date china power equipment industry asia...

Deutsche Bank Markets Research

Industry

China Power Equipment Industry

Date

16 September 2015

Asia

China

Industrials

Manufacturing

F.I.T.T. for investors

Cleaner, Stronger, Smarter – Rmb2.8trn power grid upgrade plan

Initiating coverage on power transmission & distribution equipment makers

To curb air pollution, it is critical for China to transmit coal/renewable electricity in the West to densely populated coastal regions. The Ultra High Voltage (UHV) transmission grid is therefore central to cut pollution and requires investment of Rmb500bn in 2016-20. Upgrading the under-invested distribution system with efficient, smart networks is the second part of this strategy and will cost a further Rmb1.4trn. We initiate coverage of 4 A-share equipment companies that will have strong growth visibility thanks to this spending. XJ Electric is our top pick as it is exposed to both UHV and distribution revenues. Two other Buys are NARI Tech and Pinggao Electric and China XD is rated Hold.

Michael Tong

Research Analyst

(+852) 2203 6167

[email protected]

Luka Zhu

Research Associate

(+852) 2203 6173

[email protected]

Fundamental, Industry,

Thematic, Thought leading

_______________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Deutsche Bank Markets Research

Asia

China

Industrials

Manufacturing

Industry


Date

16 September 2015

FITT Research

Cleaner, Stronger, Smarter – Rmb2.8trn power grid upgrade plan

Initiating coverage on power transmission & distribution equipment makers

________________________________________________________________________________________________________________


Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Michael Tong

Research Analyst

(+852) 2203 6167

[email protected]

Luka Zhu

Research Associate

(+852) 2203 6173

[email protected]

Key Changes

Company Target Price Rating

000400.SZ – to 22.50(CNY) NR to Buy

600406.SS – to 18.10(CNY) NR to Buy

600312.SS – to 27.10(CNY) NR to Buy

601179.SS – to 6.90(CNY) NR to Hold

Source: Deutsche Bank

Companies Featured

China XD (601179.SS),CNY5.89 Hold

2014A 2015E 2016E

P/E (x) 30.9 34.9 22.0

EV/EBITDA (x) 11.4 16.4 10.6

Price/book (x) 2.2 1.6 1.6

XJ Electric (000400.SZ),CNY14.53 Buy

2014A 2015E 2016E

P/E (x) 20.0 37.3 17.1

EV/EBITDA (x) 14.7 22.8 11.2

Price/book (x) 3.6 2.5 2.2

Pinggao Electric (600312.SS),CNY22.58 Buy

2014A 2015E 2016E

P/E (x) 20.4 26.4 19.1

EV/EBITDA (x) 13.3 18.2 13.8

Price/book (x) 2.9 4.1 3.5

NARI Tech (600406.SS),CNY14.14 Buy

2014A 2015E 2016E

P/E (x) 28.3 56.7 28.0

EV/EBITDA (x) 24.4 44.9 22.9

Price/book (x) 4.9 4.7 4.1


To curb air pollution, it is critical for China to transmit coal/renewable electricity in the West to densely populated coastal regions. The Ultra High Voltage (UHV) transmission grid is therefore central to cut pollution and requires investment of Rmb500bn in 2016-20. Upgrading the under-invested distribution system with efficient, smart networks is the second part of this strategy and will cost a further Rmb1.4trn. We initiate coverage of 4 A-share equipment companies that will have strong growth visibility thanks to this spending. XJ Electric is our top pick as it is exposed to both UHV and distribution revenues. Two other Buys are NARI Tech and Pinggao Electric and China XD is rated Hold.

Total grid investment: c.Rmb2.8trn in 2016-20 We forecast total grid investment in 2016-20 of Rmb2.8trn, a 40% increase from the previous five-year period. Growth will be driven by rising investment in 800KV and above (UHV) and 110KV and below (local distribution). Despite a slow start in 2015, we expect investment to pick up from 2H15 onward.

UHV transmission investment: c.Rmb500bn in 2016-20 UHV approval/construction has started to accelerate since 2014. Based on State Grid (SGCC)’s UHV plan, we expect 6-7 new UHV project approvals each year through 2015-18E, compared to only 0-3 p.a. in 2006-14. We forecast a total of c.Rmb500bn UHV investment in 2016-20, up from c.Rmb150bn in 2011-15. International UHV/EHV lines that connect China with border countries might provide additional upside.

Distribution network investment: c.Rmb1.4trn in 2016-20 The power distribution network – the last-mile connectivity between grids and end users – is still underinvested; automation rates are only one-third of modern standards. In order to meet the rising demand for power reliability, cater to the increasing integration of decentralized power systems, and realize effective demand-side management, it will be crucial to build a smart power distribution network. We forecast total power distribution investment of c.Rmb1.4trn in 2016-20, with average annual investment rising 50% to c.Rmb280bn in the 13th five-year period.

OBOR (One Belt One Road) grid investment: Rmb2.6trn in 2016-20 We estimate total power grid investment in OBOR regions of Rmb2.6trn in 2016-20, 40% of which will likely be spent on T&D equipment. SGCC’s overseas expansion promotes greater usage of Chinese equipment in overseas markets. After high-speed railway and nuclear power, UHV could become China’s next high-end capital goods export, utilizing proprietary technological knowhow and established track records in China.

Valuation and risks We initiate coverage on XJ Electric (key UHV DC and distribution play), Pinggao Electric (key UHV AC play), and NARI Tech (key distribution automation play) with Buy ratings. We initiate coverage on China XD (key UHV AC/DC play) with a Hold rating on valuation. We base our target prices on DCF, with WACCs of 7.1-7.9%. Key risks include lower-than-expected grid investment; delays in project construction; market share contraction due to competition; and a slower-than-expected ramp-up of new businesses.

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Manufacturing


Page 2 Deutsche Bank AG/Hong Kong

Table Of Contents

Executive summary ............................................................. 3 Total grid investment: c.Rmb2.8trn in 2016-20 .................................................. 3 UHV investment – c.Rmb500bn market (2016-20) ............................................. 3 Distribution network investment: c.Rmb1.4trn (2016-20) ................................... 4 OBOR regions: Rmb2.6trn investment (2016-20) ................................................ 5 Key beneficiaries of UHV/distribution grid/exports ............................................. 5

Power T&D investment overview ........................................ 9 Key points ........................................................................................................... 9 Industry value chain.......................................................................................... 10 UHV and distribution network to lead grid investment ..................................... 10

Rmb500bn UHV investment (2016-20) ............................. 13 Key points ......................................................................................................... 13 Rationale behind UHV ...................................................................................... 13 UHV approval/construction gathering pace ...................................................... 14 UHV equipment – Rmb200bn market potential (2015-18E) .............................. 21 Competitive landscape of UHV equipment market ........................................... 25

Rmb1.4trn power distribution investment (2016-20) ........ 27 Key points ......................................................................................................... 27 Distribution investment – key to realizing the smart grid plan .............................. 27 Rmb1.4trn distribution investment expected in 2016-20 .................................. 29 Two focuses of distribution investment ............................................................ 30 Distribution investment likely to rebound in late 2015 ..................................... 31 Competitive landscape of distribution equipment market ................................ 32

Rmb2.6trn grid investment in OBOR countries (2016-20) . 34 Key points ......................................................................................................... 34 Great export potential for Chinese T&D equipment makers ............................. 34 SGCC’s overseas expansion provide strong support ........................................ 35 UHV – the next high-end export after High-Speed Rail and Nuclear Power ..... 36

Appendix ........................................................................... 38 Terminologies of Power T&D equipment .......................................................... 38 Picture of key T&D equipment .......................................................................... 39 Introduction of SGCC and CSG ......................................................................... 40

XJ Electric .......................................................................... 41

NARI Tech ......................................................................... 66

Pinggao Electric ................................................................. 89

China XD.......................................................................... 112

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Deutsche Bank AG/Hong Kong Page 3

Executive summary

Total grid investment: c.Rmb2.8trn in 2016-20

Currently, the government is drafting a grid investment plan for the 13th five-

year period. We forecast total grid investment will amount to Rmb2.8trn, a

40% increase from estimated investment of c.Rmb2.0trn in the 12th five-year

period. We expect the growth to be driven by rising investment in 800KV and

above (UHV) and 110KV and below (distribution). Despite a slow start in 2015,

we expect investment to pick up from 2H15 onwards. We expect total grid

investment to increase by 3% this year, 17% in 2016 and another 6% in 2017.

Figure 1: UHV and distribution network to lead grid investment

175 212 187 185 192

251 256 279 310 303

194 148 176 225 225

191 181 181

181 181 17 15 42

39 46

98 136 114 86 90

-

100

200

300

400

500

600

2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

110kV and below (Distribution) 220-750kV 800kV and above (UHV)

Source: Deutsche Bank, CEC, SGCC, SCG; all data are estimates

UHV investment – c.Rmb500bn market (2016-20)

UHV approval/construction has been at an accelerated pace since 2014. Based

on SGCC’s UHV plan, we expect UHV approvals to remain high at around 6-7

p.a. through 2015-18E, vs. 0-3 p.a. during 2006-2014. International UHV/EHV

lines that connect China with border countries might provide additional upside.

We forecast a total of c.Rmb500bn UHV investment in 2016-20, up from

c.Rmb150bn in 2012-14.

.

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Manufacturing



Figure 2: Number of UHV line approvals (2006-18E)

1 1 12 2

3 3 31

1 1

12

1

54

3 3

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

AC DC

Source: Deutsche Bank, NDRC, SGCC, CSG

Figure 3: Main equipment investment breakdown of North Shanxi - Jiangsu (UHV DC line)

Key Equipment No. of units ASP (Rmb m) Investment (Rmb m) % total investment

>Converter station 2 8,100 50%

>>DC equipment 8,295 35%

Converter transformers 56 55 3,080 19%

Converter valve 8 190 1,520 9%

DC Control & Protection 2 89 178 1%

Other DC equipment 892 16%

>>AC equipment 2,430 15%

500kV GIS 65 4 280 2%

Other AC equipment 2,150 13%

>Transmission line construction 8,100 50%

Total investment 16,200 100%

Source: Deutsche Bank, SGCC

Distribution network investment: c.Rmb1.4trn (2016-20)

Compared to backbone 110-750KV transmission, the power distribution

network (110KV and below) – the last-mile connectivity between grids and

end users – is still underinvested. Automation rates are only one-third of

modern standards. In order to meet the rising demand for power reliability,

cater to the increasing integration of decentralized power systems, and realize

effective demand-side management, it will be crucial to build a smart power

distribution network.

We forecast a total power distribution investment of c.Rmb1.4trn in 2016-20,

with average annual investment up significantly to c.Rmb280bn in the 13th

five-year period from Rmb190bn in the past five years (Figure 41).

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Manufacturing



Figure 4: China’s power distribution investment forecast (Rmb bn)

-

50

100

150

200

250

300

350

2011-15E: avg. Rmb190bn

2016-20E: avg. Rmb280bn

Source: Deutsche Bank,, CEC, SGCC, CSG, Note that there is no official national distribution investment statistic ;numbers are all based on DB estimates

OBOR regions: Rmb2.6trn investment (2016-20)

We estimate total power grid investment in OBOR (One Belt One Road) regions

of Rmb2.6trn in 2016-20, 40% of which will likely be in T&D equipment.

SGCC’s overseas expansion promotes more usage of Chinese equipment in

overseas markets. After high-speed railway and nuclear power, UHV could

become China’s next high-end capital goods export with proprietary

technological knowhow and established track records in China.

Figure 5: >Rmb1trn T&D equipment market for OBOR countries (2016-20)

China Year 2014

GDP (USD bn) 10,380

Power grid investment (Rmb bn) 412

Power grid investment as % of GDP 0.64%

OBOR countries (refer to Figure 46) Year 2016-20

GDP (USD bn) 76,611


Power grid investment (Rmb bn) 2,566

Power T&D equipment as % of grid investment 40%

Market size of power T&D equipment (Rmb bn) 1,026

Source: Deutsche Bank, IMF

Key beneficiaries of UHV/distribution grid/exports

In this report, we are initiating on four A-share listed T&D equipment

companies, all of which are leading players of various products used in China’s

UHV and distribution area with competitive market positions and proprietary

technological knowhow.

XJ Electric (000400 CH, Buy): XJ Electric is one of China’s leading

UHV DC and smart grid system providers. Due to a delay in grid

investment and lack of high-margin UHV delivery, 1H15 earnings

registered a 76% decline. However, we expect the company to

deliver 117/42% earnings growth in 2016-17E, thanks to

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Manufacturing



accelerated UHV DC investment and catch-up investment in

China's distribution network upgrade (budgeted at Rmb2trn in

2015-20). It is also well positioned in the fledging electric vehicle

charging market. We initiate with a Buy and target price of

Rmb22.5.

NARI Tech (600406 CH, Buy): NARI is a leading grid automation

systems provider. Despite an earnings slide in 1H15 caused by a

delay in delivery, we project 102%/33% earnings growth in 2016-

17E on the back of resumed delivery and China’s aggressive

investment plan for its distribution network in 2016-20. It is also

best positioned among peers on the asset injection front. We

initiate with a Buy and a target price of Rmb18.1.

Pinggao Electric (600312 CH, Buy): Pinggao is a leading UHV GIS

player with a 40% market share. Thanks to accelerated UHV build-

out in China, we expect the company to deliver 40%/38%/24%

earnings growth in 2015-17E. Moreover, its newly established

mid-voltage business is poised for the catch-up investment in

China’s distribution network upgrade, which is budgeted at

Rmb2trn in 2015-20 by the government. We initiate with a Buy

rating and a target price of Rmb27.1.

China XD (601179 CH, Hold): China XD is one of China’s leading

UHV equipment makers, with a complete product offering. With

20% revenue exposure to UHV, we expect the company to deliver

26%/59%/19% earnings growth in 2015-17E. It is also well

positioned in the export market and secondary equipment through

its partnership with GE. However, the stock is trading at a fair

24x/20x FY16/17E P/E. We initiate with a Hold rating and target

price of Rmb6.9.

Figure 6: Ranking A-share power T&D players

China XD NARI Tech Pinggao Electric

XJ Electric

Exposure to UHV High Low High Medium

Exposure to power distribution Low-medium High Low-medium High

Exposure to overseas Medium Low Low Low

Asset injection upside Low High Medium Low

Gridco support Low High High High

Source: Deutsche Bank; Note: in order of relevance: high>medium>modest>low

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Figure 7: Comparison of revenue growth Figure 8: Comparison of net profit growth

7%

21%

-5%-7%

-5%

30%

-18%-14%

22%

31%

25%29%

10%

18%20%

18%

-20%

-10%

0%

10%

20%

30%

40%

China XD Pinggao Electric XJ Electric NARI Tech

2014 2015E 2016E 2017E

105%

74%

46%

-20%

26%40%

-63%-53%

59%

38%

117%

102%

19% 24%

42%33%

-70%

-20%

30%

80%

130%


2014 2015E 2016E 2017E

Source: Deutsche Bank, Company data


Figure 9: Comparison of EBIT margin Figure 10: Comparison of ROE

5%

17% 16%

14%

6%

20%

8%7%

10%

21%

14%12%

11%

22%

16%

14%

0%

5%

10%

15%

20%

25%


2014 2015E 2016E 2017E

4%

12%

19% 18%

5%

15%

7%8%

7%

18%

13%15%

8%

19%

15%17%

0%

5%

10%

15%

20%

25%


2014 2015E 2016E 2017E

Source: Deutsche Bank. Company data


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Manufacturing



Figure 11: Sector comps

Share price as of

September 14, 2015

Price % to Mkt. Cap. Absolute Relative GearingDividend yield

Company Ticker Price Rating target target US$m 3m 3m 15E 16E 17E 15E 16E 17E 15E 16E 15E 16E 15E 16E 15E 15E

China A-share power T&D companies

China XD 601179 CH CNY6.34 Hold CNY6.90 9% 5,071 (53%) (22%) 37.6 23.7 20.0 37.1 22.4 16.5 1.8 1.7 4.8 7.3 2.8 4.4 (74.0) 1.9

NARI Tech 600406 CH CNY15.13 Buy CNY18.10 20% 5,504 (50%) (17%) 60.5 29.9 22.4 62.7 30.7 13.1 5.0 4.4 8.3 15.5 4.1 8.4 (83.9) 0.5

Pinggao Electric * 600312 CH CNY22.08 Buy CNY27.10 20% 4,077 (16%) 39% 26.4 19.1 15.4 21.7 15.7 NA 4.1 3.5 16.0 19.6 9.2 12.0 11.0 1.1

XJ Electric 000400 CH CNY16.01 Buy CNY22.50 41% 2,502 (55%) (16%) 41.0 18.9 13.3 30.4 14.3 7.8 2.7 2.4 6.8 13.4 3.7 8.2 (5.9) 0.2

TBEA 600089 CH CNY11.35 NA NA NA 5,572 (44%) (7%) 14.3 11.3 10.5 15.7 12.8 10.4 1.6 1.5 10.9 12.1 3.7 4.3 49.4 1.7

Sifang Electric 601126 CH CNY26.05 NA NA NA 1,532 (40%) (1%) 23.3 19.0 15.4 34.0 27.7 18.2 2.6 2.4 11.2 12.5 7.6 8.4 (5.2) 1.2

Sieyuan Electric 002028 CH CNY11.39 NA NA NA 1,096 (57%) (19%) 13.6 11.6 9.5 NA NA NA 1.7 1.5 12.9 13.3 8.0 8.3 (37.1) 0.9

Baoding Tianwei 600550 CH CNY6.78 NA NA NA 1,617 (61%) (35%) 33.6 17.7 12.9 40.3 17.8 13.7 8.4 6.0 25.3 33.5 3.1 5.1 317.8 NA

Henan Senyuan 002358 CH CNY14.79 NA NA NA 1,663 (57%) (19%) 14.1 8.4 9.0 18.6 14.2 NA 3.1 2.3 24.5 24.0 11.3 13.1 28.5 1.1

Integrated Electronics002339 CH CNY16.37 NA NA NA 910 (72%) (47%) 29.5 21.3 16.6 25.4 18.4 14.3 3.8 3.3 13.0 15.6 10.7 11.5 (22.0) 0.4

Zhixin Electric 600517 CH CNY9.81 NA NA NA 1,890 (55%) (25%) 22.3 13.1 14.4 17.1 12.3 9.3 4.5 3.9 19.3 21.4 9.4 11.8 14.5 1.2

Wolong Electric 600580 CH CNY10.52 NA NA NA 1,835 (52%) (21%) 18.4 14.7 12.4 NA NA NA 2.3 2.0 11.1 12.7 NA NA 43.5 NA

Linyang Electronics 601222 CH CNY26.04 NA NA NA 1,631 (45%) (10%) 16.8 13.3 10.9 13.1 9.8 7.4 2.2 1.9 15.2 16.9 10.0 9.2 (25.7) 1.3

TGOOD 300001 CH CNY13.1 NA NA NA 1,738 (55%) (16%) 33.4 22.8 20.8 34.6 26.6 21.2 5.7 4.9 14.1 17.0 6.3 7.9 24.8 0.6

Clou Electronics 002121 CH CNY16.33 NA NA NA 1,221 (57%) (19%) 28.2 16.7 10.7 23.9 12.9 9.0 3.2 1.8 12.9 16.1 4.5 5.6 112.8 0.2

Shenzhen Auto 002227 CH CNY19.4 NA NA NA 624 (62%) (28%) 30.7 20.8 16.8 28.9 20.2 15.1 3.2 2.9 12.7 16.0 9.4 12.0 (18.9) 0.6

Huayi Electric 600290 CH CNY9.68 NA NA NA 792 (51%) (20%) 23.7 17.6 13.6 24.7 14.4 10.0 2.3 2.1 9.3 11.8 3.0 4.2 32.7 1.3

CREAT 002350 CH CNY14.38 NA NA NA 488 (54%) (13%) 38.0 23.2 16.7 NA NA NA 2.7 2.5 7.3 11.0 4.5 5.0 (25.4) 0.7

Average (52%) (16%) 28.1 17.9 14.5 28.5 18.0 12.8 3.4 2.8 13.1 16.1 6.5 8.2 18.7 0.9

China H-share power T&D companies

Boer 1685 HK HKD13.06 NA NA NA 1,254 (26%) 3% 12.8 10.1 8.3 9.7 7.6 6.3 3.2 2.7 25.2 26.2 13.8 14.6 (34.4) 3.5

Wasion Group 3393 HK HKD8.25 NA NA NA 1,092 (28%) 1% 11.0 9.0 7.5 10.1 8.2 6.8 1.7 1.5 16.8 17.9 9.9 10.6 12.8 3.5

Jiangnan Group 1366 HK HKD1.53 NA NA NA 800 (37%) (12%) 6.0 5.0 4.3 8.7 7.0 5.7 1.1 1.0 20.2 20.6 8.2 8.5 85.7 4.2

Average (30%) (2%) 9.9 8.0 6.7 9.5 7.6 6.3 2.0 1.7 20.7 21.5 10.6 11.2 21.4 3.8

International power T&D companies

General Electric GE US USD24.77 Hold USD29.00 17% 251,905 (9%) (3%) 19.1 15.5 13.4 21.3 15.3 12.9 2.4 2.6 7.2 13.4 1.8 2.0 35.2 3.7

Siemens SIE GR EUR85.195 NA NA NA 83,683 (8%) 0% 10.8 10.1 11.2 8.0 7.5 11.4 2.3 2.1 19.5 18.9 6.2 6.6 18.1 4.1

Siemens India Ltd SIEM IN INR1300.65 Buy INR1565.00 20% 6,570 (1%) 1% 70.7 46.3 35.1 54.3 39.0 30.7 8.1 7.1 24.4 17.2 11.0 8.8 (81.2) 0.4

ABB ABB SS SEK153.8 NA NA NA 45,243 (16%) (11%) 15.6 13.5 12.3 11.8 10.4 9.6 2.7 2.6 13.6 15.2 5.3 6.6 9.3 4.1

ABB Ltd. India ABB IN INR1151.1 Sell INR1190.00 3% 3,662 (9%) (6%) 85.9 58.6 38.8 48.6 37.1 27.3 8.0 7.1 9.7 12.8 4.0 5.6 (1.1) 0.2

Schneider Electric SASU FP EUR54.84 NA NA NA 38,486 (14%) (8%) 13.4 12.1 11.6 10.1 9.4 9.1 1.7 1.7 10.6 11.5 5.1 5.7 18.5 3.5

Average (7%) (2%) 32.8 24.1 20.3 23.3 18.1 19.2 3.8 3.5 12.6 13.5 5.1 5.4 3.8 2.5

All estimates are DB estimates and all stock data is from Bloomberg Finance LP

*Pinggao Electric was suspended trading on 23 June 2015 with last closing price at Rmb22.58; valuation was based on share price of Rmb22.58

Relative performance is against SHCOMP, SZCOMP, HSCEI, etc. based on the listed stock exchange

RoE ROA

Returns & Gearing (%)

P/BV

Valuations

EV/EBITP/E

Performance

Source: Deutsche Bank, Bloomberg Finance LP, Note all estimates for DB rated stocks are based on DB analysts forecasts and others are based on consensus from Bloomberg Finance LP

Figure 12: Sector share price performance

Share price as of avg. avg. avg.

September 14, 2015 daily daily daily

trade trade current / current/ trade

Company Price Rating 1wk 1m 3m 6m 12m 3yr US$, 1m** 1wk 1m 3m 6m 12m 3yr US$, 6m** 52w H 52w L 52W H 52W L 10yr H 10yr L US$, 1yr**


China XD CNY6.34 Hold (12%) (33%) (53%) (9%) 47% 84% 67.9 (9%) (13%) (22%) (0%) 12% 28% 211.7 14.39 4.13 0.44 1.54 14.39 2.90 145.5

NARI Tech CNY15.13 Buy (0%) (30%) (50%) (13%) (12%) 20% 126.4 3% (9%) (17%) (4%) (33%) (17%) 282.3 30.30 11.89 0.50 1.27 30.30 1.31 199.0

Pinggao Electric ** CNY22.08 Buy NA NA (16%) 19% 64% 203% NA NA NA 39% 31% 25% 111% 136.5 28.30 12.60 0.80 1.79 28.30 2.41 90.5

XJ Electric CNY16.01 Buy (13%) (35%) (55%) (35%) (26%) 85% 67.6 (7%) (8%) (16%) (32%) (41%) 1% 166.7 37.00 14.68 0.43 1.09 37.00 2.02 130.5

TBEA CNY11.35 NA (2%) (25%) (44%) (12%) 7% 87% 143.6 1% (2%) (7%) (3%) (18%) 30% 403.3 20.42 9.19 0.56 1.24 20.42 1.11 289.5

Sifang Electric CNY26.05 NA (7%) (34%) (40%) 16% 43% 37% 22.4 (3%) (14%) (1%) 27% 9% (5%) 39.8 43.40 15.94 0.60 1.63 43.40 11.89 28.1

Sieyuan Electric CNY11.39 NA (12%) (35%) (57%) (26%) (7%) 17% 29.8 (7%) (8%) (19%) (22%) (26%) (36%) 77.2 26.64 11.00 0.43 1.04 26.64 1.98 57.2

Baoding Tianwei CNY6.78 NA (8%) (37%) (61%) (31%) 10% (10%) 32.7 (5%) (18%) (35%) (24%) (16%) (38%) 78.8 18.57 5.92 0.37 1.15 40.74 2.85 49.2

Henan Senyuan CNY14.79 NA (30%) (30%) (57%) (30%) (14%) 89% 68.9 (25%) (0%) (19%) (26%) (31%) 3% 88.0 36.15 12.86 0.41 1.15 36.15 3.25 51.5

Integrated Electronics CNY16.37 NA (9%) (42%) (72%) (6%) 55% 115% 54.9 (2%) (17%) (47%) (1%) 24% 17% 86.6 56.70 9.72 0.29 1.68 56.70 5.01 56.3

Zhixin Electric CNY9.81 NA (12%) (41%) (55%) (28%) (22%) 29% 69.3 (9%) (24%) (25%) (21%) (41%) (10%) 94.9 22.48 8.32 0.44 1.18 22.48 0.61 78.4

Wolong Electric CNY10.52 NA (8%) (30%) (52%) (12%) 12% 119% 29.1 (4%) (9%) (21%) (3%) (15%) 52% 66.3 24.34 8.90 0.43 1.18 24.34 1.70 49.2

Linyang Electronics CNY26.04 NA (5%) (29%) (45%) (14%) (4%) 153% 15.6 (2%) (9%) (10%) (5%) (27%) 75% 27.5 54.98 21.76 0.47 1.20 54.98 7.98 20.7

TGOOD CNY13.1 NA (8%) (46%) (55%) 42% 34% 372% 55.7 (2%) (24%) (16%) 48% 7% 157% 92.4 34.99 7.43 0.37 1.76 34.99 2.00 55.0

Shenzhen Auto CNY19.4 NA (6%) (49%) (62%) (19%) (24%) 85% 27.6 0% (27%) (28%) (15%) (40%) 1% 46.2 54.59 17.00 0.36 1.14 54.59 3.48 31.8

Huayi Electric CNY9.68 NA (0%) (27%) (51%) (17%) (15%) 62% 32.3 4% (5%) (20%) (9%) (35%) 12% 49.4 20.43 8.32 0.47 1.16 29.92 2.09 36.4

CREAT CNY14.38 NA (2%) (35%) (54%) (1%) 17% 4% 22.4 4% (8%) (13%) 4% (6%) (43%) 27.1 32.75 11.56 0.44 1.24 32.75 7.38 18.4


Boer HKD13.06 NA (9%) (19%) (26%) 23% 22% 387% 1.6 (12%) (8%) 3% 47% 36% 390% 2.7 18.50 6.71 0.71 1.95 18.50 1.69 1.7

Wasion Group HKD8.25 NA 4% (7%) (28%) 8% 13% 177% 4.0 1% 5% 1% 29% 26% 179% 5.9 12.86 6.34 0.64 1.30 12.86 0.70 3.7

Jiangnan Group HKD1.53 NA (1%) (21%) (37%) (3%) (18%) 37% 1.7 (4%) (10%) (12%) 17% (9%) 38% 5.8 2.65 1.12 0.58 1.37 2.65 0.61 4.1


General Electric USD24.77 Hold (1%) (5%) (9%) (1%) (4%) 12% 1094.5 0% 2% (3%) 4% (3%) (16%) 1014.7 28.68 19.37 0.86 1.28 42.15 5.73 957.1

Siemens EUR85.195 NA (2%) (11%) (8%) (17%) (12%) 11% 281.6 (1%) (3%) 0% (3%) (17%) (19%) 271.7 106.35 80.17 0.80 1.06 108.63 32.03 298.6

Siemens India Ltd INR1300.65 Buy 10% (10%) (1%) (9%) 47% 93% 8.8 7% (2%) 1% 0% 53% 38% 7.7 1559.70 768.80 0.83 1.69 1559.70 186.20 7.0

ABB SEK153.8 NA (4%) (9%) (16%) (12%) (5%) 17% 44.7 (2%) (2%) (11%) 0% (10%) (11%) 41.2 196.00 142.10 0.78 1.08 203.50 54.75 46.2

ABB Ltd. India INR1151.1 Sell (1%) (11%) (9%) (13%) 0% 54% 1.2 (3%) (3%) (6%) (4%) 4% 10% 1.3 1526.30 985.00 0.75 1.17 1744.00 314.40 1.9

Schneider Electric SA EUR54.84 NA (1%) (9%) (14%) (25%) (14%) 4% 150.1 1% (1%) (8%) (17%) (16%) (17%) 151.4 75.29 52.03 0.73 1.05 75.29 19.42 148.6

** in USD millions

**Pinggao Electric was suspended trading on 23 June 2015 with last closing price at Rmb22.58

**** Relative performance is against SHCOMP, SZCOMP, HSCEI, etc. based on the listed stock exchange

Share price performance Relative performance Share price statisticslocal currency local currency & local country index****

Source: Deutsche Bank, Bloomberg Finance LP, Note all estimates for DB rated stocks are based on DB analysts forecasts and others are based on consensus from Bloomberg Finance LP

16 September 2015

Manufacturing



Power T&D investment overview

Key points

State Grid Corporation of China (SGCC) and China Southern Grid (CSG) are predominantly responsible for grid investment. We forecast total grid investment of Rmb2.8trn in 2016-20, versus c.Rmb2trn in the 12th five-year period. The investment focus is set to shift towards voltages of >=800kV (UHV) and <=110kV (distribution network).

UHV investment is intended to address the geographical mismatch of energy and load and to combat air pollution. Distribution investment is to cope with more demand for power reliability due to urbanization and the integration of wind/solar and decentralized power systems.

Despite a slow start, we expect investment to pick up from late 2015, considering: 1) the gradual fading of the impact of the audit and anti-corruption campaign; 2) a good historical track record in achieving the target; and 3) the strong messages sent after the new budget was announced, regarding rural grid upgrades and the power distribution network in 2015-20.

Figure 13: Power equipment industry chain

China XD, Pinggao Electric, XJ Electric, TBEA, NARI Tech...

Power transformation &

transmission Power plants Power distribution End users

Huaneng Power, Huadian

Power, Longyuan Power... SGCC, CSG

Power generation

equipment

Power transformation

& transmission

equipment (>110kV)

Power distribution

equipment (110 kV

and below)

Thermal, hydro, wind, solar

generation equipment

Power industry value chain

Power equipment value chain

Industrial, Residential

Shanghai Electric, Dongfang

Electric, Goldwind, Trina..

Transformers, Switchgears, Cables & Wires, Arrestors, Electric

reactors, Data collection terminals, Automation software....


16 September 2015

Manufacturing



Industry value chain

In this report, we focus on the power transmission & distribution (T&D)

equipment market and key players. Power transmission & distribution transfers

electricity from generating power plants to end users by: 1) stepping up the

voltage of electricity generated by power plants in substations; 2) transmitting

electricity through cables & wires; 3) stepping down the voltage in substations;

and 4) distributing the power to end users.

The two state-owned grid companies, namely State Grid Corporation of China

(SGCC) and China Southern Grid (CSG) (please refer to Appendix for

background of SGCC and CSG), are predominantly responsible for grid

investment in the country, with the former normally accounting for more than

80% of the total given the size of its operating regions.

Once the grid companies have set an annual investment plan, they procure

equipment from Power T&D equipment suppliers through both centralized

tenders and provincial level tenders in batches.

UHV and distribution network to lead grid investment

During the 11th five-year period (2006-10), annual grid investment (led by SGCC

and CSG) increased at a CAGR of 23%, with the proportion of total power

investment up to 50%. In the 12th five-year period, grid investment shifted into

a lower gear (CAGR of 7%) on: 1) the completion of the 110-220kV backbone

network construction; 2) a slowdown in power consumption growth; and 3)

the absence of the Rmb4trn economic stimulus package in 2008-09.

Figure 14: Power grid investment by SGCC and CSG (Rmb bn)

2006 2007 2008 2009 2010 2011 2012 2013 2014

SGCC 177 213 248 306 264 302 305 338 386

yoy % 60% 20% 16% 24% -14% 14% 1% 11% 14%

CSG 38 42 48 92 83 70 67 64 66

yoy % 15% 10% 15% 90% -9% -16% -4% -5% 3%

Total 215 255 296 397 348 372 373 402 451

yoy % 50% 19% 16% 34% -13% 7% 0% 8% 12%

Source: Deutsche Bank, SGCC, CSG

5% CAGR (2015-20E) in grid investment, led by UHV and distribution network

Though it is unrealistic to expect grid investment growth as high as in 2006-09,

we still expect a 5% CAGR in power grid investment through 2015-20E, with

the investment focus shifting towards voltages of 800kV and above (UHV) as

well as 110kV and below (distribution network).

UHV investment is intended to address the country-specific issue of a geographical mismatch of energy resources and load centers, to combat air pollution, and to achieve a cleaner energy consumption structure.

China has been accelerating UHV approval/construction since

2014. We expect 6-7 project approvals p.a. through 2015-18 vs. 0-

3 p.a. during 2006-14. We forecast a total of c.Rmb500bn UHV

investment in 2016-20.

16 September 2015

Manufacturing



The distribution network is still underinvested in China relative to generation capacity, transmission network, and the standards of developed countries. China is entering into a stage with more challenging demand for power reliability due to a higher degree of urbanization, rising living standards, increasing integration of wind/solar, and decentralized power systems. A stronger and smarter distribution network is becoming a necessity.

In August 2015, NEA announced a power distribution network

investment target of Rmb1,700bn in 2016-20, suggesting an

average of Rmb340bn p.a. during the 13th five-year period, nearly

double that in the 12th five-year period.

Figure 16: UHV and distribution network to lead grid investment (Rmb bn)

175 212 187 185 192

251 256 279 310 303

194 148 176 225 225

191 181 181

181 181 17 15 42

39 46

98 136 114 86 90

-

100

200

300

400

500

600

2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

110kV and below (Distribution) 220-750kV 800kV and above (UHV)

Source: Deutsche Bank, CEC, SGCC, SCG

Total grid investment of Rmb2.8trn in 2016-20E, versus Rmb2trn in 2011-15

Currently, the government is drafting a grid investment plan for the 13th five-

year period and the preliminary plan is expected to be released later this year.

We forecast total grid investment of Rmb2.8trn, substantially higher than the

estimated investment of c.Rmb2trn in the 12th five-year period. As shown in

Figure 16, we expect the growth to be driven by rising investment in 800KV

and above (UHV) and 110KV and below (distribution).

On a provincial level, some preliminary investment budgets have been

released and can provide a tea leaf reading. According to media reports,

Shanxi province is planning to spend Rmb97.9bn on grid construction in the

13th five-year period, which amounts to the total of that spent in the 11th and

12th five-year periods; Xinjiang province is targeting Rmb202bn, vs. Rmb130bn

spent in the 12th five-year period.

