We like Shanghai Electric as we believe the restructuring willhelp improve asset quality
　　Investors concerned about offshore turbine, execution risksof coal power orders and further restructuring
Reiterate Buy with unchanged TP of HKD5.30Shanghai Electric attended HSBC’s 2017 China Conference held in Shenzhen on 11-12May.
　　Investment thesis: We see Shanghai Electric （SEG） as a defensive industrialconglomerate, following years of multi-industry transformation. A well-diversifiedbusiness model allows it to withstand the significant decline in the thermal powermarket. Since 2012, it has strategically shifted its focus to the non-thermal powersegment, with thermal power only accounting for 15% of total revenue in 2016 vs29% in 2012. We expect the non-thermal power segment to account for over 80% oftotal revenue by 2019e, especially for the offshore wind turbine （JV with Siemens），elevators and automation segments. These new segments should be the key driversfor improvement in overall gross margin to c19% by 2019e from c17% in 2012-13.According to the company, this restructuring will support its long-term revenue targetof over RMB10bn by 2020, implying a 6.6% CAGR over 2017-20e. The companyexpects net profit growth to be higher than revenue growth over 2017-20e.
　　Key highlights from the conference: 1） Targets to be the 3rd largest player indomestic onshore wind turbine market from the current 6th position with 6-7% marketshare. Wind turbine GPM improvement in 2016 is due to the focus on high-marginoffshore turbines （ASP at RMB6,000-7,000/KW vs RMB4,000/KW for onshoreturbine） and lower base in 2015 as a result of higher warranty provision at 5% of totalsales （vs 3% previously） and booking extra RMB200m for warranty provision. 2） Thecompany verified the existing coal power order backlog （RMB97.6bn by end of 1Q17,equivalent to three major equipment of c100GW coal power capacity）。 The majority oforder backlog has substantial completion. The company expects China to add 30GWcoal power new builds p.a. and 4-5GW replacement p.a. 3） Elevator revenue was up2.5% y-o-y in 2016 driven by maintenance services. Maintenance servicescontributed 25% of total elevator sales and are expected to grow in the future. 4） Thesecond batch of assets swap with parent is pending China Securities and RegulatoryCommission’s （CSRC） approval, and all other approvals are obtained from StateownedAssets Supervision and Administration Commission （SASAC） and NationalDevelopment and Reform Commission （NDRC）。 95% of total parent's sales will beincluded in SEG after completing the second batch assets swap.
　　Reiterate Buy with unchanged TP of HKD5.30 due to scalable quality asset basesupported by solid GP margin and moderate earnings growth.