1H19 earnings in line with market expectations
Shanghai Electric Group （SHEG） announced that revenue rose 3% YoYin 1H19 to Rmb52.96bn while net profit attributable to shareholdersgrew 5% YoY to Rmb1.85bn, in line with market expectations.
Revenue maintained stable growth thanks to complementaritybusiness segments. Revenue at SHEG grew 3% YoY in 1H19. Revenuefrom its high-efficiency energy equipment fell 11% YoY due todownward pressure on the thermal-power equipment business.
However, revenue from SHEG’s elevator segment, alternative energy& environmental protection equipment segment, and modernservices segment grew 23%, 5%, and 10% YoY. The firm’s overallrevenue maintained positive growth in 1H19, with profitabilityimproving thanks to fading impact from loss provisions for thermalpower equipment. SHEG had Rmb1.15bn in asset-impairment lossprovisions for thermal power equipment in 1H18. However, the firmreduced provisions for thermal power equipment in 1H19,contributing about Rmb320mn to earnings growth. Thus, net profitgrew slightly faster than revenue in 1H19.
Trends to watch
Fierce competition weighed on gross margin of manufacturingbusiness; improving quality of projects boosted gross margin ofmodern services segment.
Rapidly growing orders to support future growth.
Financials and valuation
We cut our gross margin forecasts, but its loss provisioning hasreturned to a normal level. Thus, we raise our 2019 and 2020 netprofit forecasts 7% each to Rmb2.77bn and Rmb2.92bn. Historically,the firm’s earnings in 1H tend to account for a large share of full-yearearnings. SHEG’s A-shares trade at 28.0x 2019e P/E and 26.6x 2020eP/E, and its H-shares trade at 12.2x 2019e P/E and 11.6x 2020e P/E.
We maintain NEUTRAL on A-shares, but cut our TP 15.1% toRmb6.20 （32.9x 2019e P/E and 31.3x 2020e P/E）， offering 17.7%upside, as the firm is valued at a smaller premium in the A-sharemarket. For H-share, we maintain OUTPERFORM on H shares and ourTP of HK$4.05 （19.2x 2019e P/E and 18.3x 2020e P/E）， offering57.6%upside. Risks: Development of offshore wind power disappoints.