2018 results in line with expectation
2018 revenue fell 8% YoY to Rmb30.7bn and attributable net profitrose 7% YoY to Rmb1.1bn, largely in line with our and marketexpectation.
Trends to watch
Weak thermal power business hurts revenue; asset injection boostsgross margin. In 2018, overall revenue declined 8% YoY as revenuefrom coal-fired and gas-fired equipment tumbled 20% and 39% YoYon a changing energy structure in China. However, gross margin rose2ppt YoY thanks to assets injected. In new business lines, grossmargin was 92% for financial services, 27% for trade, and 27% forlogistics, all well above DFE’s average GM.
New orders grow steadily; significant growth potential in windbusiness. In 2018, new orders climbed 9% YoY to Rmb34.9bn.
Notably, newly effective and newly won wind power orders jumped68% and 114% YoY. DFE plans to focus on large turbines in the nexttwo years, and implement mixed-ownership reform to incentivizeemployees. Given possible rush installation in the domestic windpower market in 2019–2020, we expect incremental wind powerorders and revenue to grow more than 20%.
Integrated strength in nuclear power; watch for resumption inregulatory approval for nuclear power projects. DFE boasts a 66%market share for nuclear islands and 45% for conventional islands in2018. In January 2019, DFE gained regulatory approval tomanufacture nuclear steam supply systems, making it the firstdomestic firm to provide complete nuclear equipment. If regulatoryapproval resumes for nuclear projects, we expect DFE to benefit fromrising orders and lower costs, positive for earnings.
Earnings forecast
Given growth in wind and nuclear power businesses, we raise our2019 earnings forecast 12% to Rmb1.44bn and introduce a 2020forecast at Rmb1.59bn.
Valuation and recommendation
DFE-A/H is trading at 22.9x and 12.0x 2019e P/E. Given earningsforecast revisions and changing valuation, we maintain BUY forDFE-A/H and TPs at Rmb12.87 （27.6x 2019e P/E and 21% upside） andHK$8.07 （15.3x 2019e P/E and 28% upside）。 Risks: Disappointment inwind turbine shipment and/or nuclear power resumption.