Downstream CAPEX guidance turned strong, upgrade to BUY rating. Weupgrade GWD’s rating based on strong CAPEX and capacity addition guidancesfrom downstream developers’ FY18 results briefing. According to our summary,8 listcos in aggregate plan to double their capacity addition target from FY18（2019E: 11.2GW vs. 2018:5.6GW）， and those listcos released even moreaggressive capacity expansion target in 2020. Those power corp listcos intendto secure pipeline wind projects with approved tariff offering significantsubsidies by 2020. We believe a CAPEX boom cycle for wind farm investmentsis confirmed, and we expect the cycle will trigger acceleration of capacityinstallation in 2019-20. Besides, we expect GWD’s recent rights issue willremove overhang on share price, helping the market to regain focus on its WTGsales. We raise our 2019/20E EPS estimates by 13.7/20.1% fromRMB0.90/0.92 to RMB1.02/1.10, and raise our base case TP from HK$9.80to HK$13.66 per share with FY19E PER of 11.5x. Upgrade to BUY rating.
China wind capacity addition to accelerate in 2019/20E. Given downstreamwind operators’ ambition targets to have as more as possible pipeline projectswith fixed subsidies to commence operation by 2020, we raise our base case2019/20E China WTG installation estimates by 14/25% to 25.9/29.8GW. Webelieve the rapid capacity expansion is highly achieveable, as 1） developershave strong motive to secure profitable subsidies; 2） after 2-yr deleveraging,SOE developers now have room to gear up for CAPEX; 3） key SOE players havepressure to increase their renewable capacity proportion; and 4）projects scaleunder construction had expanded significantly. We estimate GWD’s externalWTG shipment will increase by 16%/28% in 2019/20E from our previousestimates, and expect ASP and GPM pressure will likely be eased in a boomingmarket.
Rights issues overhang is removed. GWD had proceeded it’s A+H rightsissues after obtaining approvals from CSRC. The rights issues offered 675.7mnshares at a cost of 1x 2018 PBR of RMB7.02（HK$8.16） per share, leading to EPSdilution impact of 16.0% from 2019. We expect the rights issue will be donesmoothly in the A and H share market, and believe the completion of rightissues will shift market focus back to the booming downstream market.
Valuation tends to skew upward. We expect GWD will have two majorcatalysts: 1） consensus earnings to revise upward on the back of strong WTGdemand, and 2） valuation expansion in a demand boom cycle. With reference toGWD’s valuation during demand boom cycle in 2014-15, we expect GWD’svaluation to skew upward from its 5-yr average PER of 9.5x in view ofoptimistic market sentiment. We revise our 2019E TP multiple up from 10.0x to11.5x to reflect expanding valuation potential.