What happened: Dongfang Electric announced a positive profit alert last night. The Company indicated that,based on its preliminary review of the consolidated management accounts, its net profit attributable toshareholders in 2018 is expected to increase by 65% to 95% as compared to that in 2017 （net profit in 2017was RMB 673 mn）。 Key reasons of the earnings surge during the period include: 1） Enhanced profitability ofthe principal businesses through effective management. The Company adopted countermeasures to copewith the challenges and impact brought by de-capacity within the coal-fired power segment and maintainedstable operations. The Company has focused on the development of wind power, power services andinternational businesses. 2） The Company completed the acquisition of assets from its parent throughissuance of shares. The newly acquired assets from the parent （DEC Group） have contributed significantly tothe earnings and have resulted in an improvement in profitability during the period.
Views and comments: The Company completed its reorganization with its parent （DEC Group） in the firsthalf of 2018 and acquired a bunch of promising new assets from its parent. The reorganization is the keyreason behind the successful turnaround of Dongfang Electric in 2018. Based on the profit alert, theCompany's net profit lies between RMB 1.11 bn and RMB 1.31 bn, which is 5.7% to 24.8% above our currentestimated net earnings of RMB 1.05 bn for 2018. As China is limiting the development of thermal power duringthe 13th Five-Year Plan period as a result of energy structure optimization, we believe the Company willcontinue to push through the SOE reform and gradually transform itself into a diversified energy and industrialequipment giant.
Investment suggestion: The share price of Dongfang Electric has jumped by approximately 18% since thebeginning of 2019. Our current investment rating is "Accumulate" with a TP of HK$ 5.20. We will maintain ourcurrent investment rating and further raise our TP in the next Company Report.