Event Description: Shanghai Electric （02727.HK） held a conference call regarding the potential acquisition of51% stake in Jiangsu Zhongneng at 3pm yesterday. Jiangsu Zhongneng is an indirect subsidiary of the HongKong listed company GCL-Poly Energy （03800.HK）。 Shanghai Electric officially issued an announcement onJune 6th that it had signed a framework agreement with GCL-Poly on the acquisition of equity stake in JiangsuZhongneng. The transaction has been preliminarily determined to be conducted through the issue of A sharesand cash payment by Shanghai Electric （50% in stock and 50% in cash）。 The preliminary valuation of the 100%equity interest of Jiangsu Zhongneng is expected to be no more than RMB 25 bn, but shall be subject to theappraisal value determined in the asset appraisal report issued by the appraisal institutions with securitiespractitioner qualifications and appointed by the Company and recognized by GCL Poly Energy and filed with theShanghai SASAC. The deal has entered the stage of Due Diligence. The next step is to obtain approval fromthe China Securities Regulatory Commission, Shanghai State-owned Assets Supervision and AdministrationCommission, and shareholders of the company （requires 75% approval from the shareholders in A-share andH-share markets, respectively）。 The company expects that the acquisition will be completed within the year.
Reasons for Acquisition: As a leader in domestic and international energy equipment and advanced industrialequipment markets, Shanghai Electric believes that photovoltaic （solar energy）， as a main source of greenenergy that is rapidly rising, will replace traditional energy sources to become a sustainable renewable energysource in the short term, and believes that solar energy is a major trend of future energy development. Thesociety's emphasis on green energy will continue to drive up the market share of green energy in primaryenergy consumption in the future, which is an important basis for Shanghai Electric to develop the new energybusiness segment. The company hopes to move quickly into the manufacturing field of photovoltaic materialsthrough the holding of Jiangsu Zhongneng, and suggests that it will penetrate into the mid-stream anddownstream markets of the photovoltaic industry （such as photovoltaic modules, EPC and photovoltaic powerstations） in the future. Shanghai Electric affirms Jiangsu Zhongneng's leading position in the global photovoltaicindustry, and believes that the acquisition is an excellent opportunity for Shanghai Electric to achieve furthertransformation. The company believes that this acquisition is in line with medium-term and long-term practicalinterests of the two companies （i.e. Shanghai Electric and GCL-Poly） and its significance and impact are deepand profound. The two companies complement each other with their respective advantages and will continue toexpand and strengthen China's photovoltaic industry.
Judgment on the solar industry and future development plans: The Company believes that the new policyrecently issued by the National Energy Administration （NEA）， instead of seeing it as a negative, is positive forthe solar industry. The new policy will accelerate the elimination of outdated production capacity in the solarindustry and promote the early arrival of photovoltaic grid parity. The fluctuation of the solar sector will continuein the short term, but the company is confident about the healthy development of the photovoltaic industry in themedium to long term. After acquiring Jiangsu Zhongneng, the Company promises to retain JiangsuZhongneng’s management team （recognizing the management's past achievements）， but will participate in theformulation of Jiangsu Zhongneng’s development strategy and high-level decision making. Shanghai Electric’scash on hand at the end of the 1st quarter of 2018 was RMB 29.5 billion, thus there is no pressure to payGCL-Poly over RMB 6 billion in cash. Although already a leader in energy equipment and high-end equipment,Shanghai Electric hopes to further transform itself into a leader in the global solar industry through theacquisition of Jiangsu Zhongneng. After the completion of the acquisition, similar acquisition on, or other formsof cooperation with, GCL New Energy （00451.HK） is not ruled out for the future.
About Jiangsu Zhongneng: Jiangsu Zhongneng has all the poly-silicon production capacity of GCL Poly （the totalpoly-silicon production capacity is expected to reach 115,000 tons by the end of 2018） and the majority of its waferproduction capacity （about 25 GW by the end of 2018）。 Jiangsu Zhongneng’s total assets amounted to RMB 45 billionand net assets at RMB 17.88 billion （with total liabilities of approximately RMB 27 billion） by the end of 2017. Thecompany achieved sales revenue of RMB 20 billion with net profit of RMB 1.9 billion in 2017. The massivehigh-interest debt is also the key reason why Jiangsu Zhongneng’s profitability is not as good as its peer in the solarindustry （key competitor Xi'an Longi's overall net margin was about 22% in 2017）。
Our view: As the downward trend of domestic investment in traditional energy is expected to continue （under thebackground that China has shifted its long-term energy development strategy）， the transformation of Shanghai Electricis still continuing （two rounds of restructuring have been completed with its parent company and a number of highquality new assets injected into Shanghai Electric）。 We believe that after the completion of the acquisition of JiangsuZhongneng, the Company will further increase its overall competitiveness and revenue contribution from the newenergy business segment. This acquisition will directly give Shanghai Electric the global leading position in theupstream photovoltaic materials market. Although the solar sector will continue to fluctuate in the short term, webelieve that the growth potential in solar materials in both domestic and international markets will continue to rise,especially given that PV grid parity will very soon be achieved. It’s worth noting that after Jiangsu Zhongneng isacquired by Shanghai Electric, the leverage ratio and financing cost of Jiangsu Zhongneng are expected to greatlyimprove, further enhancing its overall profitability. The average borrowing rate （i.e. interest rate） of Shanghai Electric in2017 was approximately 3.6%. We believe that Jiangsu Zhongneng will enjoy the same low interest rate after it’sincorporation into Shanghai Electric, and this will result in a significant decline in its financing costs. We expect JiangsuZhongneng to make great earnings contribution to Shanghai Electric and will drive Shanghai Electric's earnings growthin the medium to long term. Our current target price for Shanghai Electric is HK$ 3.56 and the investment rating is"Accumulate". We believe that this transaction is very positive for the development of Shanghai Electric in the mediumand long term. We will consider raising the company's target price and investment rating in the near future.