 367% yoy to HK$1,033m, in the range of 350-400% yoy growth indicated in the profit alert. The gross margin of 32.5% in2015 was 4ppt better than we expected, which was partially offset by higherthan-expected R&D expenses, finance expenses and loss from associates. Fullyear DPS was better-than-expected at HK$0.23 (vs. DBe of HK$0.15).
Wind: tone from management less conviction over 2016 delivery target
Although the delivery target of 17GW for 2016 remains unchanged fromSep’ 2015 when it was first given, management said this was only anestimate based on preliminary discussions with the wind turbine makers;and actual delivery depends on dynamic market conditions.
The delivery guidance for 2016 was 17GW, of which c.30% (or 5GW) willcome from overseas, vs. c.4.3GW in 2015. The majority should still comefrom GE in the US; and it will take more time for a break through intoEurope from turbine makers like Vestas. For China, management expectsno growth in nationwide wind capacity addition in 2016
Management expects no upside for overall gross margin from 32.5% in2015 (GPM normally falls within 25-30%). There is pressure fromcustomers to lower the ASP and margin. Management did not provide anysegmental breakdown on gross margin for the same reason.
Industrial gearbox: no improvement expected for 2016
Management acknowledges the difficulties customers are going through in theovercapacity reduction cycle. The company is therefore unlikely to raise prices, andwill provide service to the customers, even at a loss, to position itself for anindustry turnaround in the future.
Continue to scale back capex and dispose of non-core assets
Management has no intention of increasing capex, and will continue todispose of non-core assets in 2016. No guidance on dividend has been givenyet.