Grid investment below expectation in 1H but catch-up in sight

China’s power grid investment growth has decelerated to below 5% since last

May and has been flat yoy YTD in 2015 (Figure 17), which is lower than market

expectations. We think this is primarily attributable to the weak economic

conditions as well as the government’s audit/anti-corruption campaign at

SGCC/CSG since last April.

Figure 15: Comparison of

distribution automation rate (2014)

0%

10%

20%

30%

40%

50%

60%

70%

Japan Germany South Korea China


We use total investment by SGCC and CSG

as a proxy for China’s grid investment.

For UHV investment, we base our forecasts

on the approval/delivery schedule (refer to

UHV section).

For distribution investment, we forecast a

10% CAGR through 2015-20E, with total

investment at c.Rmb1,400bn in 2016-20

(refer to power distribution section).

16 September 2015

Manufacturing



Nevertheless, we expect grid investment to see a meaningful pick-up from

late 2015, considering that: 1) the impact of the government’s audit

(completed in mid-2015) and anti-corruption campaign should gradually fade

and monthly data suggests the start of a recovery in recent months; 2) the

historical track record of achieving the investment target set at the beginning

of the year is good (Figure 18); and 3) the government sent strong messages of

accelerating grid investment recently after announcing an additional budget for

rural grid upgrades and an enhanced investment target for the power

distribution network in 2015-20.

Figure 17: Accumulated power grid investment Figure 18: SGCC maintains good track record in achieving

investment target

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0

50

100

150

200

250

300

350

400

450

Jan

-Feb

14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

Dec

-14

Jan

-Feb

15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Accumulated grid investment (Rmb bn) yoy%

200

220

240

260

280

300

320

340

360

380

400

2007 2008 2009 2010 2011 2012 2013 2014

Actual Planned

Source: Deutsche Bank, WIND


16 September 2015

Manufacturing



Rmb500bn UHV investment (2016-20)

Key points

UHV is a viable option to address the geographical mismatch of resources and load centers and reduce air pollution in coastal areas. The stable operation of UHV lines completed has relieved concerns and reduced opposition.

China has been accelerating UHV approval/construction since 2014; we expect 6-7 project approvals through 2015-18 vs. 0-3 p.a. during 2006-14. We forecast a total of c.Rmb500bn UHV investment in 2016-20, up from c.Rmb150bn in 2011-15.

UHV equipment is a concentrated market dominated by a limited number of domestic leading players and we expect the competitive landscape to remain largely stable. Pinggao, China XD, XJ Electric, TBEA and NARI Group are key market players.

Rationale behind UHV

Imperative to meet energy demand in a cleaner way

UHV lines should help to address China’s geographical mismatch of energy

resources and load centers, and promote renewable power consumption. UHV

investment, as per the infra package, could also stimulate the economy.

To address geographical mismatch of resources and load center: most of the coal and hydro resources are in the northwest and southwest regions, while the load center is along the coast. To reduce air pollution, it is better not to burn coal in the populated coastal area. For long distance power transmission, UHV is a more economic option.

To increase cleaner energy consumption mix: the government is targeting an increase in the mix of non-fossil fuel energy from c.11% in 2015E to 15%/20% by end-2020/30. Renewable energy capacity installation has been on a fast track, but curtailment remains high given that most of the wind/solar/hydro capacity is located in the west or north. UHV lines can carry the clean power to the east.

Figure 19: Installed wind/solar capacity (GW) Figure 20: National avg. wind curtailment

29 45 61 75 96 121

20016

27 41

100

-

50

100

150

200

250

300

350

2010 2011 2012 2013 2014 2015E 2020 old TGT (to be

lifted)

Wind Solar

2010-2020E Capacity CAGR>25%

2020 capacity target may be lifted Wind: from 200GW to 250-280GWsolar: from 100GW to 150GW

10.0%

16.0%16.7%

10.7%

8.0%8.5%

15.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2010 2011 2012 2013 2014 1H14 1H15

Source: Deutsche Bank, NEA Source: Deutsche Bank, NEA

16 September 2015

Manufacturing



Economic and efficient to realize long-distance electricity transmission According to SGCC, it is more economic and efficient to deploy UHV than

EHV lines to realize long-distance electricity transmission. Key advantages of UHV lines include higher transmission capacity over long distance, lower operating & maintenance costs, lower line loss, and lower land requirements (Figure 21).

In addition, a well-planned network of UHV AC lines (Alternating Current transmission at voltage of 1000kV or above) and UHV DC lines (Direct Current transmission at voltage of ±800kV or above) can realize both long-distance electricity transmission and multi-point connection.

Figure 21: Advantages/disadvantages of UHV AC and DC transmission

UHV AC UHV DC

Features UHV AC lines can easily connect loads and generation points along the route to form a power network based on load center/power capacity distribution

UHV DC lines can only transmit power from one point to another, without the connection of loads/generation points along the route

Advantages Higher transmission capacity:

o UHV AC: transmission capacity of a 1000kV line = four to five 500kV lines

o UHV DC: transmission capacity of a ±800kV line = two ±500kV lines

Longer transmission distance (at same capacity):

o UHV AC: a 1000kV line can transmit over 1500km, three times a 500kV line

o UHV DC: a ±800kV line can transmit over 2500km

Lower operating & maintenance costs on substations and wires

Lower line loss:

o UHV AC: Line loss of a 1000kV line = 25% of a 500kV line

o UHV DC: Line loss of a ±800kV line = 39% of a ±500kV line

Lower land requirements:

o UHV AC: Unit transmission capacity per meter of a 1000kV line is 3 times that of a 500kV line

o UHV DC: Unit transmission capacity per meter of a ±800kV line is 1.3 times that of a ±500kV line

Can easily connect loads and generation points along the route

Grid stability not affected since the system can directly control the power transmission by converter valves

Disadvantages Will lower the grid stability and increase the probability of large-scale blackouts due to high grid voltage

Environmental impacts

Cost of building converter stations is high

Harmonics may disturb grid operation and lower power quality

Not able to flexibly change voltage by transformers

Long-distance point-to-point transmission only without capability of multi-point interconnection


UHV approval/construction gathering pace

UHV construction behind schedule due to controversy over UHV AC

China’s UHV construction has been behind schedule, mainly due to

controversy over reliability and the economic rationale of building UHV AC

lines (while UHV DC has been widely accepted) since 2004, when SGCC first

proposed the development of UHV technology. Today, there are only nine

UHV lines (three AC and six DC) in operation (see the UHV map in Figure 26):

One AC line that connects Shanxi and Central China, one AC line that connects North Zhejiang and Fuzhou, and one AC line that connects Anhui, Jiangsu and Shanghai;

16 September 2015

Manufacturing



Five DC lines that transfer hydro power from Yunnan and Sichuan to East/South China and one DC line that transfers coal/renewable power from Xinjiang to Henan.

SGCC has missed its 2015 target (released in August 2010) of building “three

verticals, three horizontals and one double loop network” of UHV synchronous

power grids (AC) in North/Central/East China and 11 DC lines.

Key concerns about UHV AC lines include the following: 1) Security and

reliability: The synchronization of power grids in North/Central/East China

could leave the whole grid network vulnerable to a failure in any one line,

which could significantly increase the possibility of a large-scale blackout. 2)

Economic viability: UHV lines are far more expensive than investing in EHV

lines or building railways for coal transportation.

Figure 22: Milestones of China’s UHV development

Time Events

Dec-04 SGCC first proposed to develop UHV technology and to build a strong grid network with UHV as the backbone

Jan-05 SGCC formally initiated feasibility studies of UHV projects

Dec-05 The State Council listed UHV technology in the National Mid-long Term Plan of Science & Technology (2006-20)

Jun-06 First UHV DC line (Yunnan-Guangdong) was approved by NDRC

Aug-06 First UHV AC line (Southeast Shanxi – Jinmen) was approved by NDRC

Time Issuer Plan Details

Aug-10 SGCC 12th FYP on UHV Line Construction

By 2015: It targets to form “3 verticals, 3 horizontals and 1 double loop network” of UHV synchronous power grids (AC) in North/Central/East China as well as to complete 11 DC lines.

3 verticals (AC), namely Ximeng (Inner Mongolia) – Nanjing (Jiangsu), Zhangbei (Hebei) – Nanchang (Jiangxi), North Shaanxi – Changsha (Hunan), are planned to transmit power from coal bases in North China (Inner Mongolia, Zhangbei, North Shaanxi, etc.) to North/Central/East China.

3 horizontals (AC), namely West Inner Mongolia – Weifang (Shandong), Jinzhong (Shanxi) – Xuzhou (Jiangsu), Ya’an (Sichuan) – South Anhui, are expected to transmit thermal power from the North and hydro power from the Southwest to North/East/Central China.

1 double loop network (AC) refers to Huainan-Nanjing-Shanghai-North Zhejiang-Huainan in the Yangtze River Delta.

By 2020: it aims to complete “5 verticals, 5 horizontals and 1 double loop network” as well as 27 DC lines.

Jun-14 NEA Mission Statement on 12 Power Transmission Lines Construction

It firstly specified the construction targets of the 12 power transmission lines (including 4 AC, 5 DC UHV lines and 3 EHV lines) with 1 AC & 1 DC planned to be completed by 2016 and 3 AC & 4 DC planned to be completed by 2017.

Jan-15 SGCC UHV construction plan laid out in 2015 annual work conference

By 2015, it aims to get approval and commence construction of 14 UHV lines (6 AC and 8 DC).

By 2017, it targets to have all 4 AC and 4 DC of the 12 power transmission lines in operation.

By 2020, it targets to complete the “4 verticals, 7 horizontals” UHV AC backbone network as well as 19 UHV DC lines.

Source: Deutsche Bank, SGCC, NEA

UHV approval/construction has accelerated since 2014

Since 2014, the debate on UHV has gradually eased off. Project approvals and

construction have accelerated amid the increasing urgency to reduce air

pollution in coastal areas. The government has imposed very strict conditions

on approving new coal-fired plants in coastal areas, which makes long-

distance power transmission a preferred option to transporting coal.

Meanwhile, curtailment for wind/solar in the west becomes a more pressing

issue. Moreover, the stable operational track records of the three AC lines

have relieved concerns over safety raised by opponents.

16 September 2015

Manufacturing



In terms of approval

In 2014, NDRC, in one go, gave preliminary approval to 12 cross-regional power transmission lines (four AC, five DC and three EHV lines) that were specifically intended to address deteriorating air pollution in East China. Among them, three were officially approved during the year, which was higher than any year before.

So far this year, four UHV lines have been approved (West Inner Mongolia-South Tianjin, Yuheng-Weifang, Jiuquan-Hunan, North Shanxi-Jiangsu), even higher than in full-year 2014. Also, we expect another three approvals – the remaining three UHV DC lines of the 12 (Ximeng-Jiangsu, Shanghaimiao-Shandong and Northwest Yunnan-Guangdong) – to come in the rest of the

year in order to achieve the target of having all 12 lines operational by 2017. Thus, we expect 2015 to turn out to be a record year in terms of UHV approvals.

Throughout 2016-20, based on SGCC’s latest UHV plan announced at its 2015 annual work conference, we expect UHV approvals to remain high at around

6-7 annually (including 3 AC lines and 3-4 DC lines) through 2016-18, vs. 0-3 annually during 2006-2014 (Figure 23).

Figure 23: Number of UHV line approvals (2006-18E)

1 1 12 2

3 3 31

1 1

12

1

54

3 3

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

AC DC


In terms of construction/operation

As of today, there are 7 UHV lines (4 AC and 3 DC) under construction,

including 3 lines approved in 2014 and 4 lines approved during 2015.

Construction and main equipment tender invitations normally start within 3-6

months upon approval based on historical experience, but it has been

shortened to within 1-2 months starting this year. Construction work normally

takes 1-1.5 years for AC lines and 2-2.5 years for DC lines depending on the

scale and complexity of the lines as well as onsite progress.

Accordingly, we expect 2017-18 will be the peak period for new UHV

operations following the peak approval period of 2015-16 (Figure 24). By 2020,

we estimate there will be 14 UHV AC lines and 22 DC lines in operation (vs. 3

AC and 6 DC by 2014).

16 September 2015

Manufacturing



We highlight our expected UHV line operation schedule by year as below.

2016: 2 AC (Huainan-Nanjing-Shanghai, Ximeng-Shandong) and 1

DC (East Ningxia- Zhejiang), likely in late 2016 (Figure 27);

2017: 2 AC (West Inner Mongolia – South Tianjin, Yuheng-

Weifang) and 5 DC (Jiuquan-Hunan, North Shanxi-Jiangsu,

Ximeng-Jiangsu, Shanghaimiao-Jiangsu, Northwest Yunnan-

Guangdong) (Figure 28);

2018: 3 AC (West Inner Mongolia – Changsha, Zhangbei-

Nanchang, Nanjing-Taizhou) and 4 DC (Zhundong-South Anhui,

Humeng-Shandong, West Inner Mongolia – Wuhan, Zhundong-

Chengdu);

2019: 3 AC (Jinan-Weifang, Batang-Ya’an, Ya’an-Chongqing) and

3 DC (Zhalute-Zhumadian, Yazhong-Hengyang, North Shaanxi-

Nanchang);

2020: 3 AC (Zaozhuang-Xuzhou, North Henan-Zaozhuang, Wuhan-

South Anhui) and 3 DC (Jinsha River – Ji’an, Kazakhstan –

Nanyang, Russia-Hebei).

Figure 24: Number of newly operational UHV lines (2006-20E)

1 1 10

2 23 3 3

21

12

0

1

54

3 3

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

AC DC


Ch

ina P

ow

er E

qu

ipm

en

t Ind

ustry

Man

ufa

ctu

ring

16

Sep

tem

ber 2

01

5

Pag

e 1

8

Deu

tsch

e B

an

k A

G/H

on

g K

on

g

Figure 25: China’s UHV/EHV lines under operation/planning

Project Covered provinces AC/DC kV Transmission capacity (GW)

Status Approval Operation Investor

Southeast Shanxi–Nanyang–Jingmen Shanxi, Henan, Hubei AC 1000 5 In operation 2006 2009 SGCC

Chuxiong, Yunnan–Zengcheng, Guangdong Yunnan–Guangdong DC ±800 5 In operation 2006 2010 CSG

Xiangjiaba–Shanghai Sichuan–Shanghai DC ±800 6.4 In operation 2007 2010 SGCC

Jinping–South Jiangsu Yunnan–Jiangsu DC ±800 7.2 In operation 2008 2012 SGCC

Huainan–North Zhejiang–Shanghai Anhui, Jiangsu, Shanghai AC 1000 6.7 In operation 2011 2013 SGCC

Nuozhadu–Guangdong Yunnan–Guangdong DC ±800 5 In operation 2011 2013 CSG

South Hami–Zhengzhou Xinjiang–Henan DC ±800 8 In operation 2012 2014 SGCC

Xiluodu–Zhejiang Sichuan–Zhejiang DC ±800 8 In operation 2012 2014 SGCC

North Zhejiang–Fuzhou Zhejiang, Fujian AC 1000 6.8 In operation 2013 2014 SGCC

# Huainan–Nanjing–Shanghai Anhui, Jiangsu, Shanghai AC 1000 5.6 Under construction since 2Q14 2014 2016E SGCC

# Ximeng–Shandong IM, Hebei, Tianjin, Shandong AC 1000 9 Under construction since 3Q14 2014 2016E SGCC

# East Ningxia–Zhejiang Ningxia–Zhejiang DC ±800 8 Under construction since 4Q14 2014 2016E SGCC

#/* West Inner Mongolia–South Tianjin IM, Shanxi, Hebei, Tianjin AC 1000 6 Under construction since 1Q15 2015 2017E SGCC

#/* Yuheng–Weifang Shaanxi, Shanxi, Hebei, Shandong

AC 1000 10 Under construction since 2Q15 2015 2017E SGCC

* Jiuquan–Hunan Gansu–Hunan DC ±800 8 Under construction since 2Q15 2015 2017E SGCC

#/* North Shanxi–Nanjing Shanxi–Jiangsu DC ±800 8 Under construction since 2Q15 2015 2017E SGCC

#/* Ximeng–Taizhou IM–Jiangsu DC ±800 8 Preliminarily approved; expected to be approved in 2H15

2015E 2017E SGCC

#/* Shanghaimiao–Linyi IM–Shandong DC ±800 10 Preliminarily approved; expected to be approved in 2H15

2015E 2017E SGCC

# Northwest Yunnan–Guangdong Yunnan–Guangdong DC ±800 5 Preliminarily approved; expected to be approved in 2H15

2015E 2017E CSG

* West Inner Mongolia–Changsha; Jingmen- Wuhan; Changsha–Nanchang

IM, Hunan, Hubei, Jiangxi AC 1000 NA Target approval/construction in 2H15 2016E 2018E SGCC

* Zhangbei–Nanchang, Southeast Shanxi–North Hebei, Nanyang–Zhumadian

Heibei, Jiangxi, Shanxi, Henan

AC 1000 NA Target approval/construction in 2H15 2016E 2018E SGCC

* Nanjing–Xuzhou–Lianyungang–Taizhou Jiangsu AC 1000 NA Target approval/construction in 2H15 2016E 2018E SGCC

* Jinan–Zaozhuang–Linyi–Weifang Shandong AC 1000 NA Target approval/construction in 2H15 2017E 2019E SGCC

* Humeng–Qingzhou IM–Shandong DC ±800 8 Target approval/construction in 2H15 2016E 2018E SGCC

* West Inner Mongolia–Wuhan IM–Hubei DC ±800 10 Target approval/construction in 2H15 2016E 2018E SGCC

* Zhundong–Chengdu Xinjiang–Sichuan DC ±1100 12 Target approval/construction in 2H15 2016E 2018E SGCC

* Zhundong–South Anhui Xinjiang–Anhui DC ±1100 12 Target approval/construction in 2H15 2016E 2018E SGCC

Note: # listed in Action Plan on Air Pollution Prevention issued by the State Council *listed in the 6 AC & 8DC UHV plan announced by SGCC in Jan 2015; ^proposed by SGCC in Jan 2015; &listed in local grid planning; IM refers to Inner Mongolia Source: Deutsche Bank, SGCC, CSG

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Figure 25: China’s UHV/EHV lines under operation/planning (Cont’d)

(Cont.) Project Covered provinces AC/DC kV Transmission capacity (GW)

Status Approval Operation Investor

^ Batang–Ya'an–Chongqing–Mianyang–Dege–Batang, Ya'an-Mianyan

Sichuan, Chongqing AC 1000 NA Planned to complete feasibility study by 2015 2017E 2019E SGCC

^ Zhalute–Zhumadian IM–Henan DC ±800 10 Planned to complete feasibility study by 2015 2017E 2019E SGCC

^ Yazhong–Hengyang Sichuan–Hunan DC ±800 8 Planned to complete feasibility study by 2015 2017E 2019E SGCC

^ North Shaanxi–Nanchang Shaanxi–Jiangxi DC ±800 8 Planned to complete feasibility study by 2015 2017E 2019E SGCC

^ Upper stream Jinsha River–Ji'an Sichuan–Jiangxi DC ±800 NA Planned to complete feasibility study by 2015 2018E 2020E SGCC

^ Kazakhstan–Nanyang Kazakhstan–Henan DC ±1100 12 Start preliminary research in Jun 2015 2018E 2020E SGCC

^ Russia–Bazhou Russia–Hebei DC ±800 8 Planned to start preliminary research in 2015 2018E 2020E SGCC

& North Hami–Chongqing Xinjiang–Chongqing DC ±800 8 Target to be operational by 2020 2019E 2021E SGCC

& East Gansu–Jiangsu Gansu–Jiangsu DC ±800 10 Under preliminary planning 2019E 2021E SGCC

EHV lines under planning

# Suizhong–Northern China Liaoning–North China DC ±500 2 Preliminarily approved; planned to be operational by 2017

2015 2015E SGCC

# Shanxi–Hebei Shanxi–Hebei DC ±500 NA Preliminarily approved; planned to be operational by 2017

2015E 2016E SGCC

# Shaanxi–Hebei Shaanxi–Hebei DC ±500 NA Preliminarily approved; planned to be operational by 2017

2015E 2016E SGCC

^ Mongolia–Tianjin Mongolia–Tianjin DC ±600 4 Planned to start preliminary research in 2015 2018E 2020E SGCC

^ Yili–Pakistan Xinjiang–Pakistan DC ±600 4 Started preliminary research in Jun 2015 2018E 2020E SGCC

Note: # listed in Action Plan on Air Pollution Prevention issued by the State Council *listed in the 6 AC & 8DC UHV plan announced by SGCC in Jan 2015; ^proposed by SGCC in Jan 2015; &listed in local grid planning; IM refers to Inner Mongolia Source: Deutsche Bank, SGCC, CSG

16 September 2015

Manufacturing



Figure 26: UHV lines in operation in 2015

Zengcheng

Suzhou

Jinping

Ningxia

Shanxi

Xinjiang

Completed AC lines

Huanan

Zhengzhou

South Shanxi

Nanyang

JinmenShanghai

Xiangjiaba

Chuxiong

Xiluodu

West Zhejiang

Fuzhou

North Zhejiang

Completed DC lines

Gansu

Inner Mongolia

Shaanxi

Hainan

Tibet

Qinghai

Guangdong

Jiangsu

Hubei

HunanJiangxi

Fujian

Taiwan

Yunnan

Sichuan

Guangxi

Guizhou

Hebei

Henan

Shangdong

Anhui

Liaoning

Jilin

Heilongjiang

Beijing

TianjinQHD

Hami

Nuozhadu

Jiangmen


Figure 27: UHV lines to be operational in 2016 Figure 28: UHV lines to be operational in 2017

Ningxia

Shanxi

Xinjiang

Ximeng

Jinan

Huainan

Shanghai

Nanjing

Newly operational DC lines in 2016

Gansu

Inner Mongolia

Shaanxi

Hainan

Tibet

Qinghai

Guangdong

Jiangsu

Zhejiang

Hubei

HunanJiangxi

Fujian

Taiwan

Yunnan

Sichuan

Guangxi

Guizhou

Hebei

Henan

Shangdong

Anhui

Liaoning

Jilin

Heilongjiang

Beijing Tianjin

QHD

Newly operational AC lines in 2016

Ningxia

Shanxi

Linyi

Shanghaimiao

Xilin Gol

Shenzhen

Lijiang

Nanjing

Shanghai

Taizhou

Fuzhou

Gansu

Inner Mongolia

Shaanxi

Hainan

Tibet

Qinghai

Guangdong

Jiangsu

Zhejiang

Hubei

HunanJiangxi

Fujian

Taiwan

Yunnan

Sichuan

Guangxi

Guizhou

Hebei

Henan

Shangdong

Anhui

Liaoning

Jilin

Heilongjiang

Beijing

TianjinQHD

Tianjin

Jiuquan

Xiangtan

Ordos

YuhengWeifang

Shijiazhuang

Newly operational DC lines in 2017

Newly operational AC lines in 2017

Xinjiang



16 September 2015

Manufacturing



UHV equipment – Rmb200bn market potential (2015-18E)

Based on our expectation of 6-7 UHV project approvals annually through 2015-

18, we forecast a total of c.Rmb500bn UHV investment in 2016-20. There will

be about Rmb200bn market potential for UHV equipment investment through

2015-18E. Investment for a UHV line is roughly Rmb20bn, of which 40-50% is

invested in main equipment.

Different main equipment in UHV AC and DC lines

For UHV AC lines, there are substations in between to step up or down voltage

for multi-point power transmission and landing, which account for around 40%

of total investment. Main equipment in the substations includes GIS,

transformers, electric reactors, arrestors, insulators, etc., among which UHV

GIS, transformers and electric reactors constitute over half of substation

investment (Figure 29).

Figure 29: Main equipment investment breakdown of Ximeng, Inner Mongolia – Shandong (UHV AC line)

Key equipment No. of units ASP (Rmb m) Investment (Rmb m) % total investment

>Substation 3 7,120 40%

1000kV GIS 30 95 2,850 16%

1000kV transformers 20 40 800 4%

1000kV electric reactors 28 20 560 3%

Others (arrestors, instrument transformers, insulators, etc.) 2,910 16%

>Transmission tower & line construction 10,680 60%



For UHV DC lines, there are two converter stations connecting the start and

end point, which account for around 45-50% of total investment. Main

equipment of converter stations include DC equipment such as converter

transformers, converter valves, DC control & protection equipment as well as

AC equipment such as contact transformers, shunt reactors and 500-750KV

GISs (Figure 30). For DC transmission, converter transformers firstly step up

voltage of AC, and then converter valves convert AC to DC through

rectification. After the wave filtering via smoothing reactors, the DC will be

transmitted to landing point, where it will be connected to AC network after

conversion back to AC and voltage step-down.

Figure 30: Main equipment investment breakdown of North Shanxi – Jiangsu (UHV DC line)

Key equipment No. of units ASP (Rmb m) Investment (Rmb m) % total investment

>Converter station 2 8,100 50%

>>DC equipment 8,295 35%

Converter transformers 56 55 3,080 19%

Converter valve 8 190 1,520 9%

DC control & protection 2 89 178 1%

Other DC equipment 892 16%

>>AC equipment 2,430 15%

500kV GIS 65 4 280 2%

Other AC equipment 2,150 13%

>Transmission line construction 8,100 50%



16 September 2015

Manufacturing



UHV equipment tender/investment forecasts

In line with the substantial increase of UHV project approvals from this year,

UHV equipment tenders and investment will also see a major jump from 2014.

Based on our proprietary UHV tender/investment forecasts (Figure 31 and

Figure 32), 2015-16 will be the peak years for equipment tenders (c.Rmb75bn

p.a.), which will translate to peak delivery/investment in 2016-18 (over

Rmb50bn p.a.).

Our UHV equipment tender/investment forecasts are based on the following

assumptions.

Main equipment investment accounts for c.40% of the total for AC lines and c.50% of the total for DC lines. Value of key equipment referred to breakdown in past tenders (Figure 29 and Figure 30);

For those UHV lines under planning but without capex information, we assume Rmb18bn for an AC line and Rmb20bn for a DC line;

Tender invitation starts within 3 months of project approval;

Construction starts within 4 months of project approval. Also, we assume it takes two years for construction on average;

In terms of equipment investment schedule: 1) For AC lines, if construction starts in 1H, equipment investments are assumed to be allocated as 50% in that year and 50% the next year. If construction starts in 2H, equipment investments are assumed to be allocated as 50% the next year and 50% the year after that; 2) For DC lines, we assume a 50%-50% delivery schedule in each year after the year of approval, considering a relatively longer delivery period vs. AC.

By main equipment product, UHV GIS are the most prominent equipment of

AC lines, which we estimate will have Rmb6-9bn investment potential annually

through 2016-18, while converter transformers and converter valves are the

most significant DC line equipment investments, each with Rmb10-17bn and

Rmb5-9bn p.a. through 2016-18.

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Figure 31: UHV equipment tender forecasts (2014-18E)

AC/DC UHV linesTotal invmt.

(Rmb bn)

Equipment invmt

(Rmb bn)Approval year Tender year 2014 2015 2016 2017 2018

AC Huainan - Nanjing - Shanghai 27.4 11.0 2014 2014 11.0 - - - -

AC Ximeng, Inner Mongolia - Jinan, Shandong 17.8 7.1 2014 2014 7.1 - - - -

DC East Ningxia - Shaoxing, Zhejiang 23.7 11.9 2014 2014 11.9 - - - -

AC West Inner Mongolia - South Tianjin 17.5 7.0 2015 2015 - 7.0 - - -

DC Jiuquan - Hunan 26.2 13.1 2015 2015 - 13.1 - - -

AC Yuheng - Weifang 24.2 9.7 2015 2015 - 9.7 - - -

DC North Shanxi - Nanjing, Jiangsu 16.2 8.1 2015 2015 - 8.1 - - -

DC Ximeng, Inner Mongolia - Taizhou,Jiangsu 33.2 16.6 2015 2015 - 16.6 - - -

DC Shanghaimiao, Inner Mongolia - Shandong 24.5 12.3 2015 2015 - 12.3 - - -

DC Northwest Yunnan - Guangdong 22.0 11.0 2015 2015 - 11.0 - - -

AC West Inner Mongolia - Changsha; Jingmen- Wuhan; Changsha-Nanchang 18.0 7.2 2016 2016 - - 7.2 - -

AC Zhangbei - Nanchang, Southeast Shanxi - North Hebei, Nanyang - Zhumadian 18.0 7.2 2016 2016 - - 7.2 - -

AC Nanjing-Xuzhou-Lianyungang-Taizhou 18.0 7.2 2016 2016 - - 7.2 - -

AC Jinan - Zaozhuang - Linyi - Weifang 18.0 7.2 2017 2017 - - - 7.2 -

DC Humeng - Qingzhou 18.0 9.0 2016 2016 - - 9.0 - -

DC West Inner Mongolia - Wuhan 20.0 10.0 2016 2016 - - 10.0 - -

DC Zhundong - South Anhui 47.0 18.8 2016 2016 - - 18.8 - -

DC Zhundong - Chengdu 40.0 16.0 2016 2016 - - 16.0 - -

AC Batang- Ya'an-Chongqing-Mianyang-Dege-Batang, Ya'an-Mianyan 18.0 7.2 2017 2017 - - - 7.2 -

DC Zhalute -Zhumadian 20.0 10.0 2017 2017 - - - 10.0 -

DC Yazhong - Hengyang 20.0 10.0 2017 2017 - - - 10.0 -

DC North Shaanxi - Nanchang, Jiangxi 20.0 10.0 2017 2017 - - - 10.0 -

DC Upper stream Jinsha River - Ji'an 20.0 10.0 2018 2018 - - - - 10.0

DC Kazakhstan - Nanyang 20.0 10.0 2018 2018 - - - - 10.0

DC Russia - Bazhou 20.0 10.0 2018 2018 - - - - 10.0

AC Ya'an- Neijiang-Chongqing 18.0 7.2 2017 2017 - - - 7.2 -

AC Zaozhuang-Xuzhou 18.0 7.2 2018 2018 - - - - 7.2

AC North Henan-Zaozhuang 18.0 7.2 2018 2018 - - - - 7.2

AC Wuhan-Anqing-South Anhui 18.0 7.2 2018 2018 - - - - 7.2

Number of UHV equipment tenders 3 7 7 6 6

AC line 2 2 3 3 3

DC line 1 5 4 3 3

UHV equipment tender value (Rmb bn) 29.9 77.7 75.4 51.6 51.6

>>AC line 40% 18.1 16.7 21.6 21.6 21.6

>>>1000kV GIS 16% 7.2 6.7 8.6 8.6 8.6

>>>1000kV transformers 4% 2.0 1.9 2.4 2.4 2.4

>>>1000kV Electric reactors 3% 1.4 1.3 1.7 1.7 1.7

>>>Other equipment 16% 7.4 6.8 8.8 8.8 8.8

>>DC line 50% 11.9 61.1 53.8 30.0 30.0

>>>Converter transformers 15% 3.6 18.3 16.1 9.0 9.0

>>>Converter valves 8% 1.9 9.8 8.6 4.8 4.8

>>>DC control & protection 2% 0.5 2.4 2.2 1.2 1.2

>>>Other DC field equipment 10% 2.4 12.2 10.8 6.0 6.0

>>>AC equipment 15% 3.6 18.3 16.1 9.0 9.0 Source: Deutsche Bank, SGCC, CSG, NEA

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Figure 32: UHV equipment investment forecast (2014-18E)

AC/DC UHV linesTotal invmt

(Rmb bn)

Equipment invmt

(Rmb bn)Approval year Construction year 2014 2015 2016 2017 2018

DC South Hami- Zhengzhou 23.4 11.7 2012 2012 5.9 - - - -

DC Xiluodu - Jinhua, Zhejiang 19.7 9.9 2012 2012 4.9 - - - -

AC North Zhejiang - Fuzhou 18.9 7.6 2013 2013 3.8 - - - -

AC Huainan - Nanjing - Shanghai 27.4 11.0 2014 2014 - 6.6 4.4 - -

AC Ximeng, Inner Mongolia - Jinan, Shandong 17.8 7.1 2014 2014 - 4.3 2.8 - -

DC East Ningxia - Shaoxing, Zhejiang 23.7 11.9 2014 2014 - 7.1 4.7 - -

AC West Inner Mongolia - South Tianjin 17.5 7.0 2015 2015 - 2.1 4.9 - -

DC Jiuquan - Hunan 26.2 13.1 2015 2015 - - 6.6 6.6 -

AC Yuheng - Weifang 24.2 9.7 2015 2015 - 2.9 6.8 - -

DC North Shanxi - Nanjing, Jiangsu 16.2 8.1 2015 2015 - - 4.1 4.1 -

DC Ximeng, Inner Mongolia - Taizhou,Jiangsu 33.2 16.6 2015 2015 - - 8.3 8.3 -

DC Shanghaimiao, Inner Mongolia - Shandong 24.5 12.3 2015 2015 - - 6.1 6.1 -

DC Northwest Yunnan - Guangdong 22.0 11.0 2015 2015 - - 5.5 5.5 -

AC West Inner Mongolia - Changsha; Jingmen- Wuhan; Changsha-Nanchang 18.0 7.2 2016 2016 - - - 3.6 3.6

AC Zhangbei - Nanchang, Southeast Shanxi - North Hebei, Nanyang - Zhumadian 18.0 7.2 2016 2016 - - - 3.6 3.6

AC Nanjing-Xuzhou-Lianyungang-Taizhou 18.0 7.2 2016 2016 - - - 3.6 3.6

AC Jinan - Zaozhuang - Linyi - Weifang 18.0 7.2 2017 2017 - - - 3.6 3.6

DC Humeng - Qingzhou 18.0 9.0 2016 2016 - - - 4.5 4.5

DC West Inner Mongolia - Wuhan 20.0 10.0 2016 2016 - - - 5.0 5.0

DC Zhundong - South Anhui 47.0 18.8 2016 2016 - - - 9.4 9.4

DC Zhundong - Chengdu 40.0 16.0 2016 2016 - - - 8.0 8.0

AC Batang- Ya'an-Chongqing-Mianyang-Dege-Batang, Ya'an-Mianyan 18.0 7.2 2017 2017 - - - 3.6 3.6

DC Zhalute -Zhumadian 20.0 10.0 2017 2017 - - - - 5.0

DC Yazhong - Hengyang 20.0 10.0 2017 2017 - - - - 5.0

DC North Shaanxi - Nanchang, Jiangxi 20.0 10.0 2017 2017 - - - - 5.0

AC Ya'an- Neijiang-Chongqing 18.0 7.2 2017 2017 - - - - 3.6

UHV equipment investment (Rmb bn) 14.6 23.0 54.2 75.4 63.5

>>AC line 40% 3.8 15.9 18.9 18.0 21.6

>>>1000kV GIS 16% 1.5 6.3 7.6 7.2 8.6

>>>1000kV transformers 4% 0.4 1.8 2.1 2.0 2.4

>>>1000kV Electric reactors 3% 0.3 1.2 1.5 1.4 1.7

>>>Other equipment 16% 1.5 6.5 7.7 7.4 8.8

>>DC line 50% 10.8 7.1 35.3 57.4 41.9

>>>Converter transformers 15% 3.2 2.1 10.6 17.2 12.6

>>>Converter valves 8% 1.7 1.1 5.6 9.2 6.7

>>>DC control & protection 2% 0.4 0.3 1.4 2.3 1.7

>>>Other DC equipment 10% 2.2 1.4 7.1 11.5 8.4

>>>AC equipment 15% 3.2 2.1 10.6 17.2 12.6

Source: Deutsche Bank, SGCC, CSG, NEA

16 September 2015

Manufacturing



Competitive landscape of UHV equipment market

Unlike the fragmented lower-voltage equipment market, which has intense

competition, the UHV equipment market is dominated by a limited number of

leading domestic players due to high technology requirements and capital

barriers.

