Unsurprising earnings, but with surprising low WTG margin. GWD’s FY18results brought some downside surprise, though the Company had released itsbottom line results in early March. Net profit came as expected, increasing 5.4%YoY to RMB3,145mn （after perpetual int. distribution）， but WTG gross profitmargin exhibited a surprisingly decline by 6.2ppt to 18.7%, 2.3ppt lower thanour estimates. Other income increased 27.1% YoY to RMB2,073mn, mainlyfrom disposal of subsidiaries, business, and investments available for sell,which helped maintain bottom line performance. Effective tax rate was lowerthan our estimates, due to higher contribution from wind farm investments.GWD declared final dividend of RMB25 cents per share, representing 28.3%payout.
Bullish WTG shipment guidance in FY19. WTG external shipment increased15.3% YoY to 5,861MW in 2018, indicating market share gain in fiercecompeting environment under grid-parity pressures. Mgmt. guidance wasbullish for 2019, in view of downstream developers accelerating capacityinstallation to secure project tariffs. GWD expected FY19 shipment to reach~10GW, of which domestic external shipment will account for more than 8GW,representing an external shipment growth higher than 36.5%. We estimate theshipment figures will indicate a significant market size expansion above 40% inChina.
Poor margin outlook. Bullish shipment won’t bring along GPM recovery,however, as mgmt. disclosed WTG margin to face further pressures from ASPdecline in 2019. In FY18, we estimate WTG ASP per watt declined slightly by0.6% YoY from to RMB3.782, while per watt COGS exclude DD&A costsexhibited a surge by 7.6% to RMB3.035. Mgmt. explained the costs hike wasdue to 1） material price rise and 2） FY18 shipments blended with higherproportion from new WTG model, which had significantly higher componentcosts in early phase market sales. In 2019, mgmt. expected WTG costs todecline by 2% through various means of costs control, but blended ASP declinefrom low price order won in 2018 will likely lead to another 4-5ppt decline inGPM. According to revised guidance, we estimate WTG ASP to decline by 8%YoY, which will bring segment GPM down to 13.6%.
Earnings is highly sensitive to GPM decline. At 13.6% GPM, we expectearnings is highly sensitive to GPM change. We estimate 1% movement in GPMwill lead to ~9% change in GWD’s bottom line. Moreover, as we expect 13.6%WTG GPM would be barely enough to cover ~8.5% selling expense （includewarranty provision） as well as admin costs incurred, our model suggests sellingmore WTG won’t generate more profit in such circumstances. We believe it isimperative for GWD to boost its GPM from WTG sales.
Selling wind farm assets to smooth earnings volatility. To offset the shorttermearnings swing, mgmt. intended to dispose certain wind farm projects. GWD sold 48MW wind farm in 2018 and recognized other income ofRMB313.9MW. The Company planned to sell 500MW wind farm assets in 2019. With reference to GWD’s wind farm disposal gain in 2017 and 2018, we expectthe Company will realize ~RMB1bn gains through asset disposal, and that willhelp smooth earnings volatility.
Downgrade to HOLD on WTG earnings pressures. We cut GWD’s 2019/20EEPS estimates by 34.4/28.4% to RMB0.76/0.90, mainly based on WTGsegment’s earnings pressures. We also cut earnings multiple from 11.5x downto 10.5x to reflect lower earnings visibility due to higher non-recurringcontribution from wind farm assets disposal. Our TP is therefore cut by 32.3%from HK$13.66 to HK$9.25 per share. Downgrade from Buy to HOLD.