Premier Li KeQiang chaired the State Council’s regular meeting yesterday, whichdecided to speed up power grid upgrading in rural areas.
This is line with our view that power grid investment is likely to accelerate in 2019,which will boost economic growth.
Willfar Information Technology’s （Willfar） application to list its shares on the SSESTAR market is in the second round of enquiry.
We maintain the view that Wasion Group’s （Wasion） spin-off of Willfar will unlock thevalue of its non-power grid-related business, and that the dilution effect from the spinoffis manageable. The power grid business will continue to deliver growth, thanks tomore favourable industry dynamics.
We maintain our BUY rating with a target price of HK$5.43, based on 13x 2019 PER.
　　Power grid investment to accelerate
　　Premier Li KeQiang chaired the State Council’s regular meeting yesterday, whichdecided to speed up power grid upgrading in rural areas. According to news flow, the 13thFive-year Plan target for power grid upgrades in rural areas will be completed in 2019, ayear earlier than expected. This is in line with our view that power grid investment is likelyto accelerate in 2019. Recall that State Grid has been promoting the development ofUbiquitous Electric Power IoT, which will create demand for high-end measuringequipment. This is line with our view that power grid investment is likely to accelerate in2019. As an infrastructure investment, power grid construction will boost economicgrowth. We believe that under the Internet of Energy （IoE） architecture, Wasion willbenefit from development of data and operation layers by providing measuring deviceswith communication and sensor features, and communication ICs and systems. Theupgrade in the power transmission standard should provide the next phase of growth forWasion. The latest backlog is about RMB2bn, which supports the Company’s top- andbottom-line growth in 2019.
　　Spin-off process going smoothly
　　After the application was filed in Apr 2019, based on our understanding, Willfar’s IPO isnow in the second round of enquiry. We expect Wasion to complete the spin-off in thecoming months. Wasion’s 65% stake in Willfar is expected to fall to about 59% after thespin-off. Willfar intends to raise RMB605m by issuing not more than 150m new shares（10% of the current no. of share outstanding）。 However, the exact size of the shareoffering depends on market conditions after completion of the proposed spin-off. Willfar isengaged in three business segments: data collection terminals, water, gas and heatmeters, and solutions-based IoT architecture. Willfar’s products include sensors,networking, data and applications. Willfar has been expanding its industry coverage fromutilities, such as power, water and heat, to smart city applications, such as intelligent firealarms and smart street lights. Willfar reported a net profit of RMB177.0m in 2018, upfrom RMB149.0m in 2017 and RMB80.5m in 2016. Willfar’s turnover also increased, fromRMB680.3m in 2016 to RMB1,038.6m in 2018. Willfar’s R&D expenses accounted about7% of total turnover in 2016–2018.
　　Share price correction was due to weak market sentimentBased on our understanding, Wasion’s recent share price correction was due to weakmarket sentiment rather than a change in fundamentals. We share the view that investorsprefer highly liquid names in the current market environment. However, we still seecatalysts for Wasion, including the spin-off of Willfar, power investment acceleration, andsolid 2019 results. We expect Wasion to release decent interim results in Aug 2019. Wemaintain our BUY rating with a target price of HK$5.43, based on 13x 2019 PER.