To gain a better understanding of UHV equipment market dynamics, we

conducted an analysis of recent tender results for AC and DC lines.

UHV AC equipment market is shared by China XD, Pinggao Electric, New Northeast Electric Group (NNE, 000585 CH), TBEA (600089 CH), Shandong Power Equipment Co. Ltd. (Shandong) and Baoding Tianwei Baobian Electric Co. Ltd (TWBB, 600550 CH).

Pinggao Electric, TBEA and China XD have secured leadership in UHV GIS, transformer and electric reactor tenders, with an average of 41%, 38% and 42% market share, respectively (Figure 33).

Figure 33: T&D equipment makers’ market share in recent AC line tenders by main equipment

1000kV GIS 1000kV transformers 1000kV electric reactors

AC lines Status China XD Pinggao Electric

NNE China XD TBEA Shandong TWBB China XD TBEA Shandong TWBB

Huainan-Nanjing-Shanghai Tendered 26% 47% 26% 27% 47% 27% 0% 48% 0% 0% 52%

Ximeng-Shandong Tendered 30% 37% 33% 0% 40% 20% 40% 50% 25% 25% 0%

West IM-South Tianjin Tendered 26% 45% 30% 25% 25% 25% 25% 37% 37% 13% 13%

Yuheng-Weifang Tendered 26% 35% 39% 0% 39% 39% 22% 35% 30% 9% 16%

Average 27% 41% 32% 13% 38% 28% 22% 42% 21% 12% 20%


UHV DC equipment market: is shared by China XD, XJ Electric, NARI Group, EPRI, TBEA and TWBB. Tenders of converter valves used to be bid for by XJ Electric, China XD and EPRI while the Sifang-ABB JV has emerged as a new supplier recently; the converter transformer market is dominated by China XD, TBEA and TWBB, while the DC control & protection market is split by XJ Electric and NR Electric (owned by NARI Group), each with around half of the market share (Figure 34).

Figure 34: T&D equipment makers’ market share in recent DC line tenders by main equipment

Converter valves Converter transformers DC control & protection

DC lines Status China XD

XJ Electric

EPRI Sifang–ABB

China XD

TBEA TWBB Shandong Chongqing ABB

Siemens XJ Electric

NR Electric

Xiluodu–Zhejiang In operation 50% 25% 25% 0% 25% 25% 25% 13% 13% 0% 100% 0%

East Ningxia–Zhejiang

Tendered 0% 50% 50% 0% 25% 25% 25% 13% 0% 13% 0% 100%

Jiuquan–Hunan Tendered 50% 0% 50% 0% 25% 25% 0% 25% 25% 0% 0% 100%

North Shanxi–Jiangsu

Tendered 0% 50% 0% 50% 25% 25% 25% 13% 0% 25% 100% 0%

Average 25% 31% 31% 13% 25% 25% 19% 13% 9% 9% 50% 50%


16 September 2015

Manufacturing



China XD is undoubtedly more exposed to the overall UHV equipment market,

with comprehensive product offerings for both AC and DC lines. Pinggao

Electric and XJ Electric – building on their signature products of UHV AC GIS

and UHV DC converter valves respectively – are significant beneficiaries of

UHV AC and DC as well (Figure 35).

Figure 35: Overall market share of UHV main equipment in recent tenders

China XD Pinggao Electric

XJ Electric TBEA Shandong TWBB NNE EPRI Tech NR Electric

AC 27% 29% NA 9% 6% 6% 23% NA NA

DC 23% NA 15% 14% 7% 11% NA 11% 3%

Source: Deutsche Bank, SGCC, *data derived from most recent 4 AC tenders and 4 DC tenders, NA stands for few or no UHV exposure

UHV equipment market’s competitive landscape to remain largely stable

We expect the market share of existing players to remain largely stable in

upcoming UHV equipment tenders.

On one hand, considering the production capacity, SGCC will balance the

orders among these players instead of overly favoring any of them; on the

other hand, from a quality and safety perspective, the market is not likely to be

opened up to many more players without mature UHV technologies and

quality track records.

One or two more suppliers may be introduced as a back-up in case of capacity

constraints upon construction acceleration, just like the case of the Sifang-ABB

JV, which for the first time received orders of converter valves in the recent

North Shanxi-Jiangsu tender.

16 September 2015

Manufacturing



Rmb1.4trn power distribution investment (2016-20)

Key points

It is crucial to build a strong and smart power distribution network in order to raise supply reliability, decentralize the power system and realize effective demand-side management.

We expect China’s power distribution investment to reach at least Rmb1.4trn during the 13th five-year period, with an average annual investment up significantly to Rmb280bn from Rmb190bn in 2011-15 by our estimation. Rural grid upgrades and distribution automation will be two areas of focus.

Distribution investment has been below expectations since early 2014, affected by the SOE probe and government audits. We expect it to resume growth from late 2015 with the underlying political and policy environment turning more favorable.

Our ranking of competition intensity is: primary distribution equipment > distribution terminals > distribution master stations. NARI Group and XJ Electric are leaders in the distribution automation market.

Distribution investment – key to realizing the smart grid plan

In past decades, China’s main backbone transmission network (220-750KV)

has been well invested. But the power distribution network (110KV and

below) – the last mile connecting end-users – is underinvested relative to

generation capacity and main transmission network construction.

In order to raise supply reliability, cater to a more decentralized power system

and realize effective demand-side management, it is crucial to build a strong

and smart power distribution network, which is defined as an intelligent power

network combined with advanced digital technologies in measurement,

communications and information control across the electricity flow system.

Specifically, we think there are two key rationales for a strong and smart

distribution network.

Further improvement in power supply reliability

China has been continuously improving the reliability and efficiency of the

power distribution network, with the power supply reliability rate in urban

areas increased to 99.95% in 2014 from 99.91% in 2010 and the average

power outage time reduced to 4.4 hours per household from 8.2 hours.

Nevertheless, as compared with developed countries (Figure 36), China still lags

behind in power supply reliability, which is partially attributable to underinvestment

in distribution automation. China’s penetration of distribution automation is still

low at c.20% currently vs. >50% in developed countries (Figure 37).

16 September 2015

Manufacturing



Figure 36: Comparison of average power outage time

(min/household p.a., 2013)

Figure 37: Comparison of distribution automation rate

(2014)

0

50

100

150

200

250

300


0%

10%

20%

30%

40%

50%

60%

70%


Source: Deutsche Bank, Taipower

Source: Deutsche Bank, Wasion Group

Figure 38: Distribution network reliability and efficiency target

2014 2017 2020

Power supply reliability rate 99.35% 99.69% 99.82%

Central urban 99.95% 99.97% 99.99%

Urban 99.80% 99.85% 99.88%

Rural 99.16% 99.45% 99.72%

Avg. power outage time 57hrs 27hrs 15.7hrs

Central urban 4.4hrs 2.6hrs 1hr

Urban 17.5hrs 13.2hrs 10hrs

Rural 73.6hrs 48hrs 24hrs

Integrated voltage qualified rate 95.88% 97.53% 98.65%

Central urban 99.94% 99.96% 99.97%

Urban 96.92% 97.95% 98.79%

Rural 90.77% 94.69% 97.00%

Line loss (110kV and below) 6.20% 6.10% 6.00%

Distribution automation coverage 20.0% 50.0% 90.0%

Distribution communication penetration 40.0% 60.0% 95.0%

Smart meters coverage 60.0% 80.0% 90.0%

Source: Deutsche Bank, NEA – Action Plan on Power Distribution Network 2015-20

Better integration of decentralized power systems and higher renewables mix

The conventional distribution network has been designed to provide the

required level of power supply reliability. However, as the grids are running

with rising complexity on the growing integration of various decentralized

power systems such as distributed energy (DE), electric vehicles (EV), energy

storage devices, etc. (Figure 40), the distributed network needs to be further

upgraded to accommodate new challenges such as the transition from

unidirectional current to multi-directional current state and higher instability on

DE connections.

Moreover, there will be rising level of intermittent wind/solar/hydro outputs

that requires higher degree of automation for the power distribution network to

absorb. In this respect, there is a sense of urgency about investing in

distribution automation as the conventional network is unable to adapt to

such a changing power ecosystem.

16 September 2015

Manufacturing



Figure 39: Power grid development in China

Micro-grid

2009 2011 2015 2020

High voltage

construction

En

erg

y e

ffic

iency

rate

%

Long-distance

transmission

System

inter-connection

Improvement in

power reliability

Rising automation

demand Increasing distribution

investment

Distributed energy

Demand-side

management (DSM)

Other new tech

Realization of smart

grid

China's current grid

development stage

Source: Deutsche Bank, Wasion Group

Figure 40: From a conventional distribution network to a smart distribution network

Smart

distribution network

Power grid

High voltage grid

Mid voltage grid

Low voltage grid

Two-way current

Distributed

energy

Storage device

Electric vehicle

Smart

meter

Smart

meter

Power grid

High voltage grid

Mid voltage grid

Low voltage grid

Conventional

distribution network


Rmb1.4trn distribution investment expected in 2016-20

To realize the strong and smart grid plan by 2020, the government is

determined to accelerate power distribution investment. At “The Action Plan

on Power Distribution Network Investment 2015-20” announced by NEA at the

end of August, a target of Rmb2.0trn is said to be invested in distribution

during 2015-20 (>Rmb300bn in 2015 and >Rmb1,700bn in the 13th five-year

period). The target investment scale is nearly double that in 2009-14, according

to our estimates.

We forecast a total of c.Rmb1.4trn of power distribution investment in 2016-

20. Our forecast is Rmb300bn shot of the above target as we have built in

some conservativeness amid a slowing macro outlook. Nonetheless, the

average annual investment will still be up significantly to c.Rmb280bn during

the 13th five-year period from Rmb190bn in the recent five years (Figure 41).

16 September 2015

Manufacturing



Figure 41: China’s power distribution investment forecast (Rmb bn)

-

50

100

150

200

250

300

350

2011-15E: avg. Rmb190bn

2016-20E: avg. Rmb280bn

Source: Deutsche Bank, CEC, SGCC, CSG, Note that there is no official national distribution investment statistic; numbers are all based on DB estimates

Two focuses of distribution investment

In our view, the rural grid upgrade and urban distribution automation will be

the two key focuses of distribution investment.

Focus 1: A new round of rural grid upgrades

Though power supply reliability in rural areas measured by average blackout

hours has been significantly improved in recent decades, it is still far from

satisfactory compared with urban areas.

In July 2015, NDRC and NEA announced that a further Rmb92.6bn would be

budgeted for rural power grid upgrades, in addition to the Rmb45bn spent in

1H15. The extra Rmb92.6bn, which is scheduled by July 2016, is intended for

building/upgrading substations, transmission lines, transformers, meters at

voltages of 110kV and below in rural areas of 25 provinces.

Hence, taking account of both the target set at the beginning of the year and

the additional budget announced this July, the total rural grid investment plan

made by SGCC and CSG for the period between 2015 and July 2016 comes

to Rmb176bn (Figure 42), which is 30% above that in 2013-14.

16 September 2015

Manufacturing



Figure 42: Rural grid investment by SGCC/CSG (Rmb bn)

67 71 70 73 8151 46

90

1426 23 21

24

21 18

12

68

6

0

20

40

60

80

100

120

140

160

180

200

2008 2009 2010 2011 2012 2013 2014 2015 to Jul-16 (TGT)

SGCC CSG SGCC additional CSG additional

Add. investment scheduled between Jul-15 and Jul-16


Focus 2: Scale-up of distribution automation upgrades

While the rural grid upgrade is primarily aimed at improving power reliability, the

distribution investment in urban areas is more focused on enhancing distribution

automation levels. As we mentioned, China’s overall penetration rate of

distribution automation is far below that of developed countries.

Both gridcos have set specific targets for enhancing distribution automation

penetration. The Action Plan on Power Distribution Network Investment 2015-

20” announced by NEA include a full set of targets on grid reliability and

efficiency as shown in Figure 38. For instance, 90% coverage rate of

distribution automation is targeted at 2020, up from 20% in 2014; 90% smart

meter coverage is targeted at 2020, up from 60% in 2014. We believe the

success of SGCC’s two pilot projects for distribution automation upgrades in

2009 and 2010 (Figure 43) will provide valuable experience for further

rollovers.

Figure 43: Reliability and efficiency improvement after distribution automation upgrade

Power supply reliability (%) Line loss (%) Voltage qualification (%) Avg. time of fault isolation (min)

Beijing Before 99.952 10.5 99.08 96

After 99.99 4.8 99.57 5

Hangzhou Before 99.99 2.5 99.734 53

After 99.995 2.2 99.924 5

Yinchuan Before 99.986 3.88 99.99 53

After 99.995 3.25 99.994 1.5

Xiamen Before 99.944 3.88 99.31 30

After 99.99 3.25 99.98 5


Distribution investment likely to rebound in late 2015

The lower-than-expected distribution investment since early 2014 has been

specifically affected by the SOE anti-bribery & corruption campaign and

government audits initiated last April. As a result, only one round of centralized

distribution automation products by SGCC was tendered in 2014 vs. three to

16 September 2015

Manufacturing



four in historical practice. And the impact has lasted longer than expected – so

far this year there has been only one tender at a contracted scale. Versus 2014,

the number of packages of distribution master stations tendered YTD slumped

to 3 (covered one province) from 23 (covered 8 provinces) while the number of

packages of distribution terminals fell to 26 from 31.

However, the SOE probe should not affect the fundamental necessity of power

distribution investment and the long-term outlook remains intact. Into 2H15,

with the underlying political and policy environment turning more favorable, we

expect power distribution investment will resume strong growth from a low

base.

So far, the 13th five-year power distribution plans of several provinces or

municipal cities are under review, including Fujian, Jiangsu, Jiangxi, Tianjin,

Chongqing, and Shanxi. For instance, Jiangxi aims to complete a modern

power distribution network with enhanced flexibility, reliability and efficiency

with investment in distribution budgeted at 60% of the total grid investment.

Competitive landscape of distribution equipment market

Competition shows diverging landscapes in different power distribution

equipment products, which can be categorized as primary distribution

equipment (including pole-mounted circuit breakers, switches, transformers,

ring network cabinets, insulators, etc. at 110kV and below) and secondary

equipment (mainly distribution master stations, distribution sub-stations and

distribution terminals). By competitive intensity in descending order, our

ranking is: primary distribution equipment > distribution terminals >

distribution master stations. Details are discussed below.

Primary distribution equipment

Currently, most of the distribution investment goes to primary distribution

equipment. The market is huge but also highly competitive given the low

barriers to entry. There is no player with over 5% market share. Chint, Daqo,

Delixi are major local players.

Distribution terminals

According to SGCC’s centralized tender data in 2014, typically over 10 players

will get the orders, each with 5-10% market share. NARI Tech, KE Electric,

Jinzhi, Sifang, Jicheng, XJ Electric, Hexin Ruitong, etc. are the key candidates

in the market (Figure 44).

Distribution master stations

Distribution master stations are regarded as the core part of distribution automation with high tech and systems integration barriers. Thus the distribution master station market is dominated by a limited number of distribution automation players. NARI Group is undoubtedly the leader, followed by XJ Electric and Sifang (Figure 45).

16 September 2015

Manufacturing



Figure 44: Market share in SGCC centralized tenders of

distribution terminals (2014)

Figure 45: Market share in SGCC centralized tenders of

distribution master station (2014)

11%

10%

10%

9%

9%9%

9%

8%

8%

7%

5%5%

2%NARI Tech

KE Electric

Sifang

Jicheng

NR ElectricJinzhiHexin Ruitong

Dongfang

XJ Electric

Luneng

Nanjing Automation

ChangyuanOthers

61%

30%

9%

NARI Tech

XJ Electric

Sifang

Source: Deutsche Bank, SGCC, Note: mkt share in terms of total units won

Source: Deutsche Bank, SGCC, Note: mkt share in terms of total units won

16 September 2015

Manufacturing



Rmb2.6trn grid investment in OBOR countries (2016-20)

Key points

China’s One Belt One Road strategy will provide strong tailwinds

to equipment players’ export growth. We estimate that the total

T&D investment in OBOR regions could be about Rmb2.6trn over

2016-20, with a likely c.Rmb1.0trn to be spent on equipment. Key

markets include India, Russia, Indonesia, Brazil, etc.

SGCC’s overseas expansion promotes more usage of Chinese

equipment in overseas markets. With the vision of realizing global

energy interconnection, SGCC is actively studying UHV power

connection with border countries.

After high-speed railways and nuclear power, UHV could become

China’s next high-end capital goods export with proprietary

technology and established track records built in China.

Great export potential for Chinese T&D equipment makers

For China’s T&D equipment makers, the overseas market holds great potential

as their track records and technology leadership have been built in the sizeable

domestic market. In March 2015, NDRC, the Ministry of Foreign Affairs and

the Ministry of Commerce jointly unveiled the state-level One Belt One Road

(OBOR) Action Plan. The OBOR plan links China with Europe and China with

the South Pacific Ocean, spanning 65 countries or regions along the routes,

located in Asia, Central/Eastern/Southeastern Europe, North Africa, etc.

Investment in power grid infrastructure will be a key element of OBOR

strategy, which will provide strong policy tailwinds to Chinese players’

overseas expansion.

Substantial grid investment needed in OBOR countries

Based on data provided by World Bank, the average power consumption per

capita of these OBOR countries is <4,000kWh (Figure 46), far below the

c.10,000kWh of developed countries, which implies great power consumption

growth potential. Moreover, the T&D power network of some OBOR countries

were built many years ago and are outdated to run efficiently enough to match

the increasing capacity and complexity of power supplies. In this respect, there

is need for replacement.

Currently in these OBOR countries, Chinese players have a footprint but a large

part of the orders is still given to international players such as ABB, Siemens,

Toshiba, Schneider, Trench, Mitsubishi, Hitachi, and BHEL.

16 September 2015

Manufacturing



Figure 46: Power consumption per capita of OBOR countries (kWh/person, 2014E)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Qat

ar

Bah

rain

Sin

gap

ore

Isra

el

Om

an

Slo

ven

ia

Mo

nte

neg

ro

Kaz

akh

stan

Bu

lgar

ia

Ch

ina

Leb

ano

n

FYR

Mac

edo

nia

Turk

men

ista

n

Hu

nga

ry

Cro

atia

Ukr

ain

e

Jord

an

Bh

uta

n

Tajik

ista

n

Uzb

ekis

tan

Egyp

t

Aze

rbai

jan

Syri

a

Arm

enia

Iraq

Mal

div

es

Ind

ia

Sri L

anka

Lao

P.D

.R.

Yem

en

Mya

nm

ar

Afg

han

ista

n

Avg. c.4,000kWh per capita

Source: Deutsche Bank, World Bank

Rmb2.6trn grid investment and Rmb1.0trn equipment market in OBOR regions

We estimate that the total T&D equipment market in OBOR regions could be

approximately Rmb1trn over 2016-20. The methodology of our estimate is

illustrated as below (Figure 47).

In 2004-13, China invested an average of 0.86% of GDP in the power grid. In

2014, China invested 0.64% of total GDP in power grid amid a slowing

economy and power demand growth. Considering a less degree of

industrialization of many OBOR countries as compared to China, we apply the

lower investment percentage of 0.5% in 2014 as an average multiple to OBOR

countries and work out the grid investment for each country through 2016-20

based on the International Monetary Fund (IMF)’s GDP forecast. Total power

grid investment during the period is estimated at c.Rmb2.57trn, 40% of

which should go to T&D equipment.

Figure 47: Estimated T&D equipment market in OBOR regions

China Year 2014

GDP (USD bn) 10,380

Power grid investment (Rmb bn) 412


OBOR countries (refer to Figure 46) Year 2016-20

GDP (USD bn) 76,611


Power grid investment (Rmb bn) 2,566

Power T&D equipment as % of grid investment 40%

Market size of power T&D equipment (Rmb bn) 1,026

Source: Deutsche Bank, IMF

SGCC’s overseas expansion provide strong support

After years of outbound investment and acquisitions, SGCC has set footprint

overseas and has a good track record of operating power networks in a

number of countries including Brazil, the Philippines, Portugal, Italy, Australia,

etc (Figure 48), with overseas assets expanding to USD29.8bn as end of 2014.

16 September 2015

Manufacturing



In July 2015, SGCC successfully won the bid for the Belo Monte ±800kV UHV

DC transmission project II in Brazil. Unlike its first overseas UHV order, Belo

Monte I, which was jointly won by SGCC and its Brazilian partner, SGCC will

act as the sole EPC provider for Belo Monte II. This means SGCC is entitled to

choose equipment suppliers, which suggests a high probability that domestic

equipment makers will win orders.

With a vision of realizing global energy inter-connection, SGCC is actively

studying UHV power connections with border countries. SGCC is currently

contemplating four projects with border countries, namely Yili (Xinjiang) –

Pakistan ±600kV DC, Kazakhstan – Nanyang (Henan) ±1100kV DC, Russia –

Bazhou (Hebei) ±800kV DC, Mongolia – Tianjin ±600kV DC. Among them, Yili

(Xinjiang) – Pakistan and Kazakhstan – Nanyang (Henan) have been under

feasibility studies since June 2015.

Figure 48: Milestones of SGCC’s overseas investment

Year Milestones

2007 Set up the wholly owned State Grid International Development Ltd (SGID) in Hong Kong as a platform for foreign investment

2009 Won 25-year operation concession for national power transmission network in the Philippines

2010 Acquired 7 power transmission franchise companies in Brazil from Spanish sellers

2011 Won 500kV Luziânia substation project and 203kV Niquelândia substation expansion project

2012 Acquired 25% stake of Portugal’s national power grid (PorRedes Energéticas Nacionais) and sent management to help with operation

Won franchise right to build and operate Teles Pires transmission project in Brazil

Acquired 46.56% stake in ElectraNet, sole power transmission network in South Australia, which covers 6% of all network in the country

2014 Acquired another two assets in Australia from Singapore Power Ltd – 60% stake in SPIAA and 19.9% stake of SP AusNet

Subscribed to 20% stake of Hong Kong Electric (2638 HK)

Won the franchise right through a JV (SGCC with 51% stake) to build and operate ±800kV UHV DC transmission project I for the Belo Monte hydro plant in Northern Brazil

Acquired 35% stake in Italian energy grid unit Cassa Depositi e Prestiti (CDP) Reti, which controls gas grid Snam and Italian TSO Terna SpA

Signed Memorandum of Understanding on three ±600kV UHV DC transmission line projects with Pakistan

2015 Won the franchise right independently to build and operate the Belo Monte ±800kV UHV DC transmission project II for 30 years


UHV – the next high-end export after High-Speed Rail and Nuclear Power

Leveraging on its domestic success, China has become a significant exporter

of high-speed railway technology. Meanwhile, China is negotiating with many

countries for the export of its nuclear power technology after the completion of

a number of nuclear projects domestically. We expect UHV to become China’s

next competitive high-end capital goods export.

UHV in demand: For some countries with vast territory, such as

Russia, India and Brazil, there is also a geographical match

between the load center and energy supply. Hence, UHV could be

a viable solution. In addition, there is cross-border power

transmission demand between countries.

Edge in UHV technology: China has mastered the core technology

and manufacturing capabilities for the full set of UHV equipment. Its

edge in UHV technology and operation can be demonstrated by the

nine domestic UHV lines under operation, with an operational track

record as long as 6 years. Compared to high-speed rail and nuclear

power, UHV technology is more proprietary to China, as no other

country has successfully installed and operated UHV to date.

16 September 2015

Manufacturing



Figure 49: Percentage of export of total revenue (2014)

10.9%

8.0%

1.4%

0.1%0%

2%

4%

6%

8%

10%

12%

China XD Pinggao Electric NARI Tech XJ Electric


16 September 2015

Manufacturing



Appendix

Terminologies of Power T&D equipment

Figure 50: China’s voltage classification standard

in kV Power distribution voltage Power transmission voltage

System voltage 0.38/0.22 3 6 10 20 35 66 110 220 330 500 750 1,000

Rated voltage 0.4 3.6 7.2 12 24 40.5 72.5 126 252 363 550 800 1,100

Voltage classification (Industry standard)

Low Medium High Extra-high Ultra-high

Source: Deutsche Bank, Shuangjie Electric IPO prospectus

Figure 51: Glossary of T&D equipment and system

Terms (Ch) Terms (En) Definition

一次设备 Primary equipment Primary equipment refers to equipment that is directly used to generate, transmit, distribute and utilize electric power. Such equipment includes generators, motors, transformers, switchgears, high/low voltage circuit breakers, fuses, isolators, contractors, reactors, lightning rods, cables, etc.

二次设备 Secondary equipment Secondary equipment functions to monitor, measure, control, protect primary equipment. Such equipment includes insulation monitoring, control and signaling, relay protection and automation devices, etc.

开关 Switch A small control for an electrical device which you use to turn the device on or off

变压器 Transformer A piece of electrical equipment which changes a voltage to a higher or lower voltage

断路器 Circuit breaker A device which can stop the flow of electricity around a circuit by switching itself off if anything goes wrong

封闭式组合电器 Gas-insulated switchgear (GIS) A compact metal encapsulated switchgear consisting of high-voltage components such as circuit-breakers and disconnectors

开关柜 Switchgear cabinet The combination of electrical disconnect switches, fuses or circuit breakers used to control, protect and isolate electrical equipment

环网柜 Ring network cabinet A set of high-voltage transmission and distribution equipment installed in a cabinet, mainly constituted by load switches and circuit breakers

配电主站 Distribution master station A core part of distribution automation to perform basic functions including collection and monitoring of distribution network data and additional functions like grid topology analysis

配电子站 Distribution sub-station The middle layer between the distribution master station and the terminals, which is to perform the functions of information collection, processing, communication and monitoring within controlled area

配电终端 Distribution terminal Including FTU, DTU and TTU. They connect distribution sub-stations and primary distribution equipment such as ring network cabinet, column switch, transformers, capacitors, etc., thus to realize real-time monitoring of the primary equipment

直流换流阀 Converter valve A converter valve is a 3-phase bridge converter made up of thyristor cluster

电抗器 Electric reactor An electric reactor is a passive two-terminal electrical component which resists changes in electric current passing through it

电容器 Capacitor A capacitor (originally known as a condenser) is a passive two-terminal electrical component used to store energy in an electric field

绝缘子 Electrical insulator An electrical insulator is a material whose internal electric charges do not flow freely, and therefore make it impossible to conduct an electric current under the influence of an electric field

避雷器 Lightning arrester A device used on electrical power systems and telecommunications systems to protect the insulation and conductors of the system from the damaging effects of lightning

互感器 Instrument transformer A high accuracy class electrical device used to isolate or transform voltage or current levels

柔性交流输电系统 Flexible alternating current transmission system(FACT)

A system composed of static equipment used for the AC transmission of electrical power. It is meant to enhance controllability and increase power transfer capability of the network.

直流保护系统 DC protection system A system used to protect direct-current electric power system


16 September 2015

Manufacturing



Picture of key T&D equipment

Figure 52: Transformer Figure 53: Switchgear Figure 54: SF6 circuit breakers

Source: Deutsche Bank, China XD



Figure 55: GIS Figure 56: Converter transformer Figure 57: Converter valve



Source: Deutsche Bank, XJ Electric

Figure 58: Electric reactor Figure 59: Switch cabinet Figure 60: Smart substation



Source: Deutsche Bank, XJ Electric

16 September 2015

Manufacturing



Introduction of SGCC and CSG

State Grid Corporation of China (SGCC)

State Grid Corporation of China (SGCC), the largest utility company in the

world, was founded in December 2002 after the unbundling of generation and

non-generation assets during the 2002 power sector reform in China. It is a

whole state-owned entity, and ranked 7th among Fortune 500 companies. With

a total asset of US$452bn at end of 2014, SGCC invests, builds and operates

power grid that covers 26 provinces, over 88% of Chinese territory and serve

over 1.1bn people. SGCC also operates grid assets in the Philippines, Brazil,

Portugal, Australia and Italy. It generated revenue of Rmb2,091bn and profit

before tax of Rmb81bn in 2014 (Figure 61).

China Southern Grid Corporation (CSG)

China Southern Grid Corporation (CSG) was also founded in December 2002.

CSG supplies power to six provinces, namely Guangdong, Guangxi, Yunnan,

Guizhou, Hainan and Xizang. It is responsible for investment, construction,

operation and management of power grid in southern area. It generated

revenue of Rmb472bn and profit before tax of Rmb15bn in 2014 (Figure 62).

Figure 61: Key financials of SGCC Figure 62: Key financials of CSG

Rmb bn 2013 2014

Revenue 2,047 2,091

Profit before tax 74 81

Cash 117 108

Total assets 2,592 2,893

Total debt 658 729

Net gearing 48% 49%

Rmb bn 2013 2014

Revenue 448 472

Profit before tax 12 15

Cash 23 20

Total assets 586 617

Total debt 235 238

Net gearing 105% 98%


Source: Deutsche Bank, CSG

16 September 2015

Manufacturing



Forecasts And Ratios

Year End Dec 31 2013A 2014A 2015E 2016E 2017E

Sales (CNYm) 8,774.1 8,359.2 6,884.0 8,584.1 10,330.9

EBITDA (CNYm) 1,199.6 1,474.9 655.3 1,299.9 1,795.1

Reported NPAT (CNYm) 728.8 1,062.3 393.3 854.8 1,210.0

Reported EPS FD(CNY) 0.77 1.06 0.39 0.85 1.20

DB EPS FD(CNY) 0.77 1.06 0.39 0.85 1.20

DB EPS growth (%) 14.4 36.8 -63.1 117.4 41.5

PER (x) 23.5 20.0 37.3 17.1 12.1

EV/EBITDA (x) 14.5 14.7 22.8 11.2 7.9

DPS (net) (CNY) 0.07 0.10 0.04 0.17 0.30

Yield (net) (%) 0.4 0.5 0.3 1.2 2.1

Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses

the year end close

Reuters Bloomberg Exchange Ticker 000400.SZ 000400 CS SHZ 000400

Strong growth to resume from 2016; Buy XJ Electric is one of China’s leading UHV DC and smart grid system providers. Due to delay in grid investment and lack of high-margin UHV delivery, 1H15 earnings registered a 76% decline. However, we expect the company to deliver 117/42% earnings growth in 2016-17E, thanks to accelerated UHV DC investment and catch-up investment in China's distribution network upgrade (budgeted as Rmb2tr in 2015-20). It is also well positioned in the fledging electric vehicle charging market. Initiating with Buy and Rmb22.5 target price.

Twin growth drivers: UHV DC and Distribution Grid Thanks to its full set of UHV DC products including converter valves, control & protection systems and field equipment, XJ stands as a key beneficiary of a visible acceleration of the approval and construction of UHV transmission lines, with an expected revenue growth of 65%/60% in 2016-17E for its DC power transmission segment. Moreover, the government’s ambitious distribution investment target of Rmb2tr in 2015-20 will benefit its smart sub-station and distribution business (contributing 50% gross profit in 2014).

Earnings to grow 117%/42% in 2016/17E; potential from overseas and EV We expect the strong net profit growth to be driven by: 1) recovery in non-DC segments after a decline in 2015; 2) strong sales growth in the DC segment; and 3) margin expansion on a rising contribution from higher margin UHV products. Potential overseas orders provide additional upside as most of the planned overseas UHV lines adopt DC technology. Leveraging on its strong R&D capability and sound track record, we believe XJ Electric will stand out as a competitive player once the electric vehicle charging market takes off.

Valuation and risks We value XJ Electric based on DCF through 2025E (WACC: 7.7%, tgr: 2%). Key risks include grid investment below expectation or delayed versus forecast; margin pressure or market share loss from intensifying competition; growth in new business below expectation.

Rating

Buy Asia

China

Industrials

Manufacturing

Company

XJ Electric

Leading UHV DC and smart grid player; initiating with Buy

Price at 15 Sep 2015 (CNY) 14.53

Price target - 12mth (CNY) 22.50

52-week range (CNY) 35.54 - 14.53

Shenzhen Index 1,739

Michael Tong

Research Analyst

(+852) 2203 6167

[email protected]

Luka Zhu

Research Associate

(+852) 2203 6173

[email protected]

Price/price relative

0

15

30

45

60

75

9/13 3/14 9/14 3/15

XJ Electric

Shenzhen Index (Rebased)

Performance (%) 1m 3m 12m

Absolute -40.3 -58.9 -31.7

Shenzhen Index -28.1 -45.9 27.7


16 September 2015

Manufacturing



Model updated:10 September 2015

Running the numbers

Asia

China

Manufacturing

XJ Electric Reuters: 000400.SZ Bloomberg: 000400 CS

Buy Price (15 Sep 15) CNY 14.53

Target Price CNY 22.50

52 Week range CNY 14.53 - 35.54

Market Cap (m) CNYm 14,651

USDm 2,300

Company Profile

Headquartered in Xuchang, Henan province, XJ Electric is a leading state-owned manufacturer of electrical machinery and equipment. The Company's main products comprise smart power distribution system, smart substation automation system, direct current (DC) transmission system, energy-saving primary equipment, industrial and transportation power supply system, smart meters, and electronic manufacturing services (EMS).

