2018 results in line with expectations
Shanghai Electric Group （SHEG） announced its 2018 results. Revenue rose27% YoY to Rmb101.2bn, and net profit attributable to shareholders grew13% YoY to Rmb3bn. Excluding one-off items like government subsidies, itscore profit grew 2% YoY to Rmb2.1bn, in line with our estimate.
Trends to watch
Coal-fired units and environmental equipment boost 2018 revenue growth.Revenue at SHEG soared 27% YoY, as revenues from coal-fired units andenvironmental equipment climbed 48% and 78% YoY. SHEG’s overall GM wasunder pressure, while the wind segment’s GM improved. In 2018, thecompany’s overall GM dropped 2ppt to 20%, due to decreased GMs of itselevator and power station EPC businesses. While wind unit equipmentrevenue dropped 6% YoY, GM of this business segment rose 5ppt YoY to 16%,as high-margin offshore wind units’ sales contribution increased.
Wind unit revenue and gross profit to grow in 2019; nuclear equipment progress takes time. We expect SHEG’s wind unit equipment shipment andrevenue to grow substantially in 2019, given its thick order book and China’sintensive wind installation. GM should further improve thanks to economiesof scale and lower costs. On a conservative basis, we estimate revenue fromnuclear islands will edge up roughly 10% in 2019, given uncertain nuclearapproval and development progress.
Earnings forecast
We cut our 2019 EPS forecast 5% to Rmb0.18, given SHEG’s elevator andpower station EPC businesses remain under pressure. We introduce a 2020forecast of Rmb0.18.
Valuation and recommendation
SHEG-A and -H are trading at 35.0x and 14.7x 2019e P/E. We maintain ourHOLD rating for SHEG-A and our BUY rating for SHEG-H. We cut our targetprices for SHEG-A and -H by 10% to Rmb7.30 （41.3x 2019e P/E, 18% upside）and HK$4.05 （20.3x 2020e P/E, 38% upside）。 Risks: SHEG winsfewer-than-expected tenders; financial costs increase; GM drops.