After the management briefing this morning, we upped FY17/18E earningsforecasts by +3%/6% and expect a soft earnings growth outlook (+2% in 2016-18E). Mgmt assured no change in CHSTE’s business strategy under the newcontrolling shareholder, while admitting joint investment is likely inupstream/downstream manufacturing as well as property development.Currently trading at 12x FY17E PE and 1.1x FY17E PB vs. 10% ROE, the stocklooks fairly valued. Maintain Hold; new TP (1.0x 2017E P/B), at Rmb7.5/shr.
17GW wind gearbox shipment guidance for FY17 vs. DBe: 16GW
CHSTE sold 14.5GW wind gearbox in FY16, down 5% yoy and below priorguidance of 17GW. Domestic sales declined -23%, in line with industrycontraction, but mitigated by rising export (+40%). For FY17, mgmt guided17GW and expect export revenue share to rise further from c.40% in FY16.Considering the miss in FY16, we set our FY17E shipment estimate at 16GW.
Expecting margin pressure from both raw material and ASP fronts
Blended GPM was up 80bps in FY16 which we think it benefitted from Rmbdepreciation for its export. On HoH basis, wind gearbox ASP dropping c.5% toRmb0.5/w. Mgmt acknowledges some margin pressure due to raw materialprice hike (mainly iron/steel), but expect more delivery of high-margin largesizegearboxes to mitigate. We also anticipate some ASP pressure as itsdownstream wind turbines’ tender price has started to retreat. We haveincorporated 80/50bps margin contraction for wind gearboxes in FY17/18.
Improving balance sheet and cash flow position
CHSTE’s debt balance has been reduced by Rmb1.1bn in FY16. Managementexpects balance sheet/cash flow to further improve, with 1) +ve FCF given onlyRmb300m of capex budget, 2) another Rmb600m land disposal proceeds to becollected in 2017. It may further dispose non-core assets but does not expectlosses considering the substantial appreciation of manufacturing land sites.
Business strategy after shareholding change
After the share exchange deal completed last Dec, Fullshare (607.HK, NR) isnow the controlling shareholder with a 75% stake. Non-executive director fromFullshare indicated potential property investment cooperation with CHSTEgiven CHSTE’s land reserves. Also, Fullshare and CHSTE may cooperate inup/downstream investment of the manufacturing business.
Financial investment in Riyue
Back in 2010, CHSTE made a financial investment of Rmb67.5m in RiyueHeavy Industry Co (603218 CH, non-rated) which was listed in A share on 28Dec 2016. CHSTE owns 4.23% interests in Riyue and is subject to a one-yearlock up. As of 31 March 2017, the closing price of Riyue is Rmb47.48 and themarket value of CHSTE’s holding is worth Rmb800m. CHSTE recognised a fairvalue gain of c.Rmb600m in other comprehensive income in FY16.