Price Performance

0

15

30

45

60

75

Sep 13Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15

XJ Electric Shenzhen Index (Rebased)

Margin Trends

68

1012141618

12 13 14 15E 16E 17E

EBITDA Margin EBIT Margin

Growth & Profitability

0

5

10

15

20

25

-40

-20

0

20

40

60

12 13 14 15E 16E 17E

Sales growth (LHS) ROE (RHS)

Solvency

0

10

20

30

40

50

-20

-10

0

10

20

12 13 14 15E 16E 17E

Net debt/equity (LHS) Net interest cover (RHS)

Michael Tong

+852 2203 6167 [email protected]

Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E

Financial Summary

DB EPS (CNY) 0.68 0.77 1.06 0.39 0.85 1.20

Reported EPS (CNY) 0.68 0.77 1.06 0.39 0.85 1.20

DPS (CNY) 0.08 0.07 0.10 0.04 0.17 0.30

BVPS (CNY) 5.7 4.1 5.6 5.9 6.7 7.8

Weighted average shares (m) 492 943 1,005 1,008 1,008 1,008

Average market cap (CNYm) 4,318 17,154 21,194 14,651 14,651 14,651

Enterprise value (CNYm) 5,133 17,434 21,625 14,931 14,588 14,158

Valuation Metrics

P/E (DB) (x) 13.0 23.5 20.0 37.3 17.1 12.1

P/E (Reported) (x) 13.0 23.5 20.0 37.3 17.1 12.1

P/BV (x) 2.19 4.98 3.59 2.46 2.16 1.87

FCF Yield (%) 10.0 3.8 nm 2.6 4.1 6.1

Dividend Yield (%) 0.9 0.4 0.5 0.3 1.2 2.1

EV/Sales (x) 0.8 2.0 2.6 2.2 1.7 1.4

EV/EBITDA (x) 7.0 14.5 14.7 22.8 11.2 7.9

EV/EBIT (x) 8.3 16.2 15.8 27.3 12.3 8.4

Income Statement (CNYm)

Sales revenue 6,612 8,774 8,359 6,884 8,584 10,331

Gross profit 1,769 2,610 2,874 1,839 2,609 3,290

EBITDA 736 1,200 1,475 655 1,300 1,795

Depreciation 79 117 99 102 107 112

Amortisation 39 7 7 7 7 7

EBIT 618 1,075 1,369 546 1,186 1,676

Net interest income(expense) -92 -71 -47 -43 -41 -38

Associates/affiliates 0 0 0 0 0 0

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 147 142 74 58 76 90

Profit before tax 673 1,147 1,396 562 1,221 1,728

Income tax expense 103 151 106 84 183 259

Minorities 238 266 227 84 183 259

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 332 729 1,062 393 855 1,210

DB adjustments (including dilution) 0 0 0 0 0 0

DB Net profit 332 729 1,062 393 855 1,210

Cash Flow (CNYm)

Cash flow from operations 498 751 -208 498 724 1,018

Net Capex -67 -107 -119 -120 -120 -120

Free cash flow 431 644 -328 378 604 898

Equity raised/(bought back) 5 0 450 0 0 0

Dividends paid -362 -198 -302 -143 -78 -209

Net inc/(dec) in borrowings -651 93 -400 0 0 0

Other investing/financing cash flows -55 18 0 0 0 0

Net cash flow -632 558 -580 235 525 689

Change in working capital -331 -404 -1,783 -131 -469 -608

Balance Sheet (CNYm)

Cash and other liquid assets 539 1,373 827 1,062 1,588 2,277

Tangible fixed assets 1,100 1,178 1,170 1,188 1,201 1,208

Goodwill/intangible assets 45 40 77 70 63 56

Associates/investments 28 25 0 0 0 0

Other assets 5,212 7,772 8,718 8,108 9,108 10,461

Total assets 6,926 10,387 10,792 10,428 11,960 14,002

Interest bearing debt 998 1,092 694 694 694 694

Other liabilities 2,740 4,546 3,865 3,124 3,655 4,400

Total liabilities 3,738 5,638 4,558 3,817 4,349 5,094

Shareholders' equity 2,803 4,164 5,669 5,962 6,779 7,818

Minorities 384 585 565 649 831 1,090

Total shareholders' equity 3,187 4,749 6,234 6,611 7,611 8,908

Net debt 458 -281 -134 -369 -894 -1,583

Key Company Metrics

Sales growth (%) 55.7 32.7 -4.7 -17.6 24.7 20.3

DB EPS growth (%) 63.2 14.4 36.8 -63.1 117.4 41.5

EBITDA Margin (%) 11.1 13.7 17.6 9.5 15.1 17.4

EBIT Margin (%) 9.3 12.3 16.4 7.9 13.8 16.2

Payout ratio (%) 11.4 9.2 9.5 9.5 20.0 25.0

ROE (%) 12.5 20.9 21.6 6.8 13.4 16.6

Capex/sales (%) 1.0 1.2 1.4 1.7 1.4 1.2

Capex/depreciation (x) 0.6 0.9 1.1 1.1 1.1 1.0

Net debt/equity (%) 14.4 -5.9 -2.1 -5.6 -11.7 -17.8

Net interest cover (x) 6.7 15.2 29.0 12.8 28.9 44.4

Source: Company data, Deutsche Bank estimates

16 September 2015

Manufacturing



Investment thesis

Outlook

XJ Electric is one of China’s leading UHV DC equipment makers with a full set

of products including converter valves, DC control & protection systems and

DC field equipment. It is also a key smart grid system provider. Due to delay in

grid investment and lack of high-margin delivery, 1H15 earnings registered a

decline. However, thanks to its core product offerings, XJ stands as a key

beneficiary of a visible acceleration in the approval and construction of UHV

transmission lines. We expect a total revenue growth of 25%/20% in 2016-17E,

to be driven by 65%/60% sales growth for its DC power transmission segment.

Moreover, the government is accelerating power distribution investment with

an ambitious investment target of Rmb2tr in 2015-20; this will benefit its smart

sub-station and distribution business, which contributed 50% gross profit in

2014.

Hence, we expect the company to deliver 117%/42% earnings growth in 2016-

17E driven by: 1) recovery in non-DC segments after a decline in 2015; 2)

strong sales growth in the DC segment; and 3) margin expansion on a rising

contribution from higher margin UHV products and operating leverage. It is

also well positioned in the fledging electric vehicle charging market. We

initiate the stock with a Buy rating and target price of Rmb22.5.

Valuation

We derive our target price of Rmb22.5 for XJ Electric based on a DCF

methodology with a WACC of 7.7% and terminal growth of 2%. Our WACC

assumption incorporates a 3.9% risk-free rate, 5.6% equity risk premium, 1.1

beta, 5.5% pre-tax cost of debt, 25% tax rate and 40% debt-capital ratio.

Risks

Key downside risks include 1) lower-than-expected grid investment; 2)

significant delay of UHV DC line tenders/construction, given most of XJ

Electric’s UHV products are applied in DC lines; 3) market share contraction in

UHV DC tenders due to new entry of competitors; 4) slower-than-expected

recovery in distribution automation tenders; and 5) lower-than-expected new

products (e.g. electric vehicle charging equipment, micro-grids).

16 September 2015

Manufacturing



Valuation and risks

DCF-based target price of Rmb22.5

We use DCF to derive our target price for XJ Electric (Figure 63). Our WACC

assumption is 7.7%, based on a 3.9% risk-free rate, a 5.6% equity risk

premium, a beta of 1.1, a 5.5% pre-tax cost of debt, a 25% tax rate and a

target 40% debt to capital ratio. By assuming 2% terminal growth, considering

the long-term growth potential from distribution automation, smart micro-grid,

electric vehicle charging equipment and overseas business, our DCF-based

target price is Rmb22.5, implying 40% upside potential from the current level.

Figure 63: DCF projection through 2025E and WACC assumption

Valuation (Rmb mn) 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EBIT 604 1,262 1,765 1,826 1,848 1,871 1,896 1,921 1,948 1,976 2,006

Effective tax rate 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

EBIT after tax 514 1,072 1,501 1,552 1,571 1,591 1,611 1,633 1,656 1,680 1,705

Add: depreciation & amortization 109 114 119 125 131 138 144 150 156 162 168

Less : project capex (120) (120) (120) (120) (120) (120) (100) (100) (100) (100) (70)

Add: change in working capital (131) (469) (608) 79 24 214 (50) (52) (56) (59) (62)

Free cash flow to the firm 372 598 892 1,636 1,606 1,823 1,606 1,631 1,656 1,683 1,741

Discount factor 1.00 1.08 1.16 1.25 1.34 1.45 1.56 1.68 1.81 1.95 2.10

Discounted Cashflow ex TV 555 769 1,310 1,195 1,259 1,030 971 916 864 830

Sum of DCF ex TV 9,699

TV 30,615

PV of TV 14,599

Summary 2015E

Total DCF (inc TV) 24,298

Less: net debt/(cash) at year end (369)

Less: minority Interest 1,946

Add. JV and associates 0

Total Equity Value 22,721

No. of shares outstanding (mn) 1,008

Equity value per share (RMB) 22.5

rf b mrp kd implied ke

after-tax

debt cost Tax Rate % equity % debt

WACC 7.7% 3.9% 1.1 5.6% 5.5% 10.1% 4.1% 25.0% 60% 40%

TV Growth 2.0% Source: Deutsche Bank estimates

Our target price implies 27x/19x 2016E/17E P/E, in line with a three-year

historical average at 25x (Figure 64), justified by a 75% earnings CAGR in

2015-17E, thanks to accelerated UHV DC product deliveries and a fast-growing

distribution automation business amid industry tailwinds. The earnings dip in

2015 should be attributable to an abnormal delay in order delivery this year,

rather than the turning point of the cycle. Hence, we are upbeat on strong

earnings recovery in the next two years.

The stock is now trading at 19x/13x FY16/17E PE, largely in line with A-share

listed peers (18x/15x FY 16/17E PE). The stock trades at higher multiples to

leading international players such as ABB, Siemens and Schneider but at

discount to their ventures in India such as ABB India and Siemens India (Figure

66). We do not evaluate FY15E PE as FY15 is likely to be a low-based year in

terms of earnings which will make comparison distorted.

16 September 2015

Manufacturing



Figure 64: Historical one-year forward P/E Figure 65: Historical one-year forward P/B

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Sep

-11

Dec-1

1

Mar-

12

Jun-1

2

Sep

-12

Dec-1

2

Mar-

13

Jun-1

3

Sep

-13

Dec-1

3

Mar-

14

Jun-1

4

Sep

-14

Dec-1

4

Mar-

15

Jun-1

5

Sep

-15

Avg P/E -1 Std Dev +1 Std Dev F-P/E

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Sep

-11

Dec-1

1

Mar-

12

Jun-1

2

Sep

-12

Dec-1

2

Mar-

13

Jun-1

3

Sep

-13

Dec-1

3

Mar-

14

Jun-1

4

Sep

-14

Dec-1

4

Mar-

15

Jun-1

5

Sep

-15

Avg P/B -1 Std Dev +1 Std Dev F-P/B

Source: Deutsche Bank, Datastream



Share price as of

September 14, 2015






















Average (52%) (16%) 28.1 17.9 14.5 28.5 18.0 12.8 3.4 2.8 13.1 16.1 6.5 8.2 18.7 0.9





Average (30%) (2%) 9.9 8.0 6.7 9.5 7.6 6.3 2.0 1.7 20.7 21.5 10.6 11.2 21.4 3.8








Average (7%) (2%) 32.8 24.1 20.3 23.3 18.1 19.2 3.8 3.5 12.6 13.5 5.1 5.4 3.8 2.5




RoE ROA


P/BV

Valuations

EV/EBITP/E

Performance

Note : DB estimates for covered names and Bloomberg Finance consensus for non-rated stocks Source: Deutsche Bank, Bloomberg Finance LP

16 September 2015

Manufacturing



Risks

Industry-specific risks Lower-than-expected grid investment, as a result of macroeconomic

downturn or change in gridcos’ investment budget, will reduce the

equipment tender/procurement value, thereby affecting the company’s

orders and revenue outlook.

Significant delay of UHV approval/construction, could arise from

unfavorable natural conditions or difficulty in land

acquisition/residents’ relocation, which would affect the on-site

construction progress. Specifically, a delay in UHV DC line

approvals/construction will more negatively affect the company’s

orders/earnings, as most of XJ Electric’s UHV products are applied in

DC lines.

Company-specific risks Market share decline in UHV DC tenders could arise from the

introduction of new suppliers in the event of capacity constraints for existing players when there is rush demand for UHV products.

Slower-than-expected recovery in distribution automation tenders will

reduce the equipment tender/procurement volume, thus affecting the

company’s orders on distribution-related products.

Growth in new products falling under expectation, e.g. electric vehicle

charging stations and micro-grid systems.

16 September 2015

Manufacturing



A leading UHV DC and smart grid equipment player

Key points

XJ Electric, as a leading UHV DC equipment maker with c.40% market

share in converter valves and 56% in DC control and protection

systems, is highly leveraged to surging UHV DC line investment. We

project revenue growth of 65%/60% in 2016-17E for its DC segment.

In addition to rising domestic tenders, overseas UHV construction

could provide additional upside, as most of the planned overseas UHV

lines adopt DC technology.

Besides, the smart sub-station & distribution segment has been XJ

Electric’s key competitive edge and major revenue source. After a

slow start in 2015, we expect segment revenue to resume growth of

30%/18% in 2016/17E on China’s initiative on building a “smarter” grid.

For the newly-developed electric vehicle business, XJ Electric will

stand out as a competitive player once the market takes off.

UHV DC to lead the growth

With accelerated project approvals and equipment tenders since 2014, UHV

will be the key growth driver of power grid investment in China with strong

order visibility for the next few years. We expect 2/3/3 UHV AC line and

approvals and 5/4/3 UHV DC approvals in 2015/16/17E, vs. 0-3 per year in

2006-14. YTD, two AC and two DC projects have already been approved and

tendered.

On accelerated UHV DC line construction, we believe that XJ Electric’s DC

power transmission business will lead the company’s growth with the

revenue contribution increasing from 12% to 21%, and the gross profit

contribution expanding from 18% to 28% during 2015-17E.

A pioneer in UHV DC technology

Since 1980s, XJ Group has been designated by the government to import

(mainly from Siemens) and localize DC power transmission and control

technology.

In 2005, XJ Group was selected as the major equipment supplier in the

Guizhou-Guangzhou ±500kV DC project (first domestic high-voltage (HV) DC

project with >70% overall localization rate), which is considered a milestone

for the company in terms of mastering the design & manufacture of converter

valves. With continuous technology digestion and innovation through various

project participations, XJ Group has become the only domestic equipment

maker that can supply a full set of HV/UHV DC equipment including converter

valves, DC control & protection systems and DC field equipment.

16 September 2015

Manufacturing



In 1Q15, XJ Group’s HV/UHV DC equipment business has been completely

transferred to the listco XJ Electric after the acquisition of the Flexible Power

Transmission Co. (over 90% of revenue from HV/UHV DC converter valves)

from parentco XJ Group.

Figure 67: Major DC transmission equipment orders of XJ

Year Tender project Equipment Order value (Rmb m)

YTD 2015 North Shanxi – Jiangsu ( ±800kV DC ) 4 units of converter valves, 2 units of DC control & protection, 210 units of mutual indicators

1,018

Hunan – Jiuquan ( ±800kV DC ) 1 unit of static reactive power compensation device 17

2014 East Ningxia - Zhejiang ( ±800kV DC ) 4 units of converter valves 790

Luxi back-to-back DC asynchronous interconnection project (invested by CSG)

Conventional DC converter valves, valve cooling system 185

2013 Zhoushan HVDC Flexible project Converter valves NA

2012 South Hami - Zhengzhou (±800kV DC) 4 units of converter valves, valve cooling system 853

2011 Jinping-Sunan (±800kV DC) 3 units of converter valves, DC control & protection, DC field equipment, etc.

2,200

2010 Nuozhadu - Guangdong (±800kV DC) 6 units of converter valves, DC control & protection, DC field equipment, etc.

2,600 Xiluodu- Zhejiang, Jinhua (±800kV DC)

2007 Yunnan-Guangdong (±800kV DC, invested by CSG)

3 units of converter valves, DC control & protection, DC field equipment, etc.

1,050

Xiangjiaba-Shanghai (±800kV DC) 4 units of converter valves, DC control & protection, DC field equipment, etc.

960

2006 Northeast-North China back-to-back DC project Converter valves, DC control & protection NA

2005 Guizhou-Guangzhou (±500kV DC) Converter valves, DC control & protection, DC field equipment, etc. >600

Source: Deutsche Bank, Company data, Note that before Flexible Power Transmission Co. was acquired by XJ Electric in 2014, orders were received by XJ Group

Leading market position in UHV DC equipment

According to historical UHV tenders, XJ Electric has secured a leading

position in UHV DC main equipment, with an average of 39% market share in

converter valves and 56% in DC control and protection systems (Figure 68).

Figure 68: XJ Electric’s market share in historical UHV DC tenders

UHV DC lines Converter valves DC Control & Protection systems

XJ Electric China XD EPRI Sifang ABB XJ Electric NR Electric

Xiangjiaba - Shanghai 50% 50% 0% 0% 50% 50%

Yunnan - Guangdong 38% 38% 25% 0% 100% 0%

Jinping - South Jiangsu 38% 38% 25% 0% 50% 50%

Nuozhadu - Guangdong 50% 50% 0% 0% 100% 0%

South Hami - Zhengzhou

50% 25% 25% 0% 0% 100%

Xiluodu - Zhejiang 25% 50% 25% 0% 100% 0%

East Ningxia - Shaoxing 50% 0% 50% 0% 0% 100%

Jiuquan - Hunan 0% 50% 50% 0% 0% 100%

North Shanxi - Jiangsu 50% 0% 0% 50% 100% 0%

Avg. 39% 33% 22% 6% 56% 44%


Quantifying UHV DC order potential

Using historical average market share, we expect XJ Electric to receive orders of

Rmb800-1,000m from each tender of UHV DC line, which covers: 1) 3-4 units of

converter valves (normally a total of eight converter valves for each UHV DC

line, four at each converter station; ASP of c.Rmb200m); and 2) one set of DC

control & protection equipment (normally two sets for each UHV DC line, ASP

16 September 2015

Manufacturing



at c.Rmb90m). In past tenders, XJ Electric and NR Electric have largely taken

DC control & protection equipment orders in turn with roughly 50% market

share each.

By assuming 5/4/3 UHV DC line tenders in 2015-17E based on our proprietary

UHV approval/tender forecast in 2015-17 (see our F.I.T.T report - Cleaner,

Stronger, Smarter – Rmb2.8trn power grid upgrade plan published on 16

September 2015), we expect XJ Electric’s UHV orders to jump to Rmb2-3bn

level per year during the period (Figure 69), up substantially from Rmb790m

in 2014. Year to date, XJ Electric has secured orders of Rmb1.1bn from the

North Shanxi-Jiangsu and Hunan-Jiuquan projects. We expect another

Rmb2bn in new orders from three new DC projects (Ximeng-Taizhou,

Shanghaimiao-Linyi, Northwest Yunnan-Guangdong) to be approved by year-

end.

Revenue from UHV DC products to grow by 150%/100% in 2016/17E

On the delivery side, XJ Electric is scheduled to deliver half of East Ningxia-

Zhejiang orders in 2015 while new orders received this year will not be

recognized in revenue until 2H16, according to the target delivery time

specified by SGCC. Given that it normally takes a relatively longer period to

deliver UHV DC equipment than AC ones (2-2.5yrs vs. 1.5-2yrs), orders to be

received in the rest of 2015 and in 2016 will be mostly recognized in 2017-18.

We project revenue growth of 150%/100% in 2016-17 for its UHV products

from Rmb0.3bn in 2015E (Figure 70, note our UHV DC products revenue

growth higher than DC transmission segment revenue growth as the later

include some non-UHV products).

Figure 69: UHV order forecast (Rmb bn, incl. VAT) Figure 70: UHV revenue recognition forecast (Rmb bn,

excl. VAT)

0.79

3.12.8

2.1

0.0

1.0

2.0

3.0

4.0

2014 2015E 2016E 2017E

- - -0.3

0.9

1.7 1.7

0.0

0.5

1.0

1.5

2.0

2.5

2014 2015E 2016E 2017E 2018E



Further upside from overseas UHV orders

In addition to rising domestic tenders, overseas UHV construction might

provide additional upside to our order/revenue forecasts as most of the

planned overseas UHV lines adopt DC technology where XJ’s core

competence lies in.

As we said in the F.I.T.T report, SGCC was recently selected as the sole EPC

provider for Brazil’s Belo Monte ±800kV UHV DC transmission project II, which

implies a high chance for domestic T&D equipment makers to get orders.

16 September 2015

Manufacturing



In addition, SGCC is also contemplating grid connection with Russia,

Mongolia, Kazakhstan and Pakistan, with four UHV/EHV DC lines under

planning. Among them, Xinjiang – Pakistan ±600kV DC and Kazakhstan –

Nanyang ±1100kV DC have been under preliminary research since June 2015.

Well positioned for the distribution grid upgrades

Owning a comprehensive product line in both primary and secondary

equipment, as well as a strong R&D capability, XJ Electric is one of those best

positioned for China’s initiative to build a “stronger and smarter” distribution

network. In our view, the company will benefit from increasing investment

along the whole value chain, from power transmission to distribution and retail

(smart power meter, EV charging, micro-grid, etc.).

The smart sub-station & distribution segment has been XJ Electric’s key

competitive edge and major revenue source. It is the largest segment with

39%/50% representation of total revenue/gross profit in 2014.

Figure 71: Revenue breakdown of smart sub-station & distribution segment

(Rmb m)

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

2011 2012 2013 2014 2015E 2016E 2017E

Smart substation system Smart distribution system Smart distribution as % of segment total

Source: Deutsche Bank, Company data, Note: revenue from smart distribution system is estimated on sum of revenue from Zhuhai XJ and Zhuhai Zhidian

Smart distribution segment to gather pace

We believe the smart distribution segment will gather pace on the back of

the government’s increased budget for power distribution investment for the

next five years.

As discussed in our F.I.T.T report, the government is accelerating power

distribution investment with NEA recently laying out an ambitious investment

target of >Rmb300bn in 2015 and >Rmb1700bn in 2016-20, which implies

nearly doubled investment budget in the 13th five year period vs. the 12th five

year period. Specifically, it aims to enhance the penetration of distribution

automation from 20% in 2014 to 90% by 2020.

XJ Electric is considered the leading domestic distribution automation provider

with the capability to supply a full range of smart distribution products and

integrated solutions. It was selected as a key equipment provider in

distribution automation trial projects of Beijing, Zhengzhou, Shandong

province and took an average of 40% share in the market. Specifically in 2011,

16 September 2015

Manufacturing



XJ Electric took a leading c.70% market share (c.Rmb4bn orders out of

Rmb6bn in total) in the distribution equipment supply of the Shandong project,

which covered all municipal cities and 93 counties.

Figure 72: Zhuhai XJ Co. Ltd. (in Rmb m) Figure 73: Zhuhai XJ Zhidian Grid Automation (in Rmb m)

651

1,912

1,504

1,217

172

489 545 422

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

500

1,000

1,500

2,000

2011 2012 2013 2014

Revenue Net profit Net margin

167

184

148

52 55 51

27%

28%

29%

30%

31%

32%

33%

34%

35%

-

50

100

150

200

2012 2013 2014

Revenue Net profit Net margin



Zhuhai XJ Co. Ltd is the company’s major subsidiary, providing smart

power distribution products, together with Zhuhai XJ Zhidian Grid

Automation (co-invested with Toshiba) (Figure 72 and Figure 73)

Zhuhai XJ’s revenue saw a significant jump in 2011-12 as a result of

Shandong orders delivery, but it experienced yoy decline in 2013-14

due to completion of the Shandong project in which the company has

a significant market share. In addition, SGCC’s tender was affected by

the ongoing auditing and anti-corruption campaign, evidenced by only

one SGCC centralized power distribution tender vs. 3-4 previously p.a.

Into 2015, power distribution orders remain below expectation.

However, we expect a meaningful recovery of XJ Electric’s power distribution

business from 2016 given: 1) a substantial increase in China’s investment plan

of power distribution (incl. rural grid); and 2) the overhang of SGCC audit and

anti-corruption campaign will be largely removed by then.

Smart sub-station system to growth steadily

We expect revenue from the smart sub-station system to register a CAGR of

12% through 2015-17E, driven by both new build-up and the upgrade of

conventional sub-stations.

With a good track record for providing equipment and service for over 300

smart stations (750kV or below), XJ Electric is among the top smart sub-station

system & equipment providers in China, right after NARI Group (incl. NARI

Tech and NR Electric) (Figure 74 and Figure 75). According to the company,

among the 50 new smart sub-stations planned by SGCC to build in 2015, XJ

Electric has received orders from 11 stations.

16 September 2015

Manufacturing



Figure 74: Market share in SGCC’s centralized tender of

220kV smart sub-station system in 2014

Figure 75: Market share in SGCC’s centralized tender of

110kV smart sub-station system in 2014

25%

35%

25%

5%

5%5% NARI Tech

NR Electric

XJ Electric

Nanjing Automation

Sifang

Changyuan

15%

27%

12%

21%

12%

12%NARI Tech

NR Electric

XJ Electric

Nanjing Automation

Sifang

Changyuan

Source: Deutsche Bank, SGCC, *Note: mkt share in terms of total units

Source: Deutsche Bank, SGCC, *Note: mkt share in terms of total units

Power supply segment – more patience needed for EV market take-off

After the acquisition of XJ Power Supply Co. from parentco in 1Q14, XJ

Electric extended its product lines to Electric Vehicle (EV) charging & battery

replacement equipment, DC power supply and other power supply equipment

for special purposes (like for military use). Although the market outlook of the

EV charging business is promising, we think more patience is needed in view

of several industry development obstacles that need to be cleared.

Lack of feasible business model: For public charging facilities, there is currently no clearly-regulated tariff for users, without which it is difficult for investors to assess the return of public charging stations. Given heavy front-loaded capex and low charging tariffs, most of the public charging facilities are running at a loss, which is not sustainable. Residential charging facilities involve negotiation with local property management companies for each installation, which also hampers the incentive for residential users.

Lack of unified EV industry standard: There is currently no unified nationwide EV industry standard for the industry players to follow. It is reported that the government is drafting an industry standard, which may be released in 2H15.

SGCC – XJ Electric’s ultimate parentco – used to have a monopoly in the

domestic EV charging investment and targeted to have 1,000 EV charging

stations and 240k charging piles by the end of 2015 while actual installation is

way below its target due to lower return of investment. SGCC fully opened the

EV charging market to private capital in 2014 and will only focus on inter-city

highway charging facilities investment.

Leveraging on its strong R&D capability and sound track record in equipment

supply, we believe XJ Electric will stand out as a competitive player once the

market takes off. It has a full product line of EV charging/battery replacement

equipment, with competitive advantage in primary and secondary battery

replacement equipment, which is demonstrated by its flagship project of the

Qingdao Xuejiadao integrated EV charging station. During SGCC’s centralized

EV charging tenders in 2014, it took a leading 30% market share.

16 September 2015

Manufacturing



Figure 76: SGCC’s electric vehicle charging stations Figure 77: SGCC’s electric vehicle charging piles

87 243 353 400 618 1000

12000

156 110 47 218 382

11000

0

2000

4000

6000

8000

10000

12000

2010 2011 2012 2013 2014 2015E * 2020E**

Total electric vehical charging stations New addition

7 13 15 19 24

240

480

6 2 4 5

216240

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015E * 2020E**

Total electric vehical charging piles ('k) New addition ('k)

Source: Deutsche Bank, Note: 2010-2014 refer to actual installation by SGCC, 2015E* refers to SGCC’s 12th FYP target, 2020E* refers to NEA’s 2020 target stated in Action Plan on Power Distribution Upgrade

Source: Deutsche Bank, Note: 2010-2014 refer to actual installation by SGCC, 2015E* refers to SGCC’s 12th FYP target, 2020E* refers to NEA’s 2020 target stated in Action Plan on Power Distribution Upgrade

Smart meter segment – demand supported by further penetration

We believe that XJ Electric’s revenue from smart power meters will be on a

steady growth path, supported by:

Further penetration: Though smart power meters have

substantially covered the urban areas, the market is still untapped

in rural and remote areas. NEA targets to realize more than 80%

coverage by 2017 and 90% by 2020, implying further penetration

potential from current 60%.

Overseas potential: As a standard product, the smart power meter

has big export potential. China has a sales record in more than

130 countries, mainly in Southeast Asia, Middle East, etc., with

over 10% global market share.

Also, despite intense competition in the smart power meter market (top five

makers only account for 30% market share), XJ Electric’s market share

improved to 5% in 2014 from 3% three years ago, relying on technology

upgrade, capacity expansion and SGCC support.

16 September 2015

Manufacturing



Financial outlook

Segmental financial outlook

We summarize the financial outlook by segment as below.

Smart sub-station & distribution segment:

Figure 78: Smart sub-station & distribution segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 3,646 3,662 3,288 2,631 3,420 4,035 We think segment revenue recognition is under pressure in 2015 due to lower-than-expected distribution investment (segment revenue down 33% in 1H15).

We believe segment growth will be led by smart distribution system, which is expected to resume growth from 2016 while smart sub-station system should keep a steady growth at c.12% p.a.

Margin jump in 2014 was due to more recognition of certain distribution automation equipment, which enjoys higher margin.

yoy gr. % 60% 0% -10% -20% 30% 18%

Gross profit 1,213 1,330 1,449 945 1,322 1,567

yoy gr. % 39% 10% 9% -35% 40% 19%

GPM % 33.3% 36.3% 44.1% 35.9% 38.7% 38.8%

Source: Deutsche Bank estimates, Company data

DC power transmission segment:

Figure 79: DC power transmission segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 1,079 2,135 1,479 838 1,382 2,211 DC power transmission segment is the main revenue/gross profit growth driver with c.60% segmented revenue UHV-related in 2016E.

We forecast XJ Electric to recognize c.Rmb340m, Rmb0.9bn, Rmb1.7bn revenue from UHV order delivery in 2015/16/17E

We believe segment GPM will also expand on more UHV products with higher margin (>40% vs. c.30% of regular voltage products)

yoy gr. % NA 98% -31% -40% 65% 60%

Gross profit 113 639 617 335 580 929

yoy gr. % -307% 466% -4% -46% 73% 60%

GPM % 10.5% 29.9% 41.7% 40.0% 42.0% 42.0%


Smart mid-voltage power supply segment:

Figure 80: Smart mid-voltage power supply segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 910 1,051 1,467 1,613 1,775 1,952 We expect the segment to maintain stable growth at 12% p.a. in 2015-17E. It is a beneficiary of China’s increased rural grid investment.

We factored in a moderate lower margin level vs. historical considering the rising competition and raw material price (oriented silicon steel) for transformers.

yoy gr. % -7% 15% 40% 10% 10% 10%

Gross profit 246 217 332 242 319 371

yoy gr. % -17% -12% 53% -27% 32% 16%

GPM % 27.0% 20.6% 22.6% 15.0% 18.0% 19.0% Source: Deutsche Bank estimates; Company data

16 September 2015

Manufacturing



Smart power meters segment:

Figure 81: Smart power meters segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 485 797 1,151 1,093 1,202 1,262 We expect segment performance to remain stable, driven by further penetration in rural areas and potentially overseas orders.

GPM is expected to remain stable.

yoy gr. % -8% 65% 44% -5% 10% 5%

Gross profit 112 157 233 208 240 252

yoy gr. % 5% 40% 48% -11% 16% 5%

GPM % 23.1% 19.7% 20.3% 19.0% 20.0% 20.0% Source: Deutsche Bank estimates, Company data

Smart power supply & application segment:

Figure 82: Smart power supply & application segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 0 605 670 402 483 531 We expect segment revenue to decline by 40% in 2015 (1H15: down 53% yoy) due to lower orders of EV charging equipment, as a result of SGCC’s exit in intra-city EV charging investment.

We expect segment to resume growth in 2016-17E with more non-grid EV players to invest in EV charging piles/stations.

We forecast GPM to contract in 2015 due to a more traditional low-margin product contribution but may recover in 2016-17 with increasing revenue from higher-margin EV charging equipment.

yoy gr. % NA NA 11% -40% 20% 10%

Gross profit 0 174 192 80 116 138

yoy gr. % NA NA 10% -58% 44% 19%

GPM % NA 28.8% 28.6% 20.0% 24.0% 26.0%

Source: Deutsche Bank estimates; Company data

Revenue mix trend:

Figure 83: Revenue mix trend

Business segment 2012 2013 2014 2015E 2016E 2017E

Smart sub-station & distribution system 55% 42% 39% 38% 40% 39%

DC power transmission 16% 24% 18% 12% 16% 21%

Smart mid-voltage power supply equipment 14% 12% 18% 23% 21% 19%

Smart power meters 7% 9% 14% 16% 14% 12%

Smart power supply & application system 0% 7% 8% 6% 6% 5%

EMS processing services and others 5% 4% 3% 4% 3% 3%

Non-primary business 3% 2% 1% 1% 1% 1%


Gross profit mix trend:

Figure 84: Gross profit mix trend

Business segment 2012 2013 2014 2015E 2016E 2017E

Smart sub-station & distribution system 69% 51% 50% 51% 51% 48%

DC power transmission 6% 24% 21% 18% 22% 28%

Smart mid-voltage power supply equipment 14% 8% 12% 13% 12% 11%

Smart power meters 6% 6% 8% 11% 9% 8%

Smart power supply & application system 0% 7% 7% 4% 4% 4%

EMS processing services and others 2% 1% 1% 1% 1% 1%



16 September 2015

Manufacturing



Company financial outlook

Revenue to recover by 25%/20% in 2016/17E

Though XJ Electric’s revenue could decline by 18% this year due to little

recognition of UHV DC equipment and delayed distribution automation

tenders, we expect it to recover by 25%/20% (Figure 85), on the back of

scheduled UHV DC equipment deliveries and recovery in distribution

equipment tenders. DC power transmission will be the key segment to lead the

growth, with revenue contribution up to 21% by 2017E from 12% in 2015E.

Figure 85: Revenue (Rmb m) and yoy growth

55.7%

32.7%

-4.7%

-17.6%

24.7%20.3%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

2,000

4,000

6,000

8,000

10,000

12,000

2012 2013 2014 2015E 2016E 2017E

Smart substation & distribution system DC power transmission Smart mid-voltage power supply equipment Smart power metersSmart power supply & application system EMS processing services and othersOther business yoy growth %


Net profit to rebound from 2016

We expect the net profit decline this year to provide a low base for a strong

rebound next year. We believe net profit will rise by 117%/42% in 2016/17E

(Figure 88), thanks to 1) 25%/20% yoy revenue growth and 2) GPM expansion

to 30%/31% from 26% in 2015 with the increasing contribution from the high-

margin DC power transmission segment. With scaled up revenue, SG&A as a

percentage of total revenue should decline in 2015-17E (Figure 86).

Note that XJ Electric books government grants (primarily VAT rebates for

software products, Figure 87), which accounted for over 10% of profit before

tax. The notable decline in 2014 was due to: 1) lower software revenue from

distribution – related products; and 2) some delay affected by local tax bureau

policies and practices. We conservatively factored in a further decrease in the

amount of rebates received in 2015 but a pick-up from 2016, in accordance

with the distribution segmental revenue trend.

As a result of margin expansion, equity return is also projected to recover to

13%/16% in 2016/17E from 7% in 2015E (Figure 89). Note that XJ Electric’s

equity return has been generally higher than most T&D equipment peers’,

given its core products – control & protection equipment and DC power

transmission equipment – the secondary power equipment enjoys higher

margins and faster asset turnover than primary power equipment such as

transformers, switchgear, etc.

16 September 2015

Manufacturing



Figure 86: SG&A as % of total revenue Figure 87: Government grant (Rmb m) as % of PBT

15.5%

16.3%

15.4%

16.3%

14.7%

13.8%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

2012 2013 2014 2015E 2016E 2017E

SG&A as % of total revenue

20%

13%

5%

11%

6%5%

0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

140

160

2012 2013 2014 2015E 2016E 2017E

Government grant as % of PBT



Figure 88: Net profit (Rmb m) and yoy growth Figure 89: Return and margin analysis

689.8%

119.4%

45.8%

-63.0%

117.4%

41.5%

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

700%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2012 2013 2014 2015E 2016E 2017E

Net profit yoy growth %

5.0%

8.3%

12.7%

5.7%

10.0%11.7%

11.9%

17.5%18.7%

6.6%

12.6%

15.5%

4.8%7.0%

9.8%

3.8%

7.1%8.6%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015E 2016E 2017E

Net margin ROE ROA



Limited capex, net cash; working capital to improve

XJ Electric is expected to maintain a healthy balance sheet in a net cash

position (Figure 90). There is modest capex needed in the near future

(c.Rmb120m capex p.a. in 2015-17E), given its asset-light manufacturing

model. Hence, it will leave plenty room for XJ Electric to consider M&A by

leveraging up its balance sheet, or raising its dividend payout (9% in 2014).

XJ Electric attributed the rising inventory and receivable turnover days in 2014

(Figure 91) to the sluggish macro economy as well as product mix effect, given

primary equipment such as smart mid-voltage power supply equipment and

smart power meters (up 40%/44% in 2014) entail longer payment terms than

for smart transformation & distribution systems (down 3.5% in 2014). Looking

forward, the working capital turnover will likely see some improvement with

the smart sub-station & distribution system segment and UHV DC products

(with favorable pre-payment terms) to resume growth.

16 September 2015

Manufacturing



Figure 90: Cash flow (Rmb m) and net gearing Figure 91: Working capital analysis

14%

-6%

-2%

-6%

-12%

-18%-20%

-10%

0%

10%

20%

(400)

(200)

-

200

400

600

800

1,000

2012 2013 2014 2015E 2016E 2017E

Capex FCF Net Gearing %

0

50

100

150

200

250

300

350

400

2012 2013 2014 2015E 2016E 2017E

Inventory days Receivable days

Payable days Cash conversion cycle



Deutsche Bank estimates vs. consensus; sensitivity analysis

Figure 92: Deutsche Bank vs. consensus Figure 93: 2016/17E profit before tax (PBT) sensitivity

Company Ticker Target price Rating

XJ Electric 000400.SZ HKD22.50

DB Consensus DB vs. Consensus

Revenue (Rmb m) DBIG003

2015 6,884 8,033 -14%

2016 8,584 10,262 -16%

2017 10,331 12,602 -18%

EBITDA (Rmb m) DBIG075

2015 655 1,173 -44%

2016 1,300 1,841 -29%

2017 1,795 2,403 -25%

Net income (Rmb m) DBIG077

2015 393 777 -49%

2016 855 1,189 -28%

2017 1,210 1,536 -21%

Consensus Ratings Buys Hold Sell

9 1 0

7.0%

1.1%0.5%

7.0%

6.0%

0.9%0.5%

6.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Blended GPM Revenue of smart substation & distribution

segment

Revenue of DC transformation

segment

SG&A ratio

2016E 2017E

Source: Deutsche Bank, Bloomberg Finance LP

Source: Deutsche Bank estimates

Sensitivity analysis Blended GPM: each 1% hike in blended GPM would increase XJ Electric’s

2016E/17E PBT by 7.0%/6.0%.

