Action
We downgrade CHST from BUY to HOLD as the stock pricehas surpassed our previous TP of HK$7.00, while we see higherrisk and limited upside in future earnings growth.
Reasoning
1H16 results slightly beat. Revenue was Rmb4,532mn(-4.6% YoY) and net profit was Rmb576mn (+9.9% YoY), orRmb0.352 per share. 1H16 earnings account for 53% of ourprevious full-year estimate (vs. 10%/47% actual in 2014/15).
Strong wind gearbox exports offset weak domesticdemand. Despite China’s declining wind power industry (newcapacity addition -16% YoY; new investment -38% YoY), CHSTrecorded stable wind revenue at 3.2% YoY in 1H16, as strongexports (+69% YoY) outweigh the weak domestic demand(-19% YoY). Considering its breakthrough in the EU and furtherexpansion in the US market through supplying GE, we lift our2016/17e wind shipments by 6%/4% to 16.5/17.7GW.
However, surging exports should be mostly priced in(stock +11% today) and we see higher risk and limitedupside in future earnings growth given: 1) CHST alreadyaccounts for >50% of GE’s wind demand and further upside islimited; 2) GE’s expansion into the EU may be threatened bySiemens, which just acquired Gamesa to expand this business;3) supply to other foreign manufacturers takes long time; and,4) competition from Goldwind, which adopts direct drive tech (nogearbox type) and has increased its share of the China market.
Earnings forecast and valuation
We revise up our 2016/17e EPS estimates by 7%/4% toRmb0.71/0.74 to factor in strong wind gearbox exports.Lift TP by 7% to HK$7.50 based on 9x 2016e PER, butdowngrade from BUY to HOLD due to the limited upside.
Risks
Worse-than-expected gross margin; larger-than-expected dropin wind gearbox shipments.