Revenue of smart substation & distribution segment: each 1% hike in revenue of smart sub-station & distribution segment would increase XJ Electric’s 2016E/17E PBT by 1.1%/0.9%.

Revenue of DC transmission segment: each 1% hike in revenue of DC transmission segment would bring 0.5% upside to XJ Electric’s 2016E/17E PBT.

SG&A ratio (as % of revenue): each 1ppt lower SG&A ratio as of total revenue would increase XJ Electric’s 2016E/17E PBT by 7%/6%.

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Manufacturing



Key operating metrics and financials

Figure 94: XJ Electric - key assumptions and metrics (2011-17E)

Operating assumptions 2011* 2012* 2013 2014 2015E 2016E 2017E

Revenue growth 10.2% 55.7% 32.7% -4.7% -17.6% 24.7% 20.3%

Primary business 12.5% 57.8% 33.6% -3.5% -17.8% 24.9% 20.5%

Smart substation & distribution system NA 60.1% 0.4% -10.2% -20.0% 30.0% 18.0%

DC power transmission NA NA 97.8% -30.7% -40.0% 65.0% 60.0%

Smart mid-voltage power supply equipment NA -7.5% 15.5% 39.6% 10.0% 10.0% 10.0%

Smart power meters NA -8.0% 64.5% 44.3% -5.0% 10.0% 5.0%

Smart power supply & application system NA NA NA 10.8% -40.0% 20.0% 10.0%

EMS processing services and others NA 9.2% 11.7% -29.9% 0.0% 5.0% 5.0%

Other business -26.6% 3.4% -2.9% -68.0% 5.0% 5.0% 5.0%

Gross margin 30.9% 26.8% 29.8% 34.4% 26.7% 30.4% 31.8%

Primary business 30.8% 26.7% 29.7% 34.4% 26.9% 30.6% 32.0%

Smart substation & distribution system 38.3% 33.3% 36.3% 44.1% 35.9% 38.7% 38.8%

DC power transmission NA 10.5% 29.9% 41.7% 40.0% 42.0% 42.0%

Smart mid-voltage power supply equipment 29.9% 27.0% 20.6% 22.6% 15.0% 18.0% 19.0%

Smart power meters 20.3% 23.1% 19.7% 20.3% 19.0% 20.0% 20.0%

Smart power supply & application system NA NA 28.8% 28.6% 20.0% 24.0% 26.0%

EMS processing services and others 12.5% 11.2% 10.4% 12.5% 10.0% 10.0% 10.0%

Other business 19.3% 15.5% 33.5% 7.9% 7.9% 7.9% 7.9%

Other assumptions

Distribution expenses / Revenue -9.9% -5.7% -6.8% -6.0% -6.0% -5.7% -5.5%

Administrative expenses / Revenue -13.0% -9.8% -9.6% -9.4% -10.3% -9.0% -8.3%

Capex (157) (67) (107) (119) (120) (120) (120)

Receivable turnover days 239 191 211 278 329 292 277 Source: Deutsche Bank estimates, Company data , Note: *2011-12 financials are not re-stated on asset injection in 2014; GPM excl. business tax and surcharges

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Manufacturing



Figure 95: XJ Electric – income statement (2011-17E)

Rmb m 2011* 2012* 2013 2014 2015E 2016E 2017E

Sales Revenue 4,248 6,612 8,774 8,359 6,884 8,584 10,331

Primary business 4,082 6,441 8,608 8,306 6,828 8,526 10,269

Smart substation & distribution system 2,278 3,646 3,662 3,288 2,631 3,420 4,035

DC power transmission - 1,079 2,135 1,479 838 1,382 2,211

Smart mid-voltage power supply equipment 983 910 1,051 1,467 1,613 1,775 1,952

Smart power meters 527 485 797 1,151 1,093 1,202 1,262

Smart power supply & application system - - 605 670 402 483 531

EMS processing services and others 294 321 359 251 251 264 277

Other business 165 171 166 53 56 59 61

COGS (2,935) (4,842) (6,164) (5,485) (5,045) (5,975) (7,041)

Business tax and surcharges (33) (65) (72) (57) (47) (58) (70)

Gross Profit 1,280 1,704 2,538 2,817 1,792 2,551 3,219

Gross Profit Margin 30.1% 25.8% 28.9% 33.7% 26.0% 29.7% 31.2%

Distribution expenses (419) (376) (592) (506) (413) (489) (568)

Administrative expenses (554) (651) (841) (786) (709) (773) (857)

Financial expenses (87) (92) (71) (47) (43) (41) (38)

Asset impairment losses (35) (60) (29) (157) (124) (103) (118)

Investment income 10 10 0 (1) - - -

Profit from Operation 195 536 1,004 1,321 504 1,145 1,638

Add: non-operating income 57 146 149 76 60 78 92

Less: non-operating expenses (2) (9) (7) (2) (2) (2) (2)

Profit before tax 249 673 1,147 1,396 562 1,221 1,728

Less: income tax expanses (60) (103) (151) (106) (84) (183) (259)

Effective tax rate 23.9% 15.3% 13.2% 7.6% 15.0% 15.0% 15.0%

Profit after tax 190 570 995 1,289 477 1,037 1,469

Minority interest (148) (238) (266) (227) (84) (183) (259)

Net Profit Attributable to Shareholders 42 332 729 1,062 393 855 1,210

Net margin 1.0% 5.0% 8.3% 12.7% 5.7% 10.0% 11.7%

yoy growth % -71% 690% 119% 46% -63% 117% 42%

EPS 0.41 0.68 0.77 1.06 0.39 0.85 1.20

yoy growth % 7% 63% 14% 37% -63% 117% 42%

DPS 0.37 0.08 0.07 0.10 0.04 0.17 0.30

yoy growth % 273% -79% -7% 41% -63% 358% 77%

Dividend payout 90% 11% 9% 9% 9% 20% 25% Source: Deutsche Bank estimates, Company data, Note: *2011-12 financials are not re-stated on asset injection in 2014

16 September 2015

Manufacturing



Figure 96: XJ Electric – balance sheet (2011-17E)

Rmb m 2011* 2012* 2013 2014 2015E 2016E 2017E

Non-current assets 1,209 1,203 1,281 1,307 1,318 1,325 1,325

Property, plant and equipment 1,074 1,100 1,178 1,170 1,188 1,201 1,208

Investment in associates 28 28 25 - - - -

Prepaid expenses - - 2 1 1 1 1

Intangible assets 75 45 40 77 70 63 56

Held-to-Maturity Investment 11 - - - - - -

Deferred tax assets 20 29 36 60 60 60 60

Current Assets 5,863 5,723 9,106 9,485 9,110 10,635 12,677

Cash and cash equivalents 1,171 539 1,311 732 967 1,492 2,181

Restricted deposit - - 62 96 96 96 96

Prepayments 294 151 399 269 275 343 413

Accounts receivable 2,784 3,460 5,070 6,369 6,196 6,867 7,851

Other receivables 196 97 131 164 164 164 164

Inventories 1,417 1,475 2,133 1,856 1,413 1,673 1,972

Total assets 7,072 6,926 10,387 10,792 10,428 11,960 14,002

Shareholders' equity 2,524 2,803 4,164 5,669 5,962 6,779 7,818

Issued capital 378 378 492 1,008 1,008 1,008 1,008

Share capital reserve 594 596 633 829 829 829 829

Retained earnings reserve 256 256 270 372 372 372 372

Retained earnings 1,297 1,574 2,769 3,461 3,753 4,570 5,610

Total Shareholders Equity 2,524 2,803 4,164 5,669 5,962 6,779 7,818

Minorities interests 442 384 585 565 649 831 1,090

Total equity 2,967 3,187 4,749 6,234 6,611 7,611 8,908

Non-current liabilities 875 691 695 697 697 697 697

Bank borrowings and other financial liability 185 - - - - - -

Bond payables 690 691 692 694 694 694 694

Special payables - - 3 3 3 3 3

Current liabilities 3,230 3,047 4,943 3,862 3,121 3,652 4,397

Borrowing due within one year 263 207 400 - - - -

Current portion of long-term liabilities - 100 - - - - -

Trade/Bills payables 1,490 1,986 3,543 3,247 2,409 3,004 3,616

Deferred revenue 689 486 802 390 390 390 390

Dividend payable 13 17 - 4 101 37 171

Other payables 170 102 129 74 74 74 74

Tax payables 95 149 69 147 147 147 147

Other current liabilities 510 - - - - - -

Total shareholder equity and liabilities 7,072 6,926 10,387 10,792 10,428 11,960 14,002 Source: Deutsche Bank estimates, Company data, Note: *2011-12 financials are not re-stated on asset injection in 2014

16 September 2015

Manufacturing



Figure 97: XJ Electric – cash flow statement (2011-17E)

Rmb m 2011* 2012* 2013 2014 2015E 2016E 2017E

Profit after tax 190 570 995 1,289 477 1,037 1,469

Depreciation 77 79 117 99 102 107 112

Amortisation 14 39 7 7 7 7 7

Allowance for asset impairment 35 60 29 157 - - -

Adj. for assets disposal (5) (6) 4 1 - - -

Change in working capital (38) (331) (404) (1,783) (131) (469) (608)

Net interest expense 87 92 71 47 43 41 38

Investment income (10) (10) (0) 1 - - -

Others 122 5 (68) (26) - - -

Total Operating Cashflow 473 498 751 (208) 498 724 1,018

Capex (157) (67) (107) (119) (120) (120) (120)

Investment income 11 19 18 0 - - -

Others - (8) - (0) - - -

Total Investment Cashflow (146) (56) (89) (119) (120) (120) (120)

Issuance/(Retirement) of new shares - 5 - 450 - - -

Borrowings 1,413 313 400 - - - -

Repayments of loans (2,064) (964) (307) (400) - - -

Interest & dividend paid (195) (362) (198) (302) (143) (78) (209)

Others 690 (66) - - - - -

Total Financing Cashflow (157) (1,073) (105) (252) (143) (78) (209)

Net cash flow 169 (632) 558 (580) 235 525 689

Source: Deutsche Bank estimates, Company data, Note: *2011-12 financials are not re-stated on asset injection in 2014

16 September 2015

Manufacturing



Company background

Headquartered in Xuchang, Henan Province, XJ Electric Co. Ltd. (XJ Electric) is

a leading domestic power T&D equipment supplier with comprehensive

competitiveness in both primary and secondary equipment, covering the whole

spectrum of the power value chain from generation to retail.

XJ Electric’s most prominent competitiveness lies in power distribution

automation solutions, sub-station protection systems and UHV DC technology,

which contributed 57% of total revenue in 2014. It is also engaged in mid-

voltage primary equipment, smart meters and EV charging/battery equipment

business.

Figure 98: Business introduction by segment

Segments Business introduction

Smart sub-station & distribution system

Production and sales of smart sub-station equipment, distribution automation products (SCADA (distribution master stations), distribution slave stations, distribution GIS, distribution terminals (FTU, DTU, TTU), distribution switches (cabinets), distribution software, etc.)

DC power transmission Production and sales of converter valves, DC control & protection equipment, DC field equipment and flexible DC power transmission products

Smart mid-voltage power supply equipment

Production and sales of switches, transformers, ring network cabinets, rail transportation sub-station and switch equipment

Smart power meters Production and sales of smart power meters, smart metering terminals

Smart power supply & application system

Production and sales of special power supply equipment (such as for military use) and EV charging/battery replacement equipment

EMS processing services and others

Mainly engaged in providing structure parts processing and surface mount services, etc.


Brief company history In 1993, XJ Electric was founded out of Xuchang Relay Manufacturing

Co. in Xuchang, Henan province.

In 1997, XJ Electric’s A share (stock code: 000400 CH) was listed on

Shenzhen Stock Exchange.

In 2010, 100% stake of XJ Group (direct parentco of XJ Electric) was

freely transferred to China Electric Power Equipment and Technology

Co. Ltd. (wholly-owned subsidiary of State Grid Corporation of China

(SGCC)). Thus SGCC effectively took over the control of XJ Electric.

In 2012, the 100% stake of XJ Group was transferred from China

Electric Power Equipment and Technology Co. Ltd. to SGCC. XJ Group

and thus became a direct subsidiary of SGCC, as with Pinggao Group

and China Electric Power Research Institute.

In 2014, XJ Electric acquired Flexible Power Transmission Co., 75%

stake of XJ Power, 10% stake of Xuchang XJ Software and 50% stake

of Shanghai XJ from parentco through a share placement. The main

business of these acquired companies includes HV/UHV DC

transmission equipment, EV charging and battery replacement

equipment, etc.

16 September 2015

Manufacturing



Figure 99: Shareholding Structure


Figure 100: Key subsidiaries and major products

Business segment Subsidiary companies Major products Stake 2014 sales (Rmb m) 2014 net profit (Rmb m)

Smart power T&D Zhuhai XJ Electric DA hardware/software, smart power monitoring terminal, smart switch (cabinet) equipment

70% 1,217 422

Smart power T&D Zhuhai Xujizhi Power Grid Automation

DA software 41% 148 51

Smart power T&D, DC Power transmission, etc.

*Xuchang XJ Software Relay protection, power system automation software

100% 527 103

DC Power transmission

*Flexible Power Transmission Co.

HV/UHV DC converter valves, control & protection, new energy generation access device

100% 804 204

Smart mid-voltage power supply

XJ Transformers Dry-type transformers, Electric reactors 78% 573 44

Smart meters Henan XJ Meters Smart meters 70% 1,157 73

Smart power & application

*XJ Power EV charging and battery replacement equipment, power electronic products (incl. those for military use)

75% 670 88

Note: * In 1Q14, XJ Electric acquired 100% stake of Flexible Power Transmission Co, 75% of XJ Power, 10% of Xuchang XJ Software from XJ Group Source: Deutsche Bank, Company data

Further asset injection unlikely in near term

Post the asset injection in late 2012, we do not expect further asset injection in

near future given most of the unlisted group companies are either barely

profitable or at a loss (Figure 101). The only company that posts direct

competition with XJ Electric is China Electric Power Equipment and

Technology Shandong Electronics (CETSDEC), which is primarily engaged in

production and sales of smart power meter. It was only transferred to XJ

Group from China Electric Power Equipment and Technology Co. (wholly-

owned by SGCC) since 2012. Hence, it will still take some time to improve the

return before it could be considered for injection.

State Grid Corporation of China

(SGCC)

XJ Electric

XJ Group

State-owned Assets Supervision

and Administration Commission

(SASAC)

100%

100%

%

41.02%

16 September 2015

Manufacturing



Figure 101: Financials of key unlisted companies of XJ Group

Company Business 2014 Sales (Rmb m) 2014 NP (Rmb m)

Xuchang XJ Wind Wind turbines, solar generation equipment 276 (43)

XJ Group International Engineering Co. International EPC 513 (3)

XJ (Xiamen) Smart Power Equipment 12-550kV mid-voltage switch products 68 (37)

Fuzhou Tianyu Electric Mid to high voltage transformers & switch products 500 5

China Electric Power Equipment and Technology Shandong Electronics (CETSDEC)

Smart power meter 394 22

XJ Group 10,623 853


Figure 102: Management profile

Name Age Position Experience & Qualifications

Mr. Leng Jun 51 Chairman Master’s Degree, Research-level Senior Engineer;

Previously served as chief of Grid Control Department of China Electric Power Research Institute (CEPRI); general manager, deputy chief engineer of Grid Control Co. of NARI Group; deputy manager of XJ Electric; deputy chief of CEPRI; deputy manager of XJ Group, etc;

Currently serving as Executive Director, General Manager of XJ Group and Chairman of XJ Electric

Mr. Xiao Zhongwen 48 Board Director Master's Degree, Senior Accountant;

Previously served as deputy manager of Finance Department of North China Power Group; chief of Finance Department, deputy chief accountant of North China Grid Co. etc;

Currently serving as chief accountant of XJ Group and Board Director of XJ Electric

Mr. Tan Guobiao 53 Board Director MBA, Senior Engineer;

Currently serving as deputy manager of XJ Group and Board Director of XJ Electric

Mr. Zhang Xinchang 50 Board Director, General Manager

Bachelor's Degree, Professor-level Senior Engineer;

Previously served as chief of R&D Department, deputy manager of XJ Electric

Mr. Zhang Xueshen 50 Board Director Bachelor's Degree, Professor-level Senior Engineer;

Currently serving as manager of Grid Protection & Automation Department, deputy general manager, Board Director of XJ Electric; Vice President, chief engineer of XJ Group; general manager of China Electric Power Equipment and Tech Co. (Marketing Co.)

Mr. Ma Baozhou 48 Board Director, Deputy General Manager, Head Accountant

EMBA, Senior Accountant;

Currently serving as deputy general manager, chief accountant, Board Director of XJ Electric

Mr. Yao Wu 48 Deputy General Manager, Board Secretary

MBA, Senior Engineer;

Currently serving as deputy general manager, Board Secretary, chief of Tech Center of XJ Electric

Mr. Wei Jianxiao 46 Deputy General Manager Bachelor's Degree, Senior Engineer;

Currently serving as deputy general manager of XJ Electric

Mr. Sun Jiqiang 45 Deputy General Manager EMBA;


Ms. Bai Hui 39 Deputy General Manager Bachelor's Degree;



16 September 2015

Manufacturing





Sales (CNYm) 9,575.6 8,907.0 7,695.4 9,895.5 11,675.8

EBITDA (CNYm) 1,566.5 1,349.9 689.9 1,338.8 1,759.2

Reported NPAT (CNYm) 1,600.3 1,283.1 605.6 1,226.2 1,634.5


DB EPS FD(CNY) 0.66 0.53 0.25 0.50 0.67

DB EPS growth (%) -20.3 -19.6 -53.0 102.5 33.3

PER (x) 20.6 28.3 56.7 28.0 21.0

EV/EBITDA (x) 19.6 24.4 44.9 22.9 17.1

DPS (net) (CNY) 0.10 0.16 0.07 0.15 0.20

Yield (net) (%) 0.7 1.1 0.5 1.1 1.4


the year end close

Reuters Bloomberg Exchange Ticker 600406.SS 600406 CH SHH 600406

Strong recovery in 2016 after a hiccup in 2015; Buy NARI is a leading grid automation systems provider. Despite an earnings slide in 1H15 caused by a delay in delivery, we project 102%/33% earnings growth in 2016-17E on the back of resumed delivery and China’s aggressive investment plan for its distribution network in 2016-20. NARI is also best positioned among peers on the asset injection front. We initiate with Buy and a target price of Rmb18.1.

Market leader in grid dispatching, automation and relay protection NARI is a leading player in power grid automation (69% of revenue in 2014). We forecast a >35% CAGR in the rural electrification and power distribution automation sub-segment in 2015-17, driven by China’s smart grid and distribution investment boom in 2016-20. China aims to boost the penetration of distribution automation from 20% in 2014 to 90% by 2020; NARI should be a key beneficiary, leveraging on its established competitiveness.

Earnings to grow by 102%/33% in 2016/17E; substantial asset injection upside We expect strong net profit growth, driven by the recovery in power automation after delayed delivery in 2015. We are upbeat on the recovery in 2016 based on the trend in order backlog/revenue in 2013-15E. Moreover, the company has a strong track record in asset injection. The injection of NARI Electric by November 2016 should substantially enlarge the company’s earnings base and increase its exposure to the booming UHV investment.

Valuation and risks We value NARI based on 1) DCF through 2025E (WACC: 7.1%, tgr: 2%), and 2) an Rmb3.6/share potential value enhancement from asset injection. Our target price translates into 36x/27x 2016/17E EPS. Key downside risks include: 1) lower-than-expected investment in secondary automation equipment; 2) market share loss or margin pressure in secondary equipment tenders; 3) risks associated with new PPP projects; and 4) uncertainty over asset injection.

Rating

Buy Asia

China

Industrials

Manufacturing

Company

NARI Tech

Leading automation player with asset injection upside; initiating with Buy



52-week range (CNY) 29.29 - 12.45

Shanghai Composite 3,115

Michael Tong

Research Analyst

(+852) 2203 6167

[email protected]

Luka Zhu

Research Associate

(+852) 2203 6173

[email protected]


10

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30

40

9/13 3/14 9/14 3/15

NARI Tech

Shanghai Composite (Rebased)


Absolute -31.3 -50.7 -13.3

Shanghai Composite -21.5 -38.5 33.2


16 September 2015

Manufacturing




Running the numbers

Asia

China

Manufacturing

NARI Tech Reuters: 600406.SS Bloomberg: 600406 CH

Buy Price (15 Sep 15) CNY 14.14


52 Week range CNY 12.45 - 29.29


USDm 5,393

Company Profile

Founded in 2001 in Nanjing, NARI Technology Co, Ltd. is a leading state-owned supplier of solutions for power and automation technologies in China. The company's main products include software and hardware of substation automation, smart dispatching, smart distribution, smart meters, etc. It is also involved in renewable power generation, energy saving and environmental protection as well as industrial & transportation automation products.

Price Performance

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NARI Tech Shanghai Composite (Rebased)

Margin Trends

68

1012141618

12 13 14 15E 16E 17E



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Michael Tong



Financial Summary

DB EPS (CNY) 0.83 0.66 0.53 0.25 0.50 0.67

Reported EPS (CNY) 0.83 0.66 0.53 0.25 0.50 0.67

DPS (CNY) 0.21 0.10 0.16 0.07 0.15 0.20

BVPS (CNY) 2.2 2.5 2.9 3.0 3.5 4.0

Weighted average shares (m) 1,576 2,429 2,421 2,429 2,429 2,429



Valuation Metrics P/E (DB) (x) 15.5 20.6 28.3 56.7 28.0 21.0

P/E (Reported) (x) 15.5 20.6 28.3 56.7 28.0 21.0

P/BV (x) 5.13 5.87 4.92 4.66 4.08 3.55

FCF Yield (%) 3.3 1.7 3.8 1.5 1.9 2.3

Dividend Yield (%) 1.6 0.7 1.1 0.5 1.1 1.4

EV/Sales (x) 2.2 3.2 3.7 4.0 3.1 2.6

EV/EBITDA (x) 13.6 19.6 24.4 44.9 22.9 17.1

EV/EBIT (x) 14.3 20.5 26.2 58.4 25.6 18.5


Sales revenue 8,309 9,576 8,907 7,695 9,895 11,676

Gross profit 2,397 2,594 2,423 1,791 2,591 3,166

EBITDA 1,342 1,567 1,350 690 1,339 1,759

Depreciation 45 48 60 71 80 90


EBIT 1,281 1,496 1,258 530 1,198 1,627

Net interest income(expense) -8 -8 -10 1 -1 -2




Profit before tax 1,482 1,796 1,461 691 1,399 1,864


Minorities 3 15 18 9 19 25


Net profit 1,302 1,600 1,283 606 1,226 1,634


DB Net profit 1,302 1,600 1,283 606 1,226 1,634

Cash Flow (CNYm)

Cash flow from operations 789 738 1,693 824 970 1,108

Net Capex -124 -165 -302 -304 -304 -304

Free cash flow 665 573 1,391 520 666 804

Equity raised/(bought back) 7 0 0 0 0 0

Dividends paid -212 -354 -274 -386 -182 -370

Net inc/(dec) in borrowings -11 55 -124 90 90 90

Other investing/financing cash flows -3 2 -13 0 0 0

Net cash flow 447 276 981 224 574 524

Change in working capital -734 -1,076 138 51 -417 -686


Cash and other liquid assets 2,376 2,772 3,901 3,979 4,407 5,084

Tangible fixed assets 467 498 531 610 680 740



Other assets 7,741 9,706 10,020 9,802 11,434 13,270

Total assets 10,761 13,274 14,797 14,647 16,715 19,247

Interest bearing debt 528 616 492 582 672 762




Minorities 40 57 71 81 99 124


Net debt -1,848 -2,156 -3,409 -3,397 -3,735 -4,322

Key Company Metrics

Sales growth (%) 78.3 15.3 -7.0 -13.6 28.6 18.0

DB EPS growth (%) 1.6 -20.3 -19.6 -53.0 102.5 33.3

EBITDA Margin (%) 16.2 16.4 15.2 9.0 13.5 15.1

EBIT Margin (%) 15.4 15.6 14.1 6.9 12.1 13.9

Payout ratio (%) 25.4 15.2 30.2 30.0 30.0 30.0

ROE (%) 33.6 29.4 19.4 8.3 15.5 18.1

Capex/sales (%) 1.5 1.7 3.4 3.9 3.1 2.6


Net debt/equity (%) -38.0 -35.2 -47.2 -45.6 -43.9 -44.1

Net interest cover (x) 161.2 184.7 124.9 nm nm 870.9


16 September 2015

Manufacturing



Investment thesis

Outlook

NARI Tech is a leading player in power grid automation (grid dispatching and

power distribution automation; smart substation systems; and relay protection

and substations), which contributed 69% of its revenue in 2014. Despite an

earnings slide in 1H15 caused by a delay in delivery, we project 102%/33%

earnings growth in 2016-17 on the back of resumed delivery and China’s

aggressive investment plan for its distribution network in 2016-20. We are

upbeat on the recovery in 2016 based on the trend of order backlog/revenue in

2013-15E.

We expect the rural electrification and power distribution automation sub-

segment to post a >35% CAGR in 2015-17, driven by China’s smart grid and

distribution investment boom in 2016-20. NARI should be a key beneficiary,

leveraging on its established competitiveness.

Moreover, the company has a strong track record of asset injection. The

injection of NR Electric by November 2016 should substantially enlarge the

company’s earnings base and increase its exposure to the booming UHV DC

market. We initiate on the stock with a Buy rating and a target price of

Rmb18.1.

Valuation

Our DCF-based target price of Rmb18.1 for NARI Tech comprises: 1) Rmb14.5

from existing assets, based on a DCF methodology with a WACC of 7.1% and

a terminal growth rate of 2%; and 2) Rmb3.6 from parentco asset acquisition

(mainly NR Electric), based on a 25% incremental value accretion assumption.

Our WACC assumption incorporates a 3.9% risk-free rate, 5.6% equity risk

premium, 1.1 beta (based on historical share price correlation), 5.5% pre-tax

cost of debt (based on current PBOC), 25% tax rate and 50% debt-capital ratio.

Risks

Key downside risks include: 1) lower-than-expected investment in secondary

grid automation/protection equipment; 2) market share loss in secondary

equipment tenders; 3) risks associated with new PPP projects; and 4)

uncertainty over asset injection: Though the parentco promised an asset

injection by 2016, this may be delayed or may fail to enhance shareholder

value if pricing terms are unattractive. As we have factored in Rmb3.6 asset

injection upside in deriving our target price, any uncertainty over asset

injection is a risk.

16 September 2015

Manufacturing



Valuation and risks

TP of Rmb18.1 (Rmb3.6 from acquisition)

Our target price of Rmb18.1 (Figure 103) for NARI Tech comprises: 1) Rmb14.5

from existing assets, based on a DCF methodology with a WACC of 7.1% and

a terminal growth rate of 2%; and 2) Rmb3.6 from parentco asset acquisition

(mainly NR Electric), a 25% NAV enhancement with a likely 30% incremental

EPS accretion in 2017E based on our scenario analysis.

Our WACC assumption is based on a 3.9% risk-free rate, a 5.6% equity risk


target 50% debt to capital ratio. We also assume 2% terminal growth,

considering the long-term growth potential from distribution automation,

smart micro-grids, overseas business, etc.

Figure 103: DCF projections through 2025E

DCF valuation 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2023E 2024E 2025E

EBIT 690 1,400 1,866 1,962 2,062 2,168 2,180 2,192 2,205 2,218

Effective tax rate 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%

EBIT after tax 614 1,246 1,661 1,746 1,835 1,930 1,940 1,951 1,962 1,974

Add: depreciation & amortization 160 141 133 131 134 140 148 158 169 180

Less : project capex (450) (450) (150) (150) (150) (150) (150) (150) (150) (70)

Add: change in working capital 51 (417) (686) (142) (73) (261) 3 (33) (34) (36)

Free cash flow to the firm 374 520 957 1,585 1,746 1,660 1,942 1,926 1,947 2,048

Discount factor 1.00 1.07 1.15 1.23 1.31 1.41 1.51 1.61 1.73 1.85

Discounted Cashflow ex TV 486 835 1,292 1,329 1,180 1,290 1,196 1,129 1,109


PV of TV 21,944

Summary 2015E


Less: net debt/(cash) at year end (3,397)

Less: minority Interest 81




Equity value per share (Rmb) 14.5

Value accretion from acquisition 25%

Target price (Rmb) 18.1


after-tax


WACC 7.1% 3.9% 1.1 5.6% 5.5% 10.0% 4.1% 25% 50% 50%

TV Growth 2.0% Source: Deutsche Bank

Earnings/EPS upside from potential NR Electric acquisition

The parentco made a statement in 2013 in which it promised to inject three

subsidiaries into the listco by November 2016. Among the three subsidiaries,

NR Electric has the largest revenue and the best asset quality, according to

management.

We show a scenario analysis of the potential acquisition of NR Electric in

Figure 104, assuming the deal is completed by end-2016 as per the company

statement. Our scenario analysis suggests that EPS accretion in 2017E is likely

to be c.30%, assuming an Rmb1.9bn profit for NR Electric in 2017E, an

acquisition multiple of 2.5x P/B and that 75% consideration is financed by

equity issuance at Rmb14/share (Figure 104).

16 September 2015

Manufacturing



Figure 104: Earnings/EPS impact analysis of NR Electric acquisition

NR Electric acquisition analysis Note

NR Electric - financial assumption (2017E, Rmb m)

Equity a 8,000

ROE b 24% Per management, NR Electric has higher ROE vs. NARI Tech (avg. 22%, 2013-14)

Profit c=a*b 1,920

Acquisition in 2016E Note

P/B for acquisition d 2.5 Referred to P/B of historical acquisitions

Acquisiton cost (Rmb m) e=a*d 20,000

Acquisition captial structure (debt %) f 25%

Debt raised (Rmb m) g=e*f 5,000

Equity raised (Rmb m) h=f-g 15,000

Share placement price (Rmb per share) i 14 Assume 10% discount to moving avg. price of last 10 days

Number of new shares issued j=h/i 1,071

Weighted no. of shares (mn) - before acquisition k 2,429

Interest expense for debt raised l 258 At benchmark interest rate (loan over 5 year) of 5.15%

Net earnings upside (Rmb m) m=c-l*(1-25%) 1,727

EPS accretion (Rmb) 0.29

EPS accretion (%) 30% Source: Deutsche Bank

Our target price implies 36x/27x 2016E/17E P/E, higher than the three-year

historical average of 30x (Figure 105). However, we think this is justified with

the approach of the parentco asset injection by November 2016. Moreover, the

stock has been trading at higher historical multiples than peers over past

years, due to strong asset injection expectations and a premium for its strong

technological capabilities and position as a leading secondary equipment

company (focusing more on software and system solutions as compared to the

hardware of a primary equipment company).

Figure 105: Historical 1-year forward P/E Figure 106: Historical 1-year forward P/B

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16 September 2015

Manufacturing




Share price as of

September 14, 2015






















Average (52%) (16%) 28.1 17.9 14.5 28.5 18.0 12.8 3.4 2.8 13.1 16.1 6.5 8.2 18.7 0.9





Average (30%) (2%) 9.9 8.0 6.7 9.5 7.6 6.3 2.0 1.7 20.7 21.5 10.6 11.2 21.4 3.8








Average (7%) (2%) 32.8 24.1 20.3 23.3 18.1 19.2 3.8 3.5 12.6 13.5 5.1 5.4 3.8 2.5




RoE ROA


P/BV

Valuations

EV/EBITP/E

Performance

Source: Deutsche Bank estimates for rated stocks, Bloomberg Finance LP consensus estimates for none-rated stocks

Risks

Industry risks Lower-than-expected grid investment, as a result of the

macroeconomic outlook and change in gridcos’ investment budget,

will reduce equipment tender/procurement volumes, thus affecting the

company’s orders.

Company-specific risks Market share loss in secondary equipment tenders: NARI Tech could

lose market share to new suppliers that are being introduced by

gridcos to satisfy the growing demand.

Lower-than-expected margin: either tender price or component price

hikes can affect margins, especially for its high-margin power grid

automation segment.

Risks associated with new PPP projects: NARI Tech has signed a PPP

project to build Nanjign Ninghe Metro Phase I, which may face risks

such as 1) budget overruns; 2) delay or failure of PPP stake buyback;

and 3) lower-than-expected returns.

Uncertainty over asset injection: Though the parentco has promised

asset injections (NR Electric, Purui UHV transmission Tech Co., EPRI

Grid Monitoring Tech Co.) by 2016, these may be delayed or may fail

to enhance shareholder value if pricing terms are unattractive. As we

have factored in Rmb3.6 asset injection upside in deriving our target

price, any uncertainty over asset injections is a risk.

16 September 2015

Manufacturing



Leading grid automation play with significant asset injection upside

Key points

NARI Tech is a leading player in power grid automation (69% of

revenue in 2014). We expect the rural electrification & power

distribution automation sub-segment to post a >35% CAGR in 2015-

17E, driven by China’s distribution investment boom in 2016-20.

We forecast a 12% revenue CAGR in 2015-17E for the substation &

utilization automation, to be driven by new build-out and the upgrade

of conventional substations.

NARI Tech has a strong track record of asset injection. Another three

subsidiaries will be injected by November 2016, of which NR Electric

should substantially enlarge the company’s earnings base and

increase its exposure to the booming UHV investment.

Market leader of power grid automation

Leveraging the support from its shareholders – State Grid Corporation of China

(SGCC) and China Electric Power Research Institute (EPRI, grid research

platform of SGCC) – NARI Tech is the market leader in the grid dispatching,

automation & protection industry, with competitive technological know-how.

Its power grid automation business, which generated 69% of the company’s

revenue in 2014, mainly includes substation automation, grid dispatching and

security & stability control, rural electrification & power distribution automation,

and utilization automation products. According to SGCC’s centralized tender

data since 2014, NARI Tech is the leader in the grid dispatching & power

distribution automation market and the second largest player in the smart

substation system relay protection & substation market (note that the No.1

player, NR Electric, is owned by NARI Tech’s parentco – NARI Group).

NARI Tech does not

disclose the sub-segment

financials of its power grid

automation business. We

provide our estimated

sub-segment revenue

breakdown in Figure 112.

16 September 2015

Manufacturing



Figure 108: Mkt share in SGCC’s centralized tender of

smart substation systems since 2014 (within “substation

automation”)


relay protection & substation monitoring systems since

2014 (within “substation automation”)

30%

19%17%

15%

9%

9% NR Electric

NARI Tech

XJ Electric

Nanjing Automation

Sifang

Changyuan

17%

14%

13%

12%

11%

11%

6%

4%

12%NR Electric

NARI Tech

Sifang

XJ Electric

Nanjing Automation

Changyuan

Jinzhi

Jicheng

Others

Source: Deutsche Bank, SGCC, Note: market share in terms of total units won



distribution terminals since 2014 (within “distribution

automation”)


distribution master stations since 2014 (within

“distribution automation”_

10%

10%

9%

9%

8%8%

8%

7%

6%

5%

5%

4%

4%3%

3% 3% NARI TechKE ElectricJinzhiDongfangHexin RuitongSifangLunengChangyuanJichengNR ElectricPanengGolden HighwayXJ ElectricShuimuyuanhuaNanjing AutomationOthers

54%

27%

12%

8%

NARI Tech

XJ Electric

NR Electric

Sifang



Diverging growth outlook for power grid automation business

The sub-segments within power grid automation will likely present different

growth outlooks. Among them, we expect the rural electrification & power

distribution automation segment to have the highest growth profile (>35%

CAGR in 2015-17E), while the grid dispatching automation business is likely to

remain steady.

Rural electrification & power distribution automation: Referring to our

F.I.T.T report (Cleaner, Stronger, Smarter – Rmb2.8trn power grid

upgrade plan published on 16 September 2015), the government is

accelerating its investment in power distribution (including rural grid)

with an ambitious investment plan of at least Rmb300bn in 2015 and

Rmb1,700bn during the 13th five-year period, nearly double that in the

12th five-year period. Specifically, it aims to enhance the penetration of

distribution automation from 20% in 2014 to 90% by 2020. We believe

NARI Tech should be a key beneficiary, leveraging on its established

competitiveness in providing distribution automation solutions for both

urban and rural projects.

16 September 2015

Manufacturing



Grid dispatching: In NARI Tech’s traditional core business, where it

holds a dominant market share at the national/provincial level and

majority market share at the city/county level, we expect a steady

revenue trend as large-scale investment in grid dispatching has been

completed and the new demand mainly comes from system upgrades

and further penetration at the county level. However, the ongoing

power sector reform, with changes in dispatching management likely,

may present some upside to our forecast.

Substation automation & utilization automation: We forecast a 12%

revenue CAGR in 2015-17E, to be driven by new build-out and the

upgrade of conventional substations, which is in line with the growth

rate that we have modeled for XJ Electric’s smart substation system

business. NARI and XJ Electric are both among the top smart

substation system and equipment providers in China. We see limited

new entrants in this market. This segment has some modest UHV

exposure: NARI won orders of substation automation monitoring

systems and smart substations for Ximeng-Shandong (1,000kV AC)

and Huainan-Shanghai-Nanjing (1,000kV AC) from tenders in 1H15.

Figure 112: Power grid automation business: sub-segment profile

Sub-segment business % of segment revenue (2014E)

% of total revenue (2014E)

Growth outlook Competitiveness

Substation automation 31% 21% Expecting 12% CAGR through 2015-17E, driven by new build-out of smart substations and also upgrades

Leading market position – 19% market share in smart substation system (49% for NARI Group) and 14% in relay protection & substation monitoring system (31% for NARI Group) during the SGCC centralized tenders since 2014 (Figure 108 and Figure 109).

Grid dispatching and grid security & stability control

28% 19% Large-scale investment in grid dispatching has almost been completed, while new demand mainly comes from system upgrades and further penetration at county level

Top player at both national/provincial level and city level;

Successfully undertook overseas projects at national level, incl. Sudan, Philippines, Laos

Utilization automation (smart meters, power utilization collecting terminals, etc.)

22% 15% Expecting 12% CAGR through next five years, on power utilization automation equipment investment

Not as competitive as other sub-segments

Rural electrification & power distribution automation

19% 13% Expecting >35% CAGR through 2015-17E on increased distribution investment (especially higher rural grid investment in 2015-16)

Market leader – 10% market share in distribution terminals (15% for NARI Group) and 54% in distribution master stations market (66% for NARI Group) during the SGCC centralized tenders since 2014 (Figure 110 and Figure 111)

Total 100% 69%

Source: Deutsche Bank, Company data, Note: segment revenue breakdown is based on DB estimates

16 September 2015

Manufacturing



Figure 113: Key order wins in power grid automation segment

Segment Key projects/products

Substation automation 1H15 orders include substation automation monitoring systems for Ximeng-Shandong (1,000kV AC), Huainan-Shanghai-Nanjing (1,000kV AC), secondary equipment for nine smart substations

Grid dispatching Grid dispatching systems at national/regional/local levels - North China, East China, Northwest China, Shandong, Beijing, Jiangsu, Shanghai, Guizhou, etc.

1H15 orders include one grid dispatching system for southwest region and nine local back-up systems in Henan province

Rural electrification & Power distribution automation Grid dispatch & automation systems for Guangdong, Jiangsu, Jilin, Shaanxi, Yunann, Tianjin, etc

Rural automation trial projects in five counties, including Shaanxi Pucheng and Shanxi Gaomi

Power distribution automation projects in central areas of Hangzhou, Yinchuan, Tianjin, Chengdu, Lanzhou, etc.

Power distribution automation projects for Shanghai World Expo, Tianjin Eco-city, Xi'an China Expo

Utilization automation SEA3000 power utilization information collection systems for Xinjiang, Qinghai, Anhui, Hebei, North China, etc.

Production dispatching platform systems of power measuring centers for SGCC, Jiangsu, Anhui, Chongqing, etc.

Smart meters

1H15 orders include Electricity Trading System II, Qinghai micro-grid project


Growth from asset injection of parentco

Established asset injection track record

SGCC has designated NARI Tech as its sole grid automation platform. Over the

past few years, EPRI and NARI Group have established a good track record of

asset injection to eliminate intra-group competition (Figure 114).

Figure 114: Group asset injection record

Year Injected company (En) Stake Major business/products Net profit (injection yr, Rmb m)

Purchased with

2004 Nanjing Sino-German Protection & Substation Control System Ltd. 63% Substation automation, rail automation 9 Cash

2007 Rural grid automation 100% Dispatching automation (county level), substation automation (110kV and below) 19 Cash

2009 Grid automation, electric control assets 100%

Low-mid voltage relay protection, generator excitation system, wind control system 70 Cash

2011 Anhui Jiyuan 100% Relay protection, grid automation 29

Anhui NARI Zhongtian 100% Smart meters 12 Cash

2013

Beijing Kedong 100% Dispatching automation, distribution automation, power automation, etc. 226

Share placement

Beijing e-Huayuan 100% Distribution automation 24

Beijing NARI Futong 100%

Auxiliary power station equipment, energy conservation & environmental protection (high temperature & pressure pipes, water-cooling systems, etc.) 46

Nanjing NARI Solar 75% Solar inverters, solar EPC 30

Grid Security & Stability Control Tech 100% Grid security & stability control 81


Introduction to NARI Group

NARI Group Corporation (NARI Group), NARI Tech’s parentco, has its origins in

the Nanjing Automation Research Institute (founded in 1973) and Wuhan High

Voltage Research Institute (founded in 1974). It is a wholly-owned subsidiary of

the State Grid Corporation of China (SGCC). In 2013, NARI Group generated

revenue of Rmb22.3bn and profit of Rmb3.7bn (including the contribution from

NARI Tech).

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Manufacturing



Further asset injection promised by parentco

In order to further eliminate competition within the group in overlapping

businesses, in 2013 NARI Group said that it would inject three subsidiaries into

NARI Tech by November 2016. The details of the three companies are shown

in Figure 115.

Figure 115: Likely asset injections in 2016

Shareholder Company (En) Major business/products Rationale for injection Promised injection timeline

EPRI/NARI Group

NR Electric Relay protection, grid security & stability control, grid automation, substation automation, flexible AC/DC transmission

To avoid competition in substation automation, dispatching automation, etc.

by Nov 2016

EPRI Purui UHV transmission Tech Co.

EV charging equipment, smart substations

To avoid competition in EV charging equipment

by Nov 2016

EPRI/NARI Group

EPRI Grid Monitoring Tech Co.

Grid security & stability control, substation monitor & control

To avoid competition in grid security & stability control

by Nov 2016


NR Electric is the jewel in the crown

Among the three subsidiaries, NR Electric has the largest revenue and best

asset quality, on our estimates. It had a slightly stronger profit scale to NARI

Tech in 2014, according to management. Based on SGCC’s tender data since

2014, it is the largest supplier of smart substation automation systems and

relay protection & substation monitoring systems, and is one of the top players

in distribution automation products.

According to management, NR Electric generated a higher return and net

profit than NARI Tech (Rmb1.3bn) in 2014. Hence, if the asset injection is

realized, we expect NARI Tech to become an unparalleled leader in substation

automation & protection and distribution automation, with its profit nearly

doubling. As discussed in the valuation, we expect a 30% EPS enhancement

based on an assumed scenario analysis of asset injection and share placement.

Exposure to UHV market to be strengthened

Compared with its key competitor in secondary equipment (XJ Electric), NARI

Tech is less exposed to the UHV market given that 1) it has no DC converter

valve production, and 2) DC control & protection systems is not in the listco.

However, the injection of NR Electric should change the competitive dynamics.

NR Electric is one of the two suppliers of UHV DC control & protection

systems, with a historical average market share of 44% (Figure 116). In

addition, its self-developed UHV DC converter valves technology has been

successfully certified by the Chinese Society for Electrical Engineering this

August, which hints at its potential as a new supplier in the UHV DC converter

valve market, in addition to XJ Electric, China XD and ABB-Sifang JV.

Figure 116: Market share in UHV DC control & protection systems UHV DC line NR Electric XJ Electric

Xiangjiaba-Shanghai 50% 50%

Yunnan-Guangdong 0% 100%

Jinping-South Jiangsu 50% 50%

Nuozhadu-Guangdong 0% 100%

South Hami- Zhengzhou 100% 0%

Xiluodu - Zhejiang 0% 100%

East Ningxia - Shaxing 100% 0%

Jiuquan - Hunan 100% 0%

North Shanxi - Jiangsu 0% 100%

Avg 44% 56%


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Manufacturing



Financial outlook

Financial outlook by segment

We summarize the financial outlook by segment below.

Power grid automation segment:

Figure 117: Power grid automation segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 5,481 5,917 6,106 4,885 6,106 7,205 We expect segment revenue in 2015 to decline by 20% yoy (1H15: -25%) due to a significant order delivery delay amid a weak macro environment and the audit of SGCC

We expect segment revenue to recover in 2016 from a low base in 2015 on the delayed delivery. By product, we expect revenue growth to be led by distribution automation on the back of rising distribution investment

The expected GPM dip in 2015 should be primarily due to a delay in high-end grid dispatching products delivery. This is likely to recover with more delivery in 2016, but may not return to as high as c.35% due to product mix changes (dispatching automation has higher margin than other products but with lower growth)

yoy gr. % NA 8% 3% -20% 25% 18%

Gross profit 1,890 2,086 1,894 1,221 1,771 2,162

yoy gr. % NA 10% -9% -36% 45% 22%

GPM % 34.5% 35.3% 31.0% 25.0% 29.0% 30.0%


Power generation & renewable energy segment:

Figure 118: Power generation & renewable energy segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 1,670 2,439 1,558 1,247 1,496 1,720 Currently, around half of the segment revenue is contributed by solar-related products and EPC projects, while the rest comes from excitation, high-pressure pipes and wind power products

The notable revenue decrease in 2014 is due to the company’s strategy of sizing down the wind EPC business, which carries low profitability but high risk

We expect segment revenue in 2015 to decline yoy (1H15: -34%) due to a delayed construction schedule for solar projects, but it may recover next year; we expect 15% growth in 2017E on the likely lifting of wind/solar 2020 installation targets

We forecast a gradual GPM improvement on management’s efforts to further enhance segment profitability

yoy gr. % NA 46% -36% -20% 20% 15%

Gross profit 263 257 217 187 239 310

yoy gr. % NA -2% -16% -14% 28% 29%

GPM % 15.7% 10.5% 13.9% 15.0% 16.0% 18.0%


Energy conservation & environmental protection segment:

Figure 119: Energy conservation & environmental protection segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 479 537 687 927 1,159 1,390 We expect the energy conservation & environmental protection segment to record the high revenue growth among all segments in 2014-17, thanks to the government’s strong initiatives. Unlike grid automation, segment revenue is less reliant on SGCC’s tender schedule

Beijing NARI Futong, the major subsidiary that undertakes business in this segment, has achieved a market breakthrough in certain utilities-related products such as those applied in waste water treatment, in addition to the traditional core products of grid energy efficiency management systems

yoy gr. % NA 12% 28% 35% 25% 20%

Gross profit 125 123 148 185 255 306

yoy gr. % NA -1% 20% 25% 38% 20%

GPM % 26.2% 23.0% 21.5% 20.0% 22.0% 22.0%


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Industrial control (incl. rail transportation) segment:

Figure 120: Industrial control (incl. rail transportation) segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 667 656 539 620 1,116 1,340 Over 80% of segment revenue is contributed by rail automation products

In 2014, a consortium led by NARI Tech signed a PPP project for Nanjing Ninghe Rail Phase I with Nanjing Metro Group. The contract value for NARI Tech is c.Rmb2bn and the project is scheduled to be completed by end-2016 or early-2017

The expected 80% revenue jump in 2016E is due to Ninghe project revenue recognition

yoy gr. % NA -2% -18% 15% 80% 20%

Gross profit 111 110 151 186 313 375

yoy gr. % NA -1% 38% 23% 68% 20%

GPM % 16.7% 16.7% 28.1% 30.0% 28.0% 28.0%


Revenue mix trend:


2012 2013 2014 2015E 2016E 2017E

Power grid automation 66% 62% 69% 63% 62% 62%

Power generation & renewable energy 20% 25% 17% 16% 15% 15%

Energy conservation & environmental protection 6% 6% 8% 12% 12% 12%

Industrial control (incl. rail transportation) 8% 7% 6% 8% 11% 11%





2012 2013 2014 2015E 2016E 2017E

Power grid automation 79% 80% 78% 68% 68% 68%

Power generation & renewable energy 11% 10% 9% 10% 9% 10%

Energy conservation & environmental protection 5% 5% 6% 10% 10% 10%

Industrial control (incl. rail transportation) 5% 4% 6% 10% 12% 12%



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Manufacturing




Expecting revenue to recover by 29%/18% in 2016/17E

We expect NARI Tech’s revenue to recover by 29% in 2016, following an

expected contraction in 2015 due to a significant delay in the order delivery

schedule (Figure 124). We believe the recovery will be mainly led by the power

grid automation segment, which accounted for c.70% of total revenue in 2014.

We are upbeat on the revenue recovery in 2016, given 1) NARI Tech had

Rmb10bn order backlog as of end-2014, which will be gradually converted into

revenue; management has guided catch-up in order delivery since 2H15 after a

significant delay in 1H15 (Figure 123); 2) accelerating growth in power

distribution automation products as the government targets investment of

Rmb1,700bn in grid distribution (including rural grid) in the 13th five-year

period (nearly double that in the 12th five-year period); and 3) a likely macro-

economic improvement after the government’s monetary and financial

stimulus.


78.3%

15.3%

-7.0%-13.6%

28.6%18.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

2012 2013 2014 2015E 2016E 2017E

Power grid automation Power generation & renewable energy

Energy conservation & environmental protection Industrial control (incl. rail transportation)


Expecting net profit to rebound by 102%/33% in 2016/17E

As a result of a revenue and margin recovery, we expect net profit to rebound

by 102% in 2016 (Figure 125) and ROE to be enhanced by 6ppt (Figure 126).

As an asset-light, tech-focused company, NARI Tech has maintained a superior

ROE/ROA to other T&D equipment companies that focus on primary

equipment. However, we do not expect ROE to return to previous high levels

due to its expansion into new business such as new energy EPC and railway

PPP, which have a lower asset return than its core automation business

(mostly software).

Note that NARI Tech booked a government grant of c.Rmb200-300m in the

last three years (Figure 128), which is mainly from VAT rebates to self-

developed software products. According to the Notice on VAT Policy of

Software Products issued by the Ministry of Finance in 2011, sales of self-

developed software products enjoy a 14% VAT rebate benefit, which should be

sustainable. Thus, we forecast a government grant trend largely in line with

power grid automation segment growth.

Figure 123: Order backlog vs.

revenue

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2013 2014 2015E

Order backlog (Rmb bn, excl. VAT) Revenue in the year (Rmb bn, excl.VAT)

Source: Deutsche Bank, Company data, Note: VAT at 17%

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Manufacturing



Figure 125: Net profit and yoy growth Figure 126: Return analysis

52.4%

22.9%

-19.8%

-52.8%

102.5%

33.3%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2013 2014 2015E 2016E 2017E


15.7% 16.7%14.4%

7.9%

12.4%14.0%

27.0% 26.4%

18.0%

8.2%

14.6%16.9%

12.1% 12.1%

8.7%

4.1%

7.3%8.5%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015E 2016E 2017E

Net margin ROE ROA



Figure 127: SG&A as % of total revenue Figure 128: Government grant as % of PBT

10.8%

9.0%

10.6%

13.7%

11.8%11.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2012 2013 2014 2015E 2016E 2017E


14%

17%

14%

25%

15%13%

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

350

2012 2013 2014 2015E 2016E 2017E

Government grant as % of PBT



Increased capex but still in net cash position; stable working capital

NARI Tech has consistently generated positive cash flow and maintained a net

cash position (at Rmb3.4bn at end-2014) without heavy capex (Figure 129). We

expect capex to increase to Rmb450m p.a. in 2015-16 due to the Nanjing

Ninghe Rail Phase I project, which is scheduled to be operational by early

2017. It has a planned capex of Rmb770m, of which c.Rmb150m has already

been spent in 2015 and the rest is set to be spent on progress of completion.

Despite the capex hike, we think NARI Tech still has a healthy balance sheet

with a significant net cash position. Hence, it should still have some headroom

for asset injection without totally relying on new share placement. We think

working capital turnover should be largely stable (Figure 130).

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Manufacturing



Figure 129: Cash flow and net gearing Figure 130: Working capital analysis

-38%-35%

-47%-46%

-44% -44%

-50%

-40%

-30%

-20%

-10%

0%

(1,000)

(500)

-

500

1,000

1,500

2012 2013 2014 2015E 2016E 2017E


0

50

100

150

200

250

300

350

2012 2013 2014 2015E 2016E 2017E

Receivable days Inventory days




Deutsche Bank vs. consensus; sensitivity analysis



NARI Tech 600406.SS HKD18.10



2015 7,695 9,248 -17%

2016 9,895 11,091 -11%

2017 11,676 12,842 -9%


2015 690 1,089 -37%

2016 1,339 1,604 -17%

2017 1,759 1,853 -5%


2015 606 1,231 -51%

2016 1,226 1,710 -28%

2017 1,634 2,079 -21%


8 2 1

7.1%

4.4%

1.3%

7.1%

6.3%

3.9%

1.2%

6.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Blended GPM GPM of Power grid automation

Revenue of Power grid automation

SG&A ratio

2016E 2017E

Source: Deutsche Bank, Bloomberg Finance LP


Sensitivity analysis Blended GPM: each 1% hike in blended GPM would increase NARI Tech’s

2016E/17E PBT by 7.1%/6.3%.

GPM of power grid automation segment: each 1% hike in the GPM of the power grid automation segment would increase NARI Tech’s 2016E/17E PBT by 4.4%/3.9%.

Revenue (volume) of power grid automation segment: each 1% increase in the revenue of the power grid automation segment would bring 1.3%/1.2% upside to NARI Tech’s 2016E/17E PBT.

SG&A ratio (as % of revenue): each 1% lower SG&A ratio as of total revenue would increase NARI Tech’s 2016E/17E PBT by 7.1%/6.3%.

NARI Tech’s business is quite

concentrated in the power

grid automation segment,

with segment revenue/gross

contribution at 69%/78% in

2014.

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Manufacturing




Figure 133: NARI Tech - key assumptions and metrics (2011-17E)

Operating assumptions 2011* 2012 2013 2014 2015E 2016E 2017E

Revenue growth 53.5% 78.3% 15.3% -7.0% -13.6% 28.6% 18.0%

Primary business 53.5% 78.2% 15.1% -6.9% -13.6% 28.6% 18.0%

Power grid automation NA NA 8.0% 3.2% -20.0% 25.0% 18.0%

Power generation & renewable energy NA NA 46.1% -36.1% -20.0% 20.0% 15.0%

Energy conservation & environmental protection NA NA 12.2% 27.8% 35.0% 25.0% 20.0%

Industrial control (incl. rail transportation) NA NA -1.6% -17.9% 15.0% 80.0% 20.0%

Non-primary business 9.7% 162.3% 110.7% -34.4% 0.0% 10.0% 10.0%

Gross margin 31.4% 28.8% 27.1% 27.2% 23.3% 26.2% 27.1%


Power grid automation NA 34.5% 35.3% 31.0% 25.0% 29.0% 30.0%

Power generation & renewable energy NA 15.7% 10.5% 13.9% 15.0% 16.0% 18.0%

Energy conservation & environmental protection NA 26.2% 23.0% 21.5% 20.0% 22.0% 22.0%

Industrial control (incl. rail transportation) NA 16.7% 16.7% 28.1% 30.0% 28.0% 28.0%

Non-primary business 63.5% 60.1% 67.7% 76.4% 70.0% 70.0% 70.0%

Other assumptions

Distribution Cost / Revenue -4.6% -4.8% -3.8% -4.1% -5.5% -5.0% -4.8%

Administrative Expenses / Revenue -6.5% -6.1% -5.2% -6.5% -8.2% -6.8% -6.5%

Capex (629) (124) (165) (302) (450) (450) (150)

Receivable turnover days 175 203 262 284 310 281 281 Source: Deutsche Bank, Company data, Note: * 2011 financials are not restated on asset injection in 2013, GPM excl. business taxes and surcharges

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Figure 134: NARI Tech – income statement (2011-17E)

Rmb m 2011* 2012 2013 2014 2015E 2016E 2017E

Sales Revenue 4,660 8,309 9,576 8,907 7,695 9,895 11,676


Power grid automation NA 5,481 5,917 6,106 4,885 6,106 7,205

Power generation & renewable energy NA 1,670 2,439 1,558 1,247 1,496 1,720

Energy conservation & environmental protection NA 479 537 687 927 1,159 1,390

Industrial control (incl. rail transportation) NA 667 656 539 620 1,116 1,340

Non-primary business 5 12 26 17 17 19 20


Cost of Sales (3,197) (5,912) (6,982) (6,484) (5,904) (7,305) (8,509)

Gross Profit 1,411 2,324 2,510 2,357 1,735 2,518 3,081




Financial expenses 7 (8) (8) (10) 1 (1) (2)


Investment income 1 - - - - - -

Profit from Operation 830 1,274 1,488 1,248 531 1,197 1,625



Profit before tax 979 1,482 1,796 1,461 691 1,399 1,864


Effective tax rate 12.6% 11.9% 10.0% 10.9% 11.0% 11.0% 11.0%

Profit after tax 856 1,305 1,615 1,301 615 1,245 1,659

Minority interest (1) (3) (15) (18) (9) (19) (25)

Net Profit Attributable to Shareholders 855 1,302 1,600 1,283 606 1,226 1,634

Net margin 18.3% 15.7% 16.7% 14.4% 7.9% 12.4% 14.0%

yoy growth % 65% 52% 23% -20% -53% 102% 33%

EPS 0.81 0.54 0.66 0.53 0.25 0.50 0.67

growth yoy% 59% -33% 22% -20% -53% 102% 33%

DPS 0.10 0.21 0.10 0.16 0.07 0.15 0.20

growth yoy% 0% 110% -52% 60% -53% 102% 33%

Dividend payout 12% 39% 15% 30% 30% 30% 30% Source: Deutsche Bank, Company data, Note: * 2011 financials are not restated on asset injection in 2013

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Manufacturing



Figure 135: NARI Tech – balance sheet (2011-17E)

Rmb m 2011* 2012 2013 2014 2015E 2016E 2017E

Non-current assets 660 858 1,042 1,322 1,612 1,921 1,939

Property, plant and equipment 368 467 498 531 610 680 740

R&D Expenses 88 110 103 94 94 94 94


Investment properties 61 59 93 58 58 58 58


Others 7 11 8 159 459 759 759

Current Assets 5,365 9,903 12,232 13,475 13,035 14,794 17,308

Cash and cash equivalents 1,598 2,376 2,772 3,901 3,979 4,407 5,084

Prepayments 184 446 399 425 346 445 525


Other receivables 76 289 112 118 102 131 155

Inventories 1,277 2,169 2,064 2,104 2,066 2,191 2,553

Total assets 6,025 10,761 13,274 14,797 14,647 16,715 19,247


Issued capital 1,050 1,576 2,429 2,429 2,429 2,429 2,429

Share capital reserve 124 434 1,113 1,148 1,148 1,148 1,148


Retained earnings 1,515 2,381 2,101 3,083 3,301 4,346 5,613

Minorities interests 13 40 57 71 81 99 124

Total equity 2,945 4,858 6,129 7,219 7,446 8,509 9,801


Long-term payables 3 3 - - - - -

Salaries payables - - 21 21 21 21 21

Deferred revenue - - 6 15 15 15 15

Special payables - 1 1 - - - -

Other non-current liabilities - 6 4 3 3 3 3


Borrowing due within one year 400 528 616 492 582 672 762


Deferred revenue 1,301 1,447 1,519 1,414 1,414 1,414 1,414

Dividend payable - 18 18 18 387 182 368

Salaries payable 49 65 44 44 44 44 44

Tax payables (27) 115 125 (24) (24) (24) (24)

Other current liabilities 33 86 53 36 36 36 36

Total shareholder equity and liabilities 6,025 10,761 13,274 14,797 14,647 16,716 19,247 Source: Deutsche Bank, Company data, Note: * 2011 financials are not restated on asset injection in 2013

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Manufacturing



Figure 136: NARI Tech – cash flow statement (2011-17E)

Rmb m 2011* 2012 2013 2014 2015E 2016E 2017E

Profit after tax 856 1,305 1,615 1,301 615 1,245 1,659

Depreciation & provision 25 45 48 60 71 80 90

Amortisation 4 16 23 32 89 61 42

Adj. for assets disposal (0) 2 1 (0) - - -

Change in working capital (532) (734) (1,076) 138 51 (417) (686)

Change in deferred assets/liabilities (8) (16) (41) (23) - - -

Net interest expense (1) (1) 8 10 (1) 1 2

Investment income (1) - - - - - -

Others 93 171 160 176 - - -

Total Operating Cashflow 435 789 738 1,693 824 970 1,108

Capex (629) (124) (165) (148) (150) (150) (150)

Investment payment - - - (154) (300) (300) -


Others (0) 0 (0) - - - -


Issuance/(Retirement) of new shares - 7 - - - - -

Borrowings 800 557 601 492 90 90 90

Repayments of loans (500) (568) (546) (616) - - -


Others - (4) (1) (13) - - -

Total Financing Cashflow 216 (220) (300) (411) (296) (92) (280)

Net cash flow 64 447 276 981 78 427 678

Source: Deutsche Bank, Company data, Note: * 2011 financials are not restated on asset injection in 2013

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Manufacturing



Company background

Headquartered in Nanjing, Jiangsu Province, NARI Technology Co. Ltd. (NARI

Tech) is a leading supplier of solutions for power and automation technologies

in China. Similar to Pinggao Electric and XJ Electric, NARI Tech’s ultimate

shareholder is State Grid Corporation of China.

NARI Tech currently derives most of its revenue (69% in 2014) from its

traditional core business of power grid automation by providing dispatching

automation, substation automation, distribution automation equipment and

solutions, etc. It expanded into industrial control (including rail transportation),

power generation & renewable energy, and energy conservation &

environmental protection in 2004/2013, respectively, by acquiring assets from

its parentco.

Figure 137: Business segment introduction


Power grid automation Production and sales of substation automation systems, high voltage relay systems, grid dispatching systems, grid security & stability systems, power distribution automation systems, power use information collection systems, smart meters, etc.

Power generation & renewable energy

Production and sales of excitation, high pressure pipes, power quality monitoring systems, wind turbine converters & control systems, solar control systems, etc; undertaking wind/solar system EPC projects

Energy conservation & environmental protection

Production and sales of grid energy efficiency management systems, EV charging/battery replacement, equipment, dry slag removal systems for coal-fired boilers, water recycling systems, etc.

Industrial control (incl. rail transportation)

Production and sales of rail automation systems and industrial automation systems, etc.


Brief company history In 2001, NARI Tech was founded by NARI Group, together with

Guodian Power (600795 CH), Nanjing Jingruike Power Equipment Co.,

Jiangsu Power Co., etc.

In 2003, the A share of NARI Tech (600406 CH) was successfully listed

on the Shanghai Stock Exchange.

In 2004, NARI Tech acquired Nanjing Sino-German Protection &

Substation Control System – which is involved in railway/metro

automation systems business – from the parentco.

In 2010, NARI Tech conducted a private placement and raised

proceeds of Rmb760m.

In 2011, NARI Tech acquired Anhui NARI Zhongtian and Anhui Jiyuan

from the parentco. These businesses are involved in relay protection,

grid automation, and smart meters.

In 2013, NARI Tech acquired Beijing Kedong, Beijing e-Huayuan,

Beijing NARI Futong, Nanjing NARI Solar and Grid Security & Stability

Control Tech Co. from the parentco through a share placement. The

main businesses of these acquired companies include distribution

automation, dispatching automation, and solar inverter/EPC.

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Manufacturing



Figure 138: Shareholding structure




Power grid automation Beijing Kedong Dispatching automation, distribution automation, power automation, etc.

100% 1,157 265

Power grid automation Beijing e-Huayuan Distribution automation 100% *330 24

Power grid automation Anhui Jiyuan Relay protection, grid automation 100% NA 35

Power grid automation Anhui NARI Zhongtian Smart meters 100% NA 28

Energy conservation & environmental protection

Beijing NARI Futong Auxiliary power station equipment, energy conservation & environmental protection (high temperature & pressure pipes, water-cooling systems, etc)

100% *878 57

Power generation & renewable energy

Nanjing NARI Solar Solar inverters, solar EPC 75% 615 32

Note: * represents 2013 figures Source: Deutsche Bank, Company data

100%

100%

100%


(SGCC)

NARI Group

State Grid China Electric Power

Research Institute (EPRI)



(SASAC)

43.01%

NARI Tech

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Manufacturing



Figure 140: Management profiles


Mr. Xiao Shijie 53 Chairman Bachelor's Degree, Research-level Senior Engineer

Previously served as deputy general manager of Fujian Power Co., Chief of China Electric Power Research Institute, general manager of NARI Group

Currently serving as chief of State Grid Information & Telecommunication Branch

Mr. Wu Weining 51 Board Director Master's Degree, Research-level Senior Engineer

Previously served as chief of Wuhan High-Voltage Research Institute, deputy general manager of NARI Group

Currently serving as deputy chief of China Electric Power Research Institute, deputy general manager of NARI Group

Mr. Hu Jiangyi 47 Board director PHD, Research-level Senior Engineer

Previously served as chief of East China Grid Dispatching Center, deputy chief of Zhejiang Power Co.

Currently serving as deputy chief of China Electric Power Research Institute, deputy general manager of NARI Group

Mr. Ren Weili 51 Board Director Bachelor's Degree, Senior Economist

Currently serves as deputy chief of China Electric Power Research Institute, deputy general manager of NARI Group, Board Director of Shanghai Zhixin Electric

Mr. Cao Peidong 47 Board Director Master's Degree, Senior Accountant

Currently serves as deputy chief of State Grid Finance Department

Mr. Ji Kan 46 Board Director, General Manager

Master's Degree, Research-level Senior Engineer

Previously served as chief of State Grid Nanjign Automation Research Institute - Urban/Rural Automation Branch, general manager of Urban/Rural Automation Co. of NARI Group

Currently serving as Party committee member of China Electric Power Research Institute, general manager of NARI Tech

Mr. Zheng Yuping 51 Board Director PHD, Professor-level Senior Engineer

Currently serving as deputy chief of EPRI, chief engineer of NARI Group

Mr. Yang Yingjian 60 Board Director Master's Degree, Professor-level Senior Engineer

Currently serving as researcher of EPRI

Mr. Wang Changbao

53 Deputy General Manager


Previously served as chief of General Service Department, chief of Tech Department of NARI Group

Mr. Zhu Jinda 51 Deputy General Manager


Previously served as chief of Rural Electric Co. of NARI Group and chief of State Grid Nanjing Automation Rural Electric Research Institute

Mr. Tang Hanqing 53 Deputy General Manager


Previously served as deputy chief of Information Tech Research Institute of EPRI, deputy chief of Information Tech. Co of NARI Group

Mr. Shen Haodong 53 Deputy General Manager


Previously served as chief of Power Distribution/Rural Electric Co. of NARI Tech

Mr. Pang Lacheng 43 Deputy General Manager

Master's Degree, Senior Engineer

Previously served as Chairman of Bejing Dianyan Huayuan, chief economist of NARI Tech

Mr. Xu Heping 60 Chief Engineer Bachelor's Degree, Professor-level Senior Engineer

Previously served as R&D Center of EPRI and NARI Group

Mr. Fang Feilong 47 CFO, Board Secretary Bachelor's Degree, Senior Accountant

Previously served as chief of Securities Department, Board Secretary of NARI Tech


16 September 2015

Manufacturing





Sales (CNYm) 3,818.4 4,605.8 6,002.1 7,841.5 9,269.2

EBITDA (CNYm) 613.4 1,102.0 1,466.4 1,944.6 2,343.4

Reported NPAT (CNYm) 398.6 693.2 972.3 1,342.5 1,666.6


DB EPS FD(CNY) 0.49 0.66 0.85 1.18 1.47

DB EPS growth (%) 194.4 34.6 30.4 38.1 24.1

PER (x) 19.5 20.4 26.4 19.1 15.4

EV/EBITDA (x) 13.4 13.3 18.2 13.8 11.3

DPS (net) (CNY) 0.05 0.50 0.26 0.35 0.44

Yield (net) (%) 0.5 3.7 1.1 1.6 1.9


the year end close


Key beneficiary of ultra-high-voltage (UHV) investment boom Pinggao is a leading UHV GIS player with 40% market share. Thanks to accelerated UHV build-out in China, we expect the company to deliver 40%/38%/24% earnings growth in 2015-17E. Moreover, its newly established mid-voltage business is also poised well for the catch-up investment in China’s distribution network upgrade, which is budgeted as Rmb2tr in 2015-20 by the government. We initiate with a Buy rating and a target price of Rmb27.1.

Most leveraged UHV play; new venture in mid-voltage products Thanks to its core UHV GIS products (”gas-insulated switchgear“, >70% revenue contribution), Pinggao stands as a key beneficiary of accelerated UHV investment, with revenue expected to double in 2014-17E. It is also the most leveraged UHV play (35% FY15E revenue) among peers. The planned huge investment in China’s distribution network will also benefit its new Tianjin venture focusing on low-mid voltage switchgear and component businesses.

Earnings to grow by 40%/38%/24% in 2015/16/17E, or 31% CAGR Based on our proprietary UHV approval/tender forecast, we expect Pinggao to receive orders of c.Rmb4-5bn p.a. during the period. We expect net profit to grow by 40%/38%/24% in 2015/16/17E, or a 31% CAGR through 2015-17E, driven not only by revenue growth but also by margin expansion on rising contribution from higher margin UHV products and operating leverage.

Valuation and risks We value Pinggao based on DCF through 2025E (WACC: 7.2%, tgr: 1%). The stock is currently suspended pending announcement of share placement and potential asset injection. Our current investment thesis is based on its existing business and we believe the planned corporate action is unlikely to be negative to the company as it is conditional on minority shareholder approval. Key downside risks include investment in UHV being below expectation or delayed versus forecast, margin and market share pressure from intensifying competition and growth in new mid-voltage business below expectation.

Rating

Buy Asia

China

Industrials

Manufacturing

Company

Pinggao Electric

Leading UHV GIS player; Initiating with Buy

Price at 19 Jun 2015 (CNY) 22.58


52-week range (CNY) 27.54 - 12.66


Michael Tong

Research Analyst

(+852) 2203 6167

[email protected]

Luka Zhu

Research Associate

(+852) 2203 6173

[email protected]


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6/13 12/13 6/14 12/14

Pinggao Electric



Absolute -1.6 12.8 72.7

Shanghai Composite 1.4 25.1 121.4


16 September 2015

Manufacturing




Running the numbers

Asia

China

Manufacturing

Pinggao Electric Reuters: 600312.SS Bloomberg: 600312 CH

Buy Price (19 Jun 15) CNY 22.58


52 Week range CNY 12.66 - 27.54


USDm 4,033

Company Profile

Headquartered in Pingdingshan, Henan province, Henan Pinggao Electric Co. Ltd. is a leading state-owned manufacturer of electric power transmission and distribution equipment. The Company's main products include Gas Insulated Switchgears (GIS), high-voltage isolating switches and earthing switches, open type sulfur hexafluoride (SF6) circuit breakers, etc.

Price Performance

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Pinggao ElectricShanghai Composite (Rebased)

Margin Trends

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Michael Tong



Financial Summary

DB EPS (CNY) 0.17 0.49 0.66 0.85 1.18 1.47

Reported EPS (CNY) 0.17 0.49 0.66 0.85 1.18 1.47

DPS (CNY) 0.05 0.05 0.50 0.26 0.35 0.44

BVPS (CNY) 3.5 4.7 5.2 5.5 6.5 7.6

Weighted average shares (m) 819 819 1,058 1,137 1,137 1,137




P/E (Reported) (x) 46.3 19.5 20.4 26.4 19.1 15.4

P/BV (x) 2.06 2.16 2.88 4.07 3.49 2.98

FCF Yield (%) 3.4 nm nm nm 1.5 2.8

Dividend Yield (%) 0.7 0.5 3.7 1.1 1.6 1.9

EV/Sales (x) 1.7 2.1 3.2 4.5 3.4 2.9

EV/EBITDA (x) 19.5 13.4 13.3 18.2 13.8 11.3

EV/EBIT (x) 32.6 17.2 19.2 22.3 16.1 13.1


Sales revenue 3,284 3,818 4,606 6,002 7,841 9,269

Gross profit 671 982 1,330 1,860 2,463 2,960

EBITDA 281 613 1,102 1,466 1,945 2,343

Depreciation 113 137 341 269 288 312


EBIT 168 477 761 1,197 1,656 2,031

Net interest income(expense) -47 -50 -18 -27 -39 -22




Profit before tax 150 464 809 1,192 1,645 2,042


Minorities 0 -1 10 41 56 69


Net profit 135 399 693 972 1,342 1,667


DB Net profit 135 399 693 972 1,342 1,667

Cash Flow (CNYm)

Cash flow from operations 471 -200 276 389 796 1,123

Net Capex -259 -462 -692 -400 -400 -400

Free cash flow 212 -662 -416 -11 396 723

Equity raised/(bought back) 0 3 1,335 0 0 0

Dividends paid 0 -97 -101 -529 -292 -403

Net inc/(dec) in borrowings 221 -55 -498 240 240 -159

Other investing/financing cash flows -233 158 -53 -27 -39 -22

Net cash flow 200 -653 266 -327 305 139

Change in working capital 247 -1,464 -1,048 -920 -930 -947


Cash and other liquid assets 1,055 245 558 231 536 675




Other assets 3,525 4,465 6,549 7,999 9,849 11,508

Total assets 6,404 7,226 9,912 11,166 13,433 15,319

Interest bearing debt 614 1,059 799 1,039 1,279 1,120




Minorities 4 3 220 261 316 386


Net debt -441 815 241 808 743 445

Key Company Metrics

Sales growth (%) 30.1 16.3 20.6 30.3 30.6 18.2

DB EPS growth (%) 676.1 194.4 34.6 30.4 38.1 24.1

EBITDA Margin (%) 8.5 16.1 23.9 24.4 24.8 25.3

EBIT Margin (%) 5.1 12.5 16.5 19.9 21.1 21.9

Payout ratio (%) 30.2 10.3 76.3 30.0 30.0 30.0

ROE (%) 4.8 11.9 14.3 16.0 19.6 20.8

Capex/sales (%) 7.9 12.1 15.0 6.7 5.1 4.3


Net debt/equity (%) -15.3 21.4 4.0 12.3 9.7 4.9

Net interest cover (x) 3.6 9.5 41.5 44.3 42.8 93.4


16 September 2015

Manufacturing



Investment thesis

Outlook

Pinggao is a leading UHV GIS (gas-insulated switchgear) player with c.40%

market share. Thanks to its core UHV GIS products (representing 15-20% of

UHV AC investment), Pinggao stands as a key beneficiary of the accelerated

UHV transmission line constructions, with revenue expected to double in 2014-

17E.

We forecast net profit to grow 40%/38%/24% in 2015/16/17E, or a 31% CAGR

through 2015-17E, driven not only by top-line growth but also margin

expansion on rising contribution from high-margin UHV products and

operating leverage. It is also the most leveraged UHV play among the T&D

equipment makers under our coverage with estimated 35% revenue

contribution in 2015.

Moreover, the government is accelerating power distribution investment, with

NEA recently laying out an ambitious investment target of Rmb2tr in 2015-20,

which will benefit its new Tianjin venture focusing on high-end low-mid

voltage switchgear and component businesses.

We initiate coverage on the stock with a Buy rating and a target price of

Rmb27.1.

Although the stock is currently suspended, our investment thesis is based on

its existing business and we regard the planned corporate action is unlikely to

be negative to the company as it is conditional on minority shareholder

approval.

Valuation

We derive our target price of Rmb27.1 for Pinggao Electric based on a DCF

methodology with a WACC of 7.2% and a terminal growth at 1%. Our WACC

assumption incorporates a 3.9% risk-free rate, 5.6% equity risk premium, 1.1

beta, 5.5% pre-tax cost of debt, 25% tax rate, and 50% debt-capital ratio.

Risks

Key downside risks include 1) lower-than-expected grid investment; 2)

significant delay of UHV line construction; 3) UHV order decline due to safety

faults/feasibility failure for the controversial UHV AC lines, given Pinggao’s

competitiveness lies in UHV AC GIS products; 4) market share contraction in

UHV AC tenders due to entry of new competitors; 5) slower-than-expected

ramp-up of its low-mid voltage distribution products; and 6) EPS dilution from

share placement for parentco asset acquisition.

16 September 2015

Manufacturing



Valuation and risks


We use DCF to derive our target price for Pinggao Electric (Figure 141). Our

WACC assumption is 7.2%, based on a 3.9% risk-free rate, a 5.6% equity risk

premium, a beta of 1.1 (based on historical share price correlation), a 5.5% pre-

tax cost of debt (based on current PBOC benchmark interest rate), a 25% tax

rate, and a 50% debt to capital ratio. By assuming 1% terminal growth, our

DCF-based target price is Rmb27.1. The stock closed at Rmb22.6 before it was

suspended on 23 June 2015. During the period, Shanghai Composite Index has

fallen 30%.

Figure 141: DCF projection through 2025E and WACC assumption

DCF valuation 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EBIT 1,219 1,684 2,064 2,068 2,073 2,078 2,083 2,088 2,093 2,099 2,105

Effective tax rate -15% -15% -15% -15% -15% -15% -15% -15% -15% -15% -15%

EBIT after tax 1,036 1,431 1,755 1,758 1,762 1,766 1,770 1,775 1,779 1,784 1,790

Add: depreciation & amortization 269 288 312 338 364 392 420 448 477 505 535

Less : project capex (400) (400) (400) (300) (300) (300) (300) (300) (300) (300) (200)

Add: change in working capital (920) (930) (947) 33 48 69 96 132 178 238 317

Free cash flow to the firm (15) 390 720 1,829 1,875 1,927 1,986 2,055 2,134 2,228 2,441

Discount factor 1.00 1.07 1.15 1.23 1.32 1.41 1.51 1.62 1.74 1.86 2.00

Discounted Cashflow ex TV 364 627 1,486 1,422 1,364 1,312 1,266 1,227 1,196 1,222


PV of TV 20,030

Summary 2015E


Less: net debt/(cash) at year end 409







after-tax


WACC 7.2% 3.9% 1.1 5.6% 5.5% 10.2% 4.1% 25.0% 50% 50%


Our target price implies 23x/19x 2016E/17E P/E, in line with a three-year

historical average at 23x (Figure 142), and is justified by a 31% earnings CAGR

in 2015-17E on the back of accelerated UHV product deliveries and expansion

of low-mid voltage business.

16 September 2015

Manufacturing



Figure 142: Historical one-year forward P/E Figure 143: Historical one-year forward P/B

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Share price as of

September 14, 2015






















Average (52%) (16%) 28.1 17.9 14.5 28.5 18.0 12.8 3.4 2.8 13.1 16.1 6.5 8.2 18.7 0.9





Average (30%) (2%) 9.9 8.0 6.7 9.5 7.6 6.3 2.0 1.7 20.7 21.5 10.6 11.2 21.4 3.8








Average (7%) (2%) 32.8 24.1 20.3 23.3 18.1 19.2 3.8 3.5 12.6 13.5 5.1 5.4 3.8 2.5




RoE ROA


P/BV

Valuations

EV/EBITP/E

Performance

Source: Deutsche Bank estimates, Bloomberg Finance LP Note : DB estimates for covered names and Bloomberg Finance consensus for non-rated stocks.

16 September 2015

Manufacturing



Risks

Industry-specific risks Lower-than-expected grid investment, as a result of macroeconomic

downturn or change in gridcos’ investment budget, would reduce the

equipment tender/procurement value, thus affecting the company’s

orders and revenue outlook.

Safety faults or feasibility failure for the controversial UHV AC lines: Still, some opposition believes that the UHV AC lines will pose high risks to the grid safety and stability and that EHV AC lines are safer and more economical. Pinggao Electric’s core UHV products are GIS for AC lines. Hence, the debate on UHV AC lines will affect the company more.

Significant delay of UHV construction may arise from unfavorable

natural conditions or difficulty in land acquisition/resident relocation,

which would affect the on-site construction progress.

Company-specific risks Market share decline in UHV AC products may arise from introduction

of new suppliers by SGCC in the case of capacity constraints of existing players when UHV deliveries surge. Pinggao’s high revenue concentration from GIS products makes it more vulnerable to the competition from new entries.

Slower-than-expected ramp-up of its low-mid voltage distribution products: There is risk of further delay in capacity ramp-up of the Tianjin low-mid voltage plants if the orders are below expectation. A low utilization may lead to bottom-line loss.

Corporate action to be announced: The stock is currently suspended before announcing a share placement proposal to acquire assets from the parentco and increase its working capital. Detailed circular is yet to be out and there is a risk of proposed deal not being value-accretive or EPS dilution from the new share placement. Though it is less likely given the requirement of minority shareholder approval for this connected transaction.

16 September 2015

Manufacturing



Highest exposure to UHV; new venture in distribution

Key points

Pinggao is highly leveraged to UHV investment boom, with revenue

from UHV products expected to double in 2014-17E (2014: 34% of the

total company revenue).

The company owns unrivalled market position in the UHV AC GIS

market with a 40% share, and we see few competitive threats from

peers.

In addition to strong revenue growth, we also expect margin

expansion from rising contribution from high-margin UHV products.

Pinggao is also well positioned for the rising distribution investment

with the establishment of Tianjin low-mid voltage plant.

Most leveraged UHV play

With accelerated project approvals and equipment tenders since 2014, UHV

will be the key growth driver of power grid investment. We expect 2/3/3 UHV

AC line approvals and 5/4/3 UHV DC approvals in 2015/16/17E, respectively.

YTD, two AC and two DC projects have already been approved and tendered.

Thanks to its core UHV GIS products (15-20% of UHV AC investment), Pinggao

Electric stands as a key beneficiary of accelerated UHV AC line constructions.

It is also the most leveraged UHV play among the T&D equipment players

under our coverage, with UHV revenue expected to double from c.Rmb1.5bn

in 2014 (c.30% of total) to c.Rmb3bn by 2017E.

Unrivalled leadership in UHV AC GIS market with 40% share

Back in 2008, Pinggao Electric successfully produced the first domestically

made 1100kV GIS through technology import and delivered two units for

Southeast Shanxi-Nanyang-Jingmen (1000kV AC) project. Since then, it has

secured a leading c.40% share in UHV AC GIS tenders (1000kV or above),

with the rest shared by China XD and New Northeast Electric (NEE). For the

two UHV AC equipment tenders this year, Pinggao Electric took 45% and 35%

of GIS orders, respectively (Figure 145).

Figure 145: UHV AC GIS market share in recent tenders

UHV lines (AC) GIS market share

Huainan-Nanjing-Shanghai 47%

Ximeng-Shandong 37%

West Inner Mongolia- South Tianjin 45%

Yuheng – Weifang 35% Source: Deutsche Bank, SGCC

16 September 2015

Manufacturing



Well exposed in UHV DC and EHV AC GIS tenders

Pinggao Electric’s competitiveness in GIS product has been further enhanced

with its stake increase in Pinggao Toshiba (from 50% to 75%) in 2014. Pinggao

Toshiba, which specializes in 72.5-550kV GIS with technology fully imported

from Toshiba Japan, has kept a good order track record. It not only

strengthens Pinggao’s competitiveness in EHV AC tenders (normally at 500kV)

but also in UHV DC ones, demonstrated by c.45% market share secured in two

UHV DC GIS tenders this year. Though GIS products account for much less of

total UHV DC investment (at c.3-5%) relative to UHV AC (at c.15-20%),

Pinggao Electric can still benefit from the upcoming UHV DC tenders, in

addition to UHV AC tenders.

Quantifying GIS order potential

Based on historical tender data (Figure 146), we arrive at some appropriate

estimates for GIS order value per each AC/DC tender.

In each UHV AC line, there are usually around 8-12 units of UHV GIS installed per substation; thus, a total of 24-36 GIS will be tendered per UHV AC line if there are three substations. With 35-45% market share, Pinggao normally obtains orders worth c.Rmb1-1.5bn, with c.11-17 units of UHV GIS (ASP: c.Rmb90-100m) and other switch products like circuit breakers and isolating switches.

In each UHV DC tender, Pinggao normally obtains orders worth c.Rmb100-500m, key products including 750 or 500kV GIS (ASP: c.Rmb20m and Rmb5m, respectively), and other switch products.

Figure 146: Major UHV/EHV GIS orders of Pinggao Electric


YTD 2015 West Inner Mongolia - Tianjin (1000kV AC) 17 units of 1100kV GIS 1,572

14 units of 550kV GIS 65

Yuheng – Weifang (1000kV AC) 11 units of 1100kV GIS 1,117


Hunan - Jiuquan (±800kV DC) 21 units of 750kV GIS 437

North Shanxi - Jiangsu (±800kV DC) 30 units of 500kV GIS 130

Hunan - Jiuquan /North Shanxi – Jiangsu (±800kV DC) Isolating switches/earthed switches 49

2014 Huainan-Nanjing-Shanghai (1000kV AC) 16 units of 1100kV GIS 1,591

Ximeng-Shandong (1000kV AC) 11 units of 1100kV GIS 1,029


East Ningxia-Zhejiang (±800kV DC) 16 units of 750 kV GIS;

564 61 units of DC disconnectors & earthed switches

56, 76, 8 units of 750kV, 500kV, 66kV DS/ES


2013 North Zhejiang – Fuzhou (1000kV AC) 16 units of 1100kV GIS 1,772

South Xi'an substation (750kV) 11 units of 800kV GIS NA

2012 Huainan-North Zhejiang-Shanghai (1000kV AC) 14 units of 1100kV GIS 1,605

4 sets of GIS busbars

2010 Southeast Shanxi- Nanyang-Jingmen expansion (1000kV AC)

3 units of 1100kV GIS NA

2006 Southeast Shanxi- Nanyang-Jingmen (1000kV AC) 2 units of 1100kV GIS NA


16 September 2015

Manufacturing



No imminent threat from new entries

UHV GIS is an oligopoly market, with Pinggao, China XD, and NEE splitting the

orders since 2006. We expect Pinggao’s leading market share in the UHV GIS

market to be maintained. While other T&D equipment companies like

Shandong Luneng and Taikai are also currently engaged in UHV GIS research

and may participate in tenders later, they are more likely to be introduced as

back-ups in case of capacity constraints among the three existing players. UHV

GIS is a high-tech product involving significant R&D investment, and the three

players have acquired many patents around the product.

Expecting 40%/18% UHV revenue growth in 2016/17E

Based on our proprietary UHV approval/tender forecast (see our F.I.T.T report -

Cleaner, Stronger, Smarter – Rmb2.8trn power grid upgrade plan published on

16 September 2015), we expect Pinggao to receive orders of c.Rmb4-5bn p.a.

during the period, a further boost over 2014, when UHV orders recorded a

historical high of c.Rmb3bn (Figure 147). In terms of revenue from UHV

products, we expect Pinggao to register growth of 35%/40%/18% in 2015-17

from Rmb1.5bn in 2014 (Figure 148).

In 2015, we expect Pinggao to deliver 20 units of UHV GIS, slightly up

from the 17 recorded in 2014. The 20 units include 11 from Ximeng-

Shandong and nine from Huainan-Nanjing-Shanghai, with a delivery

schedule of 6/14 in 1H/2H.

In 2016/17, we expect Pinggao to deliver 29/34 units, respectively,

considering both the tender progress and its UHV GIS capacity

(currently three units per month and aim for four per month). The 29

units to be delivered in 2016, including 17 from the West Inner

Mongolia – South Tianjin and 12 from the Yuheng – Weifang projects,

have been sitting in order backlog, with the delivery schedule specified

by SGCC to be by the end of 2016.

Figure 147: UHV order forecast (Rmb bn, incl. VAT) Figure 148: UHV revenue recognition forecast (Rmb bn,

excl. VAT)

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Margin expansion on growing contribution from high-margin UHV deliveries

We expect Pinggao’s profit to register a faster growth rate than revenue, in

view of margin improvement on more favorable product mix. UHV GIS enjoys

higher margin at >40% vs. 20% of regular voltage products due to its high-tech

nature and much less competition.

16 September 2015

Manufacturing



Despite some decline in UHV GIS ASP to c.Rmb90m from Rmb95-100m two

years ago, margin is not under threat, as costs are expected to trend down on

increasing application of localization components with domestic intellectual

property. Currently, due to lack of track record, only one UHV GIS (out of 8-10)

is allowed to be made of localized key components per one substation, while

others have to adopt more expensive imported parts. Pinggao expects that

three to five GIS will be allowed to be made of localized components in the

near future after domestic technology has demonstrated a longer track record

of reliability.

Expansion into low-mid voltage supports further growth

As discussed in our F.I.T.T report, the government is accelerating power

distribution investment, with NEA recently laying out an ambitious investment

target of >Rmb300bn in 2015 and >Rmb1,700bn in 2016-20, which implies a

nearly doubled investment budget in the 13th five-year period vs. the 12th five-

year period. As an essential part of the distribution network upgrade, NDRC

and NEA raised the budget in rural grid upgrade for 2015-16 by another

Rmb93bn in addition to the Rmb45bn spent in 1H15.

In late 2012, Pinggao expanded into high-end low-mid voltage switchgear

and component businesses by establishing the Tianjin smart vacuum

switchgear plant, which we consider as a strategic foresight move to better

position the company for the long-term growth after the UHV boom. Given

most of the distribution investment (especially rural grid upgrade) will go to

primary equipment such as low-mid voltage transformers, switches, etc.,

Tianjin plant is set to benefit from the distribution investment acceleration in

the next few years.

Competitive advantages of Tianjin plant

We identify two key advantages for Pinggao to establish a footprint in the

competitive low-mid voltage switchgear market.

Technology edge in high-end vacuum interrupters: The low-mid

voltage switchgear market is large but quite fragmented in China.

Those with strong R&D and self-supplied core components such as

vacuum interrupters (c.15% of costs) and solid sealing poles are

poised to take market share, as many switchgear makers still heavily

rely on third-party supply of key components. Pinggao Electric has

been equipped with technology capability of high-end vacuum

interrupters on absorption of Toshiba technology. Its Tianjin plant has

a designed annual capacity of 500k vacuum interrupters.

Support from SGCC: SGCC looks to break foreign companies’ monopoly in high-end vacuum interrupters through supporting domestic ones. As its subsidiary, the Pinggao Tianjin plant would be fully supported by SGCC and is likely to gain a bidding advantage.

Currently, in China’s vacuum interrupters market, foreign players like Siemens and ABB are dominating the high-end segment, while domestic leaders like Shaanxi Baoguang (600379 CH, non-rated), Yuguang Electric, and Chengdu Xuguang are competing in the mid-end segment.

16 September 2015

Manufacturing



Expect a gradual utilization ramp-up

The Tianjin plant is planned in two phases, each with production capability that

can generate revenue of c.Rmb3-4bn, according to the management. After

two-year preliminary work, Phase I has started to deliver products since late

2014. However, it is still at an early stage in terms of customer development,

with orders now mainly sourcing from EPC projects of Pinggao Group.

It may take some time for utilization ramp-up on 1) more participation in

SGCC’s tenders upon obtaining the operational qualification; and 2)

strengthening sales efforts in developing non-gridco customers. We expect

Tianjin plant to be still at a loss this year, but it may achieve breakeven or turn

profitable next year with sales gradually picking up. We have conservatively

forecast its revenue to reach Rmb800m with a gross margin of 20% in 2017E,

which is significantly behind its planned Phase I production capacity (Figure

153).

16 September 2015

Manufacturing



Financial outlook


We summarize the financial outlook by segment below.

GIS (Gas Insulated Switchgears) segment:

Figure 149: GIS (Gas Insulated Switchgears) segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 2,524 2,594 3,464 4,503 5,854 6,732 The paramount revenue/gross profit driver for the company

Around 35% of segment revenue was contributed by UHV products in 2014

Expecting segment revenue to see strong growth in next few years on deliveries of 20/29/34 UHV GIS in 2015/16/17E (vs.17 in 2014); growth in 2015E is also attributed to full-year consolidation of Pinggao Toshiba vs. one quarter consolidation in 2014

GPM to expand on more UHV GIS deliveries, which has a higher margin (>40%) than regular voltage products (20-30%)

yoy gr. % 36% 3% 34% 30% 30% 15%

Gross profit 603 717 1,044 1,441 1,932 2,289

yoy gr. % 67% 19% 46% 38% 34% 18%

GPM % 23.9% 27.6% 30.1% 32.0% 33.0% 34.0%


Component parts and others segment:

Figure 150: Component parts and others segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 95 133 333 532 612 704 Segment revenue of 2014 includes c.Rmb100m from operation and maintenance revenue, which is projected to reach c.Rmb300m in 2015

GPM to remain stable (high margin for components sales)

yoy gr. % -63% 40% 151% 60% 15% 15%

Gross profit 44 57 124 224 257 296

yoy gr. % -55% 30% 118% 80% 15% 15%


SF6 circuit breaker segment:

Figure 151: SF6 circuit breaker segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 167 437 394 394 433 455 Expecting segment revenue to stay largely stable, marginally helped by UHV products

Expecting GPM to remain stable; we note that the negative GPM in 2012 was due to low revenue recognition

yoy gr. % 10% 162% -10% 0% 10% 5%

Gross profit (21) 77 86 87 95 100

yoy gr. % 19% -469% 11% 1% 10% 5%

GPM % -12.5% 17.6% 21.7% 22.0% 22.0% 22.0% Source: Deutsche Bank estimates, Company data

16 September 2015

Manufacturing



High-voltage isolating switches/earthed switches segment:

Figure 152: High-voltage switchgears/earthed segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 167 289 279 329 362 380 Around 20% of segment revenue was contributed by UHV products in 2014

Expecting segment revenue to stay largely stable, marginally helped by UHV products (we note that Pinggao Electric received orders of UHV isolating switches/earthed switches valued at Rmb49m from the Jiuquan-Hunan and Shanxi-Jiangsu DC lines

Expecting GPM to remain stable; we note that the negative GPM in 2012 was due to a significant decline in revenue

yoy gr. % -14% 73% -3% 18% 10% 5%

Gross profit (4) 78 36 49 54 57

yoy gr. % -124% -2159% -54% 37% 10% 5%

GPM % -2.3% 27.1% 12.9% 15.0% 15.0% 15.0%


Mid-voltage switchgears segment:

Figure 153: Mid-voltage switchgears segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 0 0 0 80 400 800 Mid-voltage switchgears – Tianjin Plant, will be reported as a separate segment once sales reach a certain scale

Segment sales will benefit from China’s increased budget for grid distribution investment; while planned sales at full capacity can reach c.Rmb4bn, we expect a gradual ramp-up

Normalized GPM should be at c.20% for the mid-high end mid-voltage products; we factored in lower margin at ramp-up period

yoy gr. % NA NA NA NA 400% 100%

Gross profit 0 0 0 12 72 160

yoy gr. % NA NA NA NA 500% 122%

GPM % NA NA NA 15.0% 18.0% 20.0%


Revenue mix trend


2012 2013 2014 2015E 2016E 2017E

SF6 circuit breaker 5% 11% 9% 7% 6% 5%

High voltage isolating switches/earthed switches 5% 8% 6% 5% 5% 4%

GIS (Gas Insulated Switchgears) 77% 68% 75% 75% 75% 73%

Mid-voltage switchgears 0% 0% 0% 1% 5% 9%

Component parts and others 3% 3% 7% 9% 8% 8%

Non-primary business 10% 10% 3% 3% 2% 2% Source: Deutsche Bank estimates, Company data

Gross profit mix trend

Figure 155: Gross profit trend

2012 2013 2014 2015E 2016E 2017E

SF6 circuit breaker -3% 8% 6% 5% 4% 3%

High voltage isolating switches/earthed switches -1% 8% 3% 3% 2% 2%

GIS (Gas Insulated Switchgears) 90% 73% 79% 77% 78% 77%

Mid-voltage switchgears 0% 0% 0% 1% 3% 5%

Component parts and others 7% 6% 9% 12% 10% 10%


16 September 2015

Manufacturing




Expecting revenue to increase by 30%/31%/18% in 2015-17E on UHV GIS

delivery

With over 70% of total revenue exposed to the GIS, Pinggao is a direct

beneficiary of UHV investment. We expect the company to record

30%/31%/18% revenue growth in 2015-17E (Figure 156), highest among our

covered T&D power equipment companies. Specifically, in 2015, revenue

increase is also partially attributable to full-year consolidation of Pinggao

Toshiba (vs. one quarter consolidation in 2014), which recorded sales of

Rmb1.1bn in 2014 and is expected to achieve sales of c.Rmb1.3bn in 2015E.

It is worth noting that, given the UHV AC line approvals come earlier than DC

lines YTD and the delivery cycle of AC line equipment is shorter than that of DC

line equipment, we believe the revenue recognition for Pinggao will be faster

and more visible than peers with higher exposure to DC lines.

Also, mid-voltage product is another growth driver, and we expect its revenue

contribution to trend up to c. 9% by 2017 (Figure 154).


30%

16%

21%

30% 31%

18%

0%

10%

20%

30%

40%

0

2,000

4,000

6,000

8,000

10,000

2012 2013 2014 2015E 2016E 2017E

SF6 circuit breaker

High voltage isolating switches/earthed switches

GIS (Gas Insulated Switchgears)

Mid-voltage switchgears

Component parts and others

yoy growth %


Net profit expected to grow 40%/38%/24% in 2015-17E; margin/return on

upward trend

We expect net profit to grow 40%/38%/24% in 2015/16/17E, or a 31% CAGR

through 2015-17E (Figure 157), driven not by only revenue growth but also by

net margin expansion (up to 18% by 2017E from 15% in 2014) on rising

contribution from higher-margin UHV products and operating leverage.

Company return measured by ROE/ROA should also sustain the upward trend

thanks to continuous improvement in margin (Figure 158).

16 September 2015

Manufacturing



Figure 157: Net profit (Rmb m) and yoy growth Figure 158: Return analysis

678%

194%

74%40% 38% 24% 0%

100%

200%

300%

400%

500%

600%

700%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2012 2013 2014 2015E 2016E 2017E


4.1%

10.4%

15.1%16.2%

17.1% 18.0%

4.7%

10.5%11.8%

15.4%

18.2% 19.3%

2.1%

5.5%7.0%

8.7%10.0% 10.9%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015E 2016E 2017E

Net margin ROE ROA



UHV deliveries may help improve cash turnover

After completing the build-up of the Tianjin mid-voltage switchgears plant,

there should be no further significant capex requirement, except for potential

overseas plants investment after planned asset acquisition from the parentco.

We factored in Rmb400m capex p.a. through 2015-17E. Pinggao Electric will

maintain a healthy balance sheet position with a low gearing level (Figure 159)

(note the company is likely to issue new shares for acquiring parentco assets

and increasing working capital as per recent announcement).

On the working capital front, the cash conversion cycle has lengthened in

2012-14. As we expect UHV product to entail more favorable prepayment

terms, we expect the cash conversion cycle to improve a bit over the next

three years (Figure 160).

Figure 159: Cash flow (Rmb m) and net gearing Figure 160: Working capital analysis

-29%

9%

-3%

6%4% 5%

-40%

-30%

-20%

-10%

0%

10%

20%

(800)

(600)

(400)

(200)

-

200

400

600

800

2012 2013 2014 2015E 2016E 2017E


-

50

100

150

200

250

300

350

2012 2013 2014 2015E 2016E 2017E

Receivable turnover days Inventory turnover days

Payable turnover days Cash conversion cycle



16 September 2015

Manufacturing



Deutsche Bank estimates vs. consensus; sensitivity analysis

Figure 161: Deutsche Bank estimates vs. consensus Figure 162: 2016/17E profit before tax (PBT) sensitivity


Pinggao Electric 600312.SS HKD27.10



2015 6,002 6,552 -8%

2016 7,841 8,408 -7%

2017 9,269 9,121 2%


2015 1,466 1,559 -6%

2016 1,945 2,106 -8%

2017 2,343 2,324 1%


2015 972 1,068 -9%

2016 1,342 1,467 -9%

2017 1,667 1,654 1%


11 1 0

4.8%

3.6%

1.2%

4.8%4.5%

3.3%

1.1%

4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Blended GPM GPM of GIS segment

Revenue of GIS segment

SG&A ratio

2016E 2017E

Source: Deutsche Bank estimates, Bloomberg Finance LP Source: Deutsche Bank estimates

Sensitivity analysis Blended GPM: each 1% hike in blended GPM would increase Pinggao

Electric’s 2016E/17E PBT by 4.8%/4.5%.

GPM of GIS segment: each 1% hike in GPM of GIS segment would increase Pinggao Electric’s 2016E/17E PBT by 3.6%/3.3%.

Revenue of GIS segment: each 1% increase in revenue of the GIS segment would bring 1.2%/1.1% upside to Pinggao Electric’s 2016E/17E PBT.

SG&A ratio (as % of revenue): each 1% lower SG&A ratio as a percentage of total revenue would increase Pinggao Electric’s 2016E/17E PBT by 4.8%/4.5%.

16 September 2015

Manufacturing




Figure 163: Pinggao Electric – key assumptions and metrics (2011-17E)

Operating assumptions 2011 2012 2013 2014 2015E 2016E 2017E

Revenue growth


SF6 circuit breaker -63.7% 10.0% 161.9% -9.8% 0.0% 10.0% 5.0%

High voltage isolating switches/earthed switches -21.5% -14.3% 73.3% -3.5% 18.0% 10.0% 5.0%

GIS (Gas Insulated Switchgears) 56.8% 35.8% 2.7% 33.5% 30.0% 30.0% 15.0%

Mid-voltage switchgears NA NA NA NA NA 400.0% 100.0%

Component parts and others 53.3% -62.6% 39.8% 150.9% 60.0% 15.0% 15.0%

Non-primary business 12.4% 392.8% 10.6% -62.7% 20.0% 10.0% 10.0%

Gross margin


SF6 circuit breaker -11.5% -12.5% 17.6% 21.7% 22.0% 22.0% 22.0%

High voltage isolating switches/earthed switches 8.0% -2.3% 27.1% 12.9% 15.0% 15.0% 15.0%

GIS (Gas Insulated Switchgears) 19.4% 23.9% 27.6% 30.1% 32.0% 33.0% 34.0%

Mid-voltage switchgears 0.0% 0.0% 0.0% 0.0% 15.0% 18.0% 20.0%

Component parts and others 38.4% 46.1% 42.9% 37.3% 42.0% 42.0% 42.0%


Other assumptions

Sales/total revenue -8.4% -5.9% -6.4% -4.1% -3.8% -3.5% -3.5%

adminsitrative expenses/total revenue -7.5% -8.0% -5.6% -6.4% -5.8% -5.5% -5.3%

Capex (227) (260) (462) (692) (400) (400) (400)

Receivable turnover days 233 214 271 339 329 310 310 Source: Deutsche Bank estimates, Company data, Note: 1) 2014 financial reflects one quarter consolidation of Pinggao Toshiba while 2015 will reflect full-year consolidation; 2) GPM excl. business tax and surcharges

16 September 2015

Manufacturing



Figure 164: Pinggao Electric – income statement (2011-17E)

Rmb m 2011 2012 2013 2014 2015E 2016E 2017E

Revenue 2,525 3,284 3,818 4,606 6,002 7,841 9,269


SF6 circuit breaker 152 167 437 394 394 433 455

High voltage isolating switches/earthed switches 194 167 289 279 329 362 380

GIS (Gas Insulated Switchgears) 1,858 2,524 2,594 3,464 4,503 5,854 6,732

Mid-voltage switchgears - - - - 80 400 800

Component parts and others 254 95 133 333 532 612 704

Non-primary business 67 332 367 137 164 181 199


Cost of Sales (2,045) (2,614) (2,836) (3,276) (4,142) (5,378) (6,310)

Gross Profit 463 657 953 1,294 1,814 2,402 2,887

Gross margin 18.3% 20.0% 25.0% 28.1% 30.2% 30.6% 31.1%



Financing expenses (40) (47) (50) (18) (27) (39) (22)



Profit from operation 4 148 454 793 1,170 1,617 2,010

Add: non-operating income 36 5 10 34 44 58 69Less: non-operating expenses (8) (3) (0) (18) (23) (30) (36)

Profit before tax 31 150 464 809 1,192 1,645 2,042


Effective tax rate -99.8% -11.7% -15.3% -13.9% -15.0% -15.0% -15.0%

Profit after tax 16 (262) (214) (293) (348) (431) (491)

Minority interest 1 (0) 1 (10) (41) (56) (69)

Net profit attributable to Shareholders 17 135 399 693 972 1,342 1,667

Net margin 0.7% 4.1% 10.4% 15.1% 16.2% 17.1% 18.0%

growth yoy% 383% 678% 194% 74% 40% 38% 24%

Basic EPS (Rmb) 0.02 0.17 0.49 0.66 0.85 1.18 1.47

growth yoy% 676% 194% 35% 30% 38% 24%

DPS 0.00 0.05 0.05 0.50 0.26 0.35 0.44

growth yoy% 0% 900% -49% 38% 24%

Dividen payout 0.0% 30.2% 10.3% 76.3% 30.0% 30.0% 30.0% Source: Deutsche Bank estimates, Company data, Note that 2014 financial reflects one quarter consolidation of Pinggao Toshiba while 2015 will reflect full-year consolidation

16 September 2015

Manufacturing



Figure 165: Pinggao Electric – balance sheet (2011-17E)

Rmb m 2011 2012 2013 2014 2015E 2016E 2017E


Property, plant and equipment 993 1,114 1,638 2,124 2,255 2,367 2,455

Investment in Associates 353 371 384 - - - -

Prepaid expenses 1 1 3 1 1 1 1



Others 143 189 229 562 562 562 562

Current Assets 3,157 4,355 4,444 6,500 7,623 9,779 11,576

Cash and cash equivalents 674 1,055 245 558 231 536 675

Trade/bill receivables 1,612 1,928 2,839 4,272 5,402 6,665 7,879

Prepayments 152 277 340 326 425 555 656

Inventories 680 1,061 969 1,309 1,530 1,987 2,332

Other current assets 40 34 52 35 35 35 35

Total assets 4,971 6,404 7,226 9,912 11,166 13,433 15,319


Issued capital 819 819 819 1,137 1,137 1,137 1,137

Share capital reserve 1,337 1,337 1,921 3,024 3,024 3,024 3,024


Retained earnings 441 564 879 1,453 1,897 2,947 4,211


Total equity 2,738 2,874 3,814 6,089 6,573 7,679 9,013


Long term bank borrowings - 60 - - 240 480 720

Bonds payable 110 397 398 - 399 399 -

Other payables 28 32 33 10 10 10 10


Short-term debt 200 156 603 400 400 400 400

Current portion of long-term liabilities 74 - 58 399 - - -

Interest Payable 22 14 12 10 10 10 10


Dividend payable 3 3 3 3 - - -

Deferred revenue 168 390 259 364 364 364 364

Other creditors and accruals 510 512 75 52 66 86 100

Tax payable (8) 43 150 139 204 239 284

Total shareholder equity and liabilities 4,971 6,404 7,226 9,912 11,166 13,433 15,319 Source: Deutsche Bank estimates, Company data, Note that 2014 financial reflects one quarter consolidation of Pinggao Toshiba while 2015 will reflect full-year consolidation

16 September 2015

Manufacturing



Figure 166: Pinggao Electric – cash flow statement (2011-17E)

Rmb m 2011 2012 2013 2014 2015E 2016E 2017E

Cashflow from operating activities

Profit after tax 16 136 397 703 1,013 1,398 1,736

Depreciation & amortisation 83 113 137 182 269 288 312

Amortisation for deffered expenses 1 0 0 2 - - -


Adj. for assets disposal 5 2 (0) 15 - - -

Adj. for investment income (16) (28) (28) (50) - - -

Adj. for net interest expense 45 51 57 26 27 39 22

Net changes in working capital 540 247 (1,464) (1,048) (920) (930) (947)

Others (665) (85) 682 396 - - -

Total Operating Cashflow 43 471 (200) 276 389 796 1,123

Cashflow from investing activitiesCapex (227) (260) (462) (692) (400) (400) (400)

Investment income - - - 20 - - -

Others 31 9 - (22) - - -


Cashflow from financing activities

Issuance/(Retirement) of new shares - - 3 1,335 - - -

Issue of bonds 498 895 - - - - -

Borrowings 400 700 753 876 240 240 240

Repayments of loans (821) (1,374) (808) (1,374) - - (399)

Interest Paid (45) (51) (57) (26) (27) (39) (22)

Dividend paid - - (97) (101) (529) (292) (403)

Others 22 (190) 214 (21) - - -

Total Financing Cashflow 53 (21) 9 689 (316) (90) (584)

Net cash flow (99) 200 (653) 271 (327) 305 139 Source: Deutsche Bank estimates, Company data, Note that 2014 financial reflects one quarter consolidation of Pinggao Toshiba while 2015 will reflect full-year consolidation

16 September 2015

Manufacturing



Company background

Headquartered in Pingdingshan, Henan Province, Henan Pinggao Electric Co.

Ltd., is a leading supplier of ultra-high and high-voltage switchgear products in

China.

It specializes in switch products (90% of total revenue), which mainly include

Gas Insulated Switchgears (GIS), isolating switches, earthing switches, and

SF6 circuit breakers at a voltage ranging from 72.5 to 1100kV. Specifically, GIS

is the company’s core product, which contributed 75% of total revenue and

79% of total gross profit in 2014. Its competitiveness in GIS products is mostly

reflected in its leading market share in UHV GIS tenders (avg. at 40%).

Figure 167: Business introduction by segment


SF6 circuit breaker production and sales of 72.5-1100kV open type SF6 circuit breakers

High-voltage isolating switches/earthing switches

production and sales of 72.5-1100kV high-voltage isolating switches and earthing switches

GIS (Gas Insulated Switchgears) production and sales of 72.5-1100kV SF6 GIS (Gas Insulated Switchgears)

Mid-voltage switchgears production and sales of vacuum interrupters, embedded poles, smart pole-mounted vacuum switches, and smart GIS, etc. (may be reported as a separate segment once sales reach certain scale)

Component parts and others production and sales of components and providing operation & maintenance service


Brief company history In 1998, Pingdingshan Pinggao Electric Co. Ltd. was founded by

Pinggao Group (formerly known as Pingdingshan Tianying Group) and

four other companies.

In 1999, Pingdingshan Pinggao Electric Limited Co. was renamed to

Henan Pinggao Electric Co. Ltd.

In 2001, Pinggao Electric’s A share (stock code: 600312 CH) was listed

on the Shanghai Stock Exchange.

In 2010, 100% stake of Pinggao Group (direct parentco of Pinggao

Electric) was freely transferred to China Electric Power Equipment and

Technology Co. Ltd. (wholly owned subsidiary of State Grid

Corporation of China (SGCC)). Thus, SGCC effectively took over the

control of Pinggao Electric.

In 2012, the 100% stake of Pinggao Group was transferred from China

Electric Power Equipment and Technology Co. Ltd. to SGCC. Pinggao

Group thus became a direct subsidiary of SGCC, just like NARI Group,

XJ Group, and China Electric Power Research Institute.

In March 2014, Pinggao Electric acquired certain high- to ultra-high

voltage switchgear business from Pinggao Group by private placement

of 318m shares. After the placement, Pinggao Group’s direct stake

ownership in Pinggao Electric increased from 24.91% to 45.9%.

In September 2014, Pinggao Electric increased stake in Pinggao

Toshiba from 50% to 75%. The main business of Pinggao Toshiba

includes production and sales of 72.5-550kV GIS, SF6 circuit breakers,

etc.

16 September 2015

Manufacturing



Stock trading suspension pending asset injection announcement The stock of Pinggao Electric has suspended trading since 23 June 2015, pending the company’s announcement on planned share placement. According to the company, the proceeds of placement will be used for asset injection from the parentco, new project investment and working capital enhancement. The target assets from Pinggao Group include its overseas EPC and low-mid voltage products business. Management indicates that the net profit of the target assets is c.Rmb200m, including c.Rmb40m from overseas. The stock will resume trading by 2 November 2015 as per its latest announcement, dated 8 September 2015.




(SGCC)



(SASAC)

100%

Pinggao Electric

Pinggao Group

100%

45.94%

16 September 2015

Manufacturing





Mr. Li Yonghe 44 Chairman Senior Engineer, MBA;

Previously served as deputy chief, Party committee member of China Electric Power Construction Research Institute, Chairman of the Board of Directors of Pinggao Electric;

Currently serving as executive director, general manager, Party deputy secretary of Pinggao Group

Mr. Wei Guanglin 52 Board Director Professor-level Senior Engineer, Master's degree, Part-time Professor;

Previously served as deputy manager of Pingdingshan Tianying Group, general manager of Pinggao Electric, Chairman of the Board of Directors;

Currently serving as Party secretary, deputy general manager of Pinggao Group

Mr. Li Wenhai 55 Board Director Professor-level Senior Engineer, MBA;

Currently serving as Party secretary, deputy general manager of Pinggao Group

Mr. Shi Houyun 44 Board Director Senior Auditor, MBA;

Currently serving as deputy chief of SGCC Audit Department

Mr. Pang Qingping 51 Board Director, General Manager

Senior Engineer, MBA;

Previously served as Chairman of Pinggao Toshiba, Board Director of Pinggao Electric

Mr. Zhang Jianguo 52 Board Director Senior Engineer, Bachelor's Degree;

Currently serving as deputy general manager of Pinggao Group

Mr. Tan Shengwu 46 Deputy General Manager

Engineer, Bachelor’s Degree;

Previously served as chief engineer of R&D center of Pinggao Electric

Mr. Zhang Wujie 50 Deputy General Manager

Engineer, MBA;

Previously served as chief technologist of Pinggao Electric, deputy general manager of Pinggao Toshiba

Mr. Sunpeng 38 Deputy General Manager

Senior Economist, Master’s Degree;

Previously served as chief of Human Resources Department of Pinggao Electric

Mr. Zou Gaopeng 48 Deputy General Manager

Senior Engineer, Bachelor’s Degree;

Currently serves as deputy chief engineer, manager of intelligent control department of Pinggao Electric;

Mr. Li Huiping 46 Chief Financial Officer

Senior Accountant, Bachelor’s Degree;

Previously served as chief accountant of Pinggao Toshiba, chief of Finance Department of Pinggao Electric, and deputy chief of Pinggao Group

Mr. Zhao Yaping 53 Chief Engineer Senior Engineer, Master’s Degree;

Previously served as chief of Tech, R&D Department of Pinggao Toshiba

Mr. Chang Yongbin 42 Board Secretary MBA;

Previously served as Board Secretary and chief of Securities Department


16 September 2015

Manufacturing





Sales (CNYm) 13,197.6 14,082.0 13,446.5 16,398.9 18,006.8

EBITDA (CNYm) 813.9 1,183.7 1,355.6 2,095.0 2,476.7

Reported NPAT (CNYm) 333.8 684.1 865.0 1,373.9 1,631.2


DB EPS FD(CNY) 0.08 0.13 0.17 0.27 0.32

DB EPS growth (%) 183.8 74.2 26.4 58.8 18.7

PER (x) 44.0 30.9 34.9 22.0 18.5

EV/EBITDA (x) 8.0 11.4 16.4 10.6 8.8

DPS (net) (CNY) 0.08 0.10 0.12 0.13 0.16

Yield (net) (%) 2.4 2.4 2.0 2.3 2.7


the year end close


Earnings growth but no valuation upside; initiating with Hold With the broadest product portfolio in the power equipment sector, a partnership with GE and a well developed export business, China XD ranks as one of the leading UHV equipment makers. Close to 20% of revenue comes from UV products, which will contribute to earnings rising 130% by 2017, but valuations appear fair, with a P/E of 20x looking out two years. RoE is also low at 7.2% for the next year, while expense control remains a challenge. Initiating with a Hold and target price of Rmb6.9.

Benefiting from UHV investment; ambitious export growth target UHV will be the key growth driver for the company over the next few years. Thanks to broad product exposure to both UHV AC (GIS/transformers/reactors) and DC (converter valves/transformers), China XD will benefit from accelerated UHV transmission line constructions with revenue expected to grow 28% in 2014-17. GE is a strategic shareholder with a 15% stake. The company targets 30% revenue from exports by 2020.

Strong earnings growth on UHV and opex control, but more efforts needed Earnings growth of 26%/59%/19% in 2015/16/17E will be significantly higher than our forecasts for revenue expansion, as we model a marked improvement in expense control where it ranks poorly against its peers. Operating margins have the potential to improve more than our 2.4ppt forecast reduction in SG&A/revenue ratio but we refrain from counting this further upside until management shows evidence of delivering on this front.

Valuation and risks We value China XD based on DCF through 2025E (WACC: 7.9%, tgr: 1%). Our target price translates into 26x/22x 2016/17E EPS. Key risks include higher/lower-than expected grid investment (incl. UHV); market share gain/loss in UHV and regular products; variance in gross margin; and higher/lower-than-expected SG&A expense.

Rating

Hold Asia

China

Industrials

Manufacturing

Company

China XD

Comprehensive product offering; initiating with Hold on valuation



52-week range (CNY) 14.04 - 4.16


Michael Tong

Research Analyst

(+852) 2203 6167

[email protected]

Luka Zhu

Research Associate

(+852) 2203 6173

[email protected]


0

4

8

12

16

9/13 3/14 9/14 3/15

China XD



Absolute -37.1 -56.1 38.6

Shanghai Composite -21.5 -38.5 33.2


16 September 2015

Manufacturing




Running the numbers

Asia

China

Manufacturing

China XD Reuters: 601179.SS Bloomberg: 601179 CH

Hold Price (15 Sep 15) CNY 5.89


52 Week range CNY 4.16 - 14.04


USDm 4,741

Company Profile

Founded in 2008 in Xi'an, Shaanxi province, China XD Electric Co. Ltd. is a leading electric power transmission and distribution equipment manufacturer with a comprehensive product line. Main products include switches, transformers, electric reactors, insulators, capacitors and electrical/electronic products etc. The Company is also involved in related engineering, trading, research, development and testing business. It has export footprints in over 40 countries and regions.

Price Performance

0

4

8

12

16


China XD Shanghai Composite (Rebased)

Margin Trends

0

4

8

12

16

12 13 14 15E 16E 17E



0

2

4

6

8

10

-10-505

10152025

12 13 14 15E 16E 17E


Solvency

0

2

4

6

8

10

12

-50

-40

-30

-20

-10

0

12 13 14 15E 16E 17E


Michael Tong



Financial Summary

DB EPS (CNY) 0.03 0.08 0.13 0.17 0.27 0.32

Reported EPS (CNY) 0.03 0.08 0.13 0.17 0.27 0.32

DPS (CNY) 0.00 0.08 0.10 0.12 0.13 0.16

BVPS (CNY) 3.2 3.5 3.5 3.6 3.7 3.9

Weighted average shares (m) 4,357 4,357 5,126 5,126 5,126 5,126




P/E (Reported) (x) 132.0 44.0 30.9 34.9 22.0 18.5

P/BV (x) 1.05 0.92 2.19 1.64 1.58 1.50

FCF Yield (%) 3.8 nm nm 2.4 2.2 3.6

Dividend Yield (%) 0.0 2.4 2.4 2.0 2.3 2.7

EV/Sales (x) 0.8 0.5 1.0 1.7 1.4 1.2

EV/EBITDA (x) 18.6 8.0 11.4 16.4 10.6 8.8

EV/EBIT (x) 110.2 23.5 22.1 29.1 14.9 11.8


Sales revenue 12,604 13,198 14,082 13,446 16,399 18,007

Gross profit 2,616 2,989 3,560 3,530 4,582 5,134

EBITDA 557 814 1,184 1,356 2,095 2,477

Depreciation 408 460 483 503 526 548


EBIT 94 276 614 765 1,487 1,852

Net interest income(expense) -14 -25 60 49 39 28




Profit before tax 199 394 823 1,001 1,662 2,017


Minorities -27 -22 -23 -29 0 33


Net profit 118 334 684 865 1,374 1,631


DB Net profit 118 334 684 865 1,374 1,631

Cash Flow (CNYm)

Cash flow from operations 1,140 290 3 1,119 1,020 1,429

Net Capex -544 -696 -459 -400 -350 -350

Free cash flow 596 -406 -456 719 670 1,079

Equity raised/(bought back) 0 3,448 53 0 0 0

Dividends paid -106 -78 -478 -463 -567 -659

Net inc/(dec) in borrowings -796 -333 -465 240 210 210

Other investing/financing cash flows -297 -3,331 -265 0 0 0

Net cash flow -603 -700 -1,611 496 313 629

Change in working capital 406 -745 -1,320 -261 -926 -835


Cash and other liquid assets 6,411 9,218 8,219 8,714 9,027 9,656


Goodwill/intangible assets 1,366 1,444 1,456 1,368 1,286 1,209


Other assets 15,468 15,376 15,215 15,248 17,491 19,087

Total assets 29,235 32,089 30,905 31,242 33,537 35,487

Interest bearing debt 1,130 799 335 575 785 995




Minorities 636 741 782 753 753 787


Net debt -5,281 -8,419 -7,884 -8,139 -8,242 -8,661

Key Company Metrics

Sales growth (%) 12.0 4.7 6.7 -4.5 22.0 9.8

DB EPS growth (%) na 183.8 74.2 26.4 58.8 18.7

EBITDA Margin (%) 4.4 6.2 8.4 10.1 12.8 13.8

EBIT Margin (%) 0.7 2.1 4.4 5.7 9.1 10.3

Payout ratio (%) 0.0 104.4 74.9 70.0 50.0 50.0

ROE (%) 0.8 2.1 3.8 4.8 7.3 8.3

Capex/sales (%) 4.3 5.3 3.3 3.0 2.1 1.9


Net debt/equity (%) -35.9 -45.7 -41.9 -42.5 -41.4 -41.5

Net interest cover (x) 6.9 11.0 nm nm nm nm


16 September 2015

Manufacturing



Investment thesis

Outlook

China XD is one of China’s leading UHV equipment makers with a complete

set of product offering. It is also well positioned in the export market and aims

to develop secondary equipment through partnership with GE.

Thanks to broad exposure to both UHV AC and DC products, China XD should

benefit from accelerated UHV transmission line constructions with net profit to

grow by 26%/59%/19% in 2015/16/17E, or 34% CAGR. Compared with peers,

China XD has higher SG&A expenses at c.19% of total revenue. There could be

earnings upside if management can further control SG&A expense. We have

assumed 2.4ppt reduction in SG&A/revenue ratio but we refrain from counting

this further upside until management shows evidence of delivering on this

front.

Despite its strong earnings growth, the stock is trading at a fair valuation of

24x/20x FY16/17E P/E. We initiate the stock with a Hold and target price of

Rmb6.9.

Valuation

We derive our target price of Rmb6.9 for China XD based on a DCF

methodology with a WACC of 7.9% and a terminal growth rate of 1%

(factoring in long-term secondary equipment growth). Our WACC assumption

incorporates a 3.9% risk-free rate, a 5.6% equity risk premium, a beta of 1.3

(based on historical share price correlation), a 5.5% pre-tax cost of debt (based

on current PBOC benchmark interest rate), a 25% tax rate and a 45% debt-

capital ratio.

Risks

Key risks include 1) higher- or lower-than-expected grid investment based on

gridcos’ investment decisions; 2) acceleration or delay in UHV construction

that will affect company orders; 3) market share gain/loss in UHV products on

competition; 4) variance in gross profit margin as a result of change in tender

price or raw material cost; 5) variance in SG&A expenses, which will pose large

impact on earnings; and 6) uncertainty in overseas operation and expansion.

16 September 2015

Manufacturing



Valuation and risks


We use DCF to derive our target price for China XD (Figure 170). Our WACC

assumption is 7.9%, based on a 3.9% risk-free rate, a 5.6% equity risk


target 45% debt to capital ratio. By assuming a 1% terminal growth rate, our

DCF-based target price is Rmb6.9, implying limited upside potential from

current level.

Figure 170: DCF projection through 2025E

DCF valuation 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2023E 2024E 2025E

EBIT 919 1,641 2,006 2,036 2,069 2,104 2,107 2,110 2,113 2,117

Effective tax rate 18.5% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0%

EBIT after tax 749 1,346 1,645 1,670 1,696 1,725 1,728 1,730 1,733 1,736

Add: depreciation & amortization 591 608 625 639 651 663 673 682 691 699

Less : project capex (400) (350) (350) (250) (250) (250) (200) (200) (200) (150)

Add: change in working capital (261) (926) (835) (80) (218) (226) 8 (8) (8) (9)

Free cash flow to the firm 679 678 1,085 1,979 1,880 1,912 2,209 2,204 2,215 2,276

Discount factor 1.00 1.08 1.16 1.25 1.35 1.46 1.57 1.70 1.83 1.97

Discounted Cashflow ex TV 629 933 1,578 1,389 1,310 1,403 1,299 1,210 1,153


PV of TV 16,825

Summary 2015E


Less: net debt/(cash) at year end (8,139)







after-tax


WACC 7.9% 3.9% 1.3 5.6% 5.5% 10.9% 4.1% 25.0% 55% 45%


Our target price implies 26x/22x 2016E/17E P/E, justified by a 34% earnings

CAGR through 2014-17E. The implied valuation is lower than a three-year

historical average at 35x (Figure 171), which we believe is likely to be distorted

by a poor earnings profile in 2012-13.

Based on 2016-17E P/E, the stock is at 32%/38% premium to A-share listed

peers (18x/15x FY16/17E P/E). We believe this is due to its more

comprehensive equipment exposure and the market’s high expectation of

earnings upside if SG&A expenses would be in better control (Figure 173).

16 September 2015

Manufacturing



Figure 171: Historical 1-year forward P/E Figure 172: Historical 1-year forward P/B

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Sep

-12

No

v-1

2

Jan-1

3

Mar-

13

May-1

3

Jul-1

3

Sep

-13

No

v-1

3

Jan-1

4

Mar-

14

May-1

4

Jul-1

4

Sep

-14

No

v-1

4

Jan-1

5

Mar-

15

May-1

5

Jul-1

5

Sep

-15


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Sep

-12

No

v-1

2

Jan-1

3

Mar-

13

May-1

3

Jul-1

3

Sep

-13

No

v-1

3

Jan-1

4

Mar-

14

May-1

4

Jul-1

4

Sep

-14

No

v-1

4

Jan-1

5

Mar-

15

May-1

5

Jul-1

5

Sep

-15





Source: Deutsche Bank estimates, Bloomberg Finance LP

Share price as of September 14, 2015

Price % to Mkt. Cap. Absolute Relative Gearing Dividend yield Company Ticker Price Rating target target US$m 3m 3m 15E 16E 17E 15E 16E 17E 15E 16E 15E 16E 15E 16E 15E 15E China A-share power T&D companies China XD 601179 CH CNY6.34 Hold CNY6.90 9% 5,071 (53%) (22%) 37.6 23.7 20.0 37.1

22.4 16.5

1.8 1.7 4.8 7.3 2.8 4.4 (74.0) 1.9 NARI Tech 600406 CH CNY15.13 Buy CNY18.10 20% 5,504 (50%) (17%) 60.5 29.9 22.4 62.7

30.7 13.1

5.0 4.4 8.3 15.5 4.1 8.4 (83.9) 0.5 Pinggao Electric * 600312 CH CNY22.08 Buy CNY27.10 20% 4,077 (16%) 39% 26.4 19.1 15.4 21.7

15.7 NA 4.1 3.5 16.0 19.6 9.2 12.0 11.0 1.1

XJ Electric 000400 CH CNY16.01 Buy CNY22.50 41% 2,502 (55%) (16%) 41.0 18.9 13.3 30.4 14.3

7.8 2.7 2.4 6.8 13.4 3.7 8.2 (5.9) 0.2

TBEA 600089 CH CNY11.35 NA NA NA 5,572 (44%) (7%) 14.3 11.3 10.5 15.7 12.8

10.4 1.6 1.5 10.9 12.1 3.7 4.3 49.4 1.7

Sifang Electric 601126 CH CNY26.05 NA NA NA 1,532 (40%) (1%) 23.3 19.0 15.4 34.0 27.7

18.2 2.6 2.4 11.2 12.5 7.6 8.4 (5.2) 1.2

Sieyuan Electric 002028 CH CNY11.39 NA NA NA 1,096 (57%) (19%) 13.6 11.6 9.5 NA NA NA 1.7 1.5 12.9 13.3 8.0 8.3 (37.1) 0.9 Baoding Tianwei 600550 CH CNY6.78 NA NA NA 1,617 (61%) (35%) 33.6 17.7 12.9 40.3

17.8 13.7

8.4 6.0 25.3 33.5 3.1 5.1 317.8 NA Henan Senyuan 002358 CH CNY14.79 NA NA NA 1,663 (57%) (19%) 14.1 8.4 9.0 18.6

14.2 NA 3.1 2.3 24.5 24.0 11.3 13.1 28.5 1.1

Integrated Electronics 002339 CH CNY16.37 NA NA NA 910 (72%) (47%) 29.5 21.3 16.6 25.4 18.4

14.3 3.8 3.3 13.0 15.6 10.7 11.5 (22.0) 0.4

Zhixin Electric 600517 CH CNY9.81 NA NA NA 1,890 (55%) (25%) 22.3 13.1 14.4 17.1 12.3

9.3 4.5 3.9 19.3 21.4 9.4 11.8 14.5 1.2

Wolong Electric 600580 CH CNY10.52 NA NA NA 1,835 (52%) (21%) 18.4 14.7 12.4 NA NA NA 2.3 2.0 11.1 12.7 NA NA 43.5 NA Linyang Electronics 601222 CH CNY26.04 NA NA NA 1,631 (45%) (10%) 16.8 13.3 10.9 13.1

9.8 7.4

2.2 1.9 15.2 16.9 10.0 9.2 (25.7) 1.3 TGOOD 300001 CH CNY13.1 NA NA NA 1,738 (55%) (16%) 33.4 22.8 20.8 34.6

26.6 21.2

5.7 4.9 14.1 17.0 6.3 7.9 24.8 0.6 Clou Electronics 002121 CH CNY16.33 NA NA NA 1,221 (57%) (19%) 28.2 16.7 10.7 23.9

12.9 9.0

3.2 1.8 12.9 16.1 4.5 5.6 112.8 0.2 Shenzhen Auto 002227 CH CNY19.4 NA NA NA 624 (62%) (28%) 30.7 20.8 16.8 28.9

20.2 15.1

3.2 2.9 12.7 16.0 9.4 12.0 (18.9) 0.6 Huayi Electric 600290 CH CNY9.68 NA NA NA 792 (51%) (20%) 23.7 17.6 13.6 24.7

14.4 10.0

2.3 2.1 9.3 11.8 3.0 4.2 32.7 1.3 CREAT 002350 CH CNY14.38 NA NA NA 488 (54%) (13%) 38.0 23.2 16.7 NA NA NA 2.7 2.5 7.3 11.0 4.5 5.0 (25.4) 0.7

Average (52%) (16%) 28.1 17.9

14.5 28.5

18.0 12.8 3.4 2.8 13.1 16.1 6.5 8.2 18.7 0.9 China H-share power T&D companies Boer 1685 HK HKD13.06 NA NA NA 1,254 (26%) 3% 12.8 10.1 8.3 9.7

7.6 6.3 3.2 2.7 25.2 26.2 13.8 14.6 (34.4) 3.5 Wasion Group 3393 HK HKD8.25 NA NA NA 1,092 (28%) 1% 11.0 9.0 7.5 10.1

8.2 6.8 1.7 1.5 16.8 17.9 9.9 10.6 12.8 3.5 Jiangnan Group 1366 HK HKD1.53 NA NA NA 800 (37%) (12%) 6.0 5.0 4.3 8.7

7.0 5.7 1.1 1.0 20.2 20.6 8.2 8.5 85.7 4.2 Average (30%) (2%) 9.9

8.0 6.7 9.5 7.6 6.3 2.0 1.7 20.7 21.5 10.6 11.2 21.4 3.8

International power T&D companies General Electric GE US USD24.77 Hold USD29.00 17% 251,905 (9%) (3%) 19.1 15.5 13.4 21.3

15.3 12.9 2.4 2.6 7.2 13.4 1.8 2.0 35.2 3.7 Siemens SIE GR EUR85.195 NA NA NA 83,683 (8%) 0% 10.8 10.1 11.2 8.0

7.5 11.4 2.3 2.1 19.5 18.9 6.2 6.6 18.1 4.1 Siemens India Ltd SIEM IN INR1300.65 Buy INR1565.00 20% 6,570 (1%) 1% 70.7 46.3 35.1 54.3

39.0 30.7 8.1 7.1 24.4 17.2 11.0 8.8 (81.2) 0.4 ABB ABB SS SEK153.8 NA NA NA 45,243 (16%) (11%) 15.6 13.5 12.3 11.8

10.4 9.6 2.7 2.6 13.6 15.2 5.3 6.6 9.3 4.1 ABB Ltd. India ABB IN INR1151.1 Sell INR1190.00 3% 3,662 (9%) (6%) 85.9 58.6 38.8 48.6

37.1 27.3 8.0 7.1 9.7 12.8 4.0 5.6 (1.1) 0.2 Schneider Electric SA SU FP EUR54.84 NA NA NA 38,486 (14%) (8%) 13.4 12.1 11.6 10.1

9.4 9.1 1.7 1.7 10.6 11.5 5.1 5.7 18.5 3.5 Average (10%) (4%) 35.9

26.0 20.4 25.7 19.8 16.8 4.2 3.9 14.2 14.8 5.6 5.9 (0.2) 2.7

All estimates for covered companies are DB estimates and all non-rated stock data is from Bloomberg Finance LP; *Pinggao Electric was suspended trading on 23 June 2015 with last closing price at Rmb22.58; valuations are based on share price of Rmb22.58 Relative performance is against SHCOMP, SZCOMP, HSCEI, etc. based on the listed stock exchange

RoE ROA Returns & Gearing (%)

P/BV Valuations

EV/EBIT P/E Performance

16 September 2015

Manufacturing



Risks

Industry–specific risks

Higher- or lower-than-expected grid investment as a result of macroeconomics outlook and change in gridcos’ investment budget will increase/decrease the equipment tender/procurement volume, thus affecting the company’s orders and revenue outlook.

Acceleration or delay of UHV construction: UHV lines

approval/construction may come faster or slower than expectation,

affected by various factors such as the government’s decision and on-

site construction conditions. A delay may be a result of unfavorable

natural conditions or any safety faults or feasibility failure, especially

for the controversial UHV AC lines.

Company–specific risks

Market share gain/loss in UHV products would directly affect the company’s UHV orders. A market share contraction may arise from introduction of new suppliers by SGCC in case of the capacity constraint of existing players.

Higher- or lower-than-expected margin affected by either tender price or raw material price (such as silicon steel for transformers).

Variance in SG&A expenses given China XD’s SG&A expenses account for a higher portion of revenue (19% in 2014) than peers’; a variance in SG&A expenses will have a larger impact on earnings.

Uncertainties in overseas operation and expansion include local economical/political turmoil, payment collection, currency risk, project funding and execution, given most of the overseas markets of the company are in developing countries.

16 September 2015

Manufacturing



Full exposure but less profitable on expenses

Key points

China XD has the most comprehensive UHV product offering covering

both UHV AC and DC with a market share of c.15-40% for its various

core products. We expect UHV-related revenue to grow 78%/15% in

2016/17E.

Among listed players, China XD has more experience in the overseas

market, and it targets 30% revenue from exports by 2020, up from

11% in 2014. GE is a strategic shareholder with a 15% stake.

Compared with peers, China XD has higher SG&A expenses at c.19%

of total revenue. However, management needs to demonstrate more

effective cost cutting efforts than in previous years.

UHV: key growth driver with comprehensive exposure

Among listed T&D power equipment players, China XD has the most

comprehensive UHV product offering covering both UHV AC and DC, with nearly

all kinds of primary main equipment except for cables & wires, which makes it

one of the key beneficiaries in the UHV investment boom. For UHV equipment

tenders since 2012, XD received orders valued at between Rmb1bn and

Rmb2bn for each UHV line, including key products such as GIS, transformers,

reactors and converter valves (Figure 174).

Figure 174: Major UHV orders of China XD


YTD 2015 West Inner Mongolia - Tianjin (1000kV AC) 12 units of 1000kV GIS, 7 units of 1000kV transformers, 11 units of 1000kV reactors, 16 units of 500kV GIS and other equipment

1,651

Yuheng- Weifang (1000kV AC) 12 units of 1100kV GIS, 15 unit of 1000kV reactors, 8 units of 500kV GIS, etc.

1,299

Jiuquan – Hunan (±800kV DC) 4 units of converter valves, 14 units of converter transformers, etc. 2,238

North Shanxi – Jiangsu (±800kV DC) 14 units of converter transformers, etc.

2014 Huainan-Nanjing-Shanghai (1000kV AC) 9 units of 1000kV GIS, 4 units of 1000kV transformers, 13 units of 1000kV electric reactors, and other equipment

1,303

Ximeng-Shandong (1000kV AC) 9 units of 1000kV GIS, 14 units of 1000kV electric reactors 826

East Ningxia-Zhejiang (±800kV DC) 7 units of 750kV converter transformers, 7 units of 500kV converter transformers

1,441

2013 North Zhejiang - Fuzhou (1000kV AC) 10 units of 1000kV GIS, 7 units of 1000kV transformers, 18 units of 1000kV electric reactors

1,661

2012 Huainan-North Zhejiang-Shanghai (1000kV AC) 9 units of 1000kV GIS, 11 units of 1000kV transformers, 14 units of 1000kV electric reactors

1,774

South Hami- Zhengzhou (±800kV DC) 2 units of converter valves, converter transformers, GIS 2,055

Xiluodu-Zhejiang (±800kV DC) 4 units of converter valves, 14 units of converter transformers NA

2011 Jinping-South Jiangsu (±800kV DC) 3 units of converter valves , converter transformers 1,480

2010 Nuozhadu-Guangdong (±800kV DC)

Xiluodu-Guangdong (±500kV DC) Converter valves, converter transformers, DC field and other equipment 2,800


16 September 2015

Manufacturing



Leading market share with dominant position in electric reactors

Based on tender results, we can estimate China XD’s market share for various

UHV products, specifically

UHV AC: Average of 27% share in GIS, 13% share in transformers,

42% share in electric reactors, etc.;

UHV DC: Average of 25% share in converter valves, 25% share in

converter transformers, etc.

Figure 175: China XD’s market share by product in recent UHV tenders

Approval/tender yr UHV AC GIS Transformer Electric reactor

2014 Huainan-Nanjing-Shanghai 26% 27% 48%

2014 Ximeng-Shandong 30% 0% 50%

2015 West Inner Mongolia- Tianjin

26% 25% 37%

2015 Yuheng - Weifang 26% 0% 35%

Avg 27% 13% 42%

Approval/tender yr UHV DC Converter valve Converter transformer

2012 Xiluodu - Zhejiang 50% 25%

2014 East Ningxia - Zhejiang 0% 25%

2015 Jiuquan – Hunan 50% 25%

2015 North Shanxi - Jiangsu 0% 25%

Avg 25% 25%

Source: Deutsche Bank, SGCC; Note: market share based on average of UHV equipment tenders since 2012

Figure 176: Historical average UHV main equipment market share of key

players

China XD Pinggao Electric

XJ Electric NARI Group

UHV AC line

GIS 27% 41% NA NA

Transformer 13% NA NA NA

Electric reactor 42% NA NA NA

UHV DC line

Converter valve 25% NA 31% NA

Converter transformer 25% NA NA NA

DC Control & Protection system NA NA 50% 50%

Source: Deutsche Bank, SGCC, Note: market share based on average of UHV equipment tenders since 2012

Revenue from UHV products to grow 78%/15% in 2016/17E

Based on our proprietary UHV approval/tender forecast in 2015-17 (see our

F.I.T.T report - Cleaner, Stronger, Smarter – Rmb2.8trn power grid upgrade plan

published on 16 September 2015), we expect China XD to receive UHV orders

of Rmb7-9bn in 2015-16 with a balanced mix in both AC and DC, nearly triple

of that in 2014 (Figure 177). Year to date, the company has won c.Rmb5bn

UHV orders.

16 September 2015

Manufacturing



Meanwhile on the revenue recognition side, we expect a meaningful increase

in UHV sales to be booked from 2016 as most of the orders received this year

will not commence the delivery until 2H16 (Figure 178). As such, we expect

UHV-related revenue to increase by 78%/15% in 2016/17E, with contribution to

total revenue rising from c.20% in 2014 to c.33% in 2017.

Figure 177: UHV order forecast (Rmb bn, incl. VAT)

Figure 178: UHV revenue recognition forecast (Rmb bn,

excl. VAT)

2.13.0

3.9 3.9

1.4

5.8 4.8

3.6

0.0

2.0

4.0

6.0

8.0

10.0

2014 2015E 2016E 2017E

AC DC

1.4 1.62.8 2.9 2.9

1.4 1.2

2.22.9 3.1

0.0

2.0

4.0

6.0

8.0

2014 2015E 2016E 2017E 2018E

AC DC


Source: Deutsche Bank, Company data, VAT at 17%

GE partnership to benefit export growth and new business

Among listed players, China XD has more experience in the overseas market

as peers like Pinggao Electric and XJ Electric have relied more on parentco for

their export business. The company has already set up two overseas

manufacturing plants, one in Egypt which mainly produces switches and one

in Indonesia which will commence production of transformers this November.

In 2013, China XD introduced GE as a strategic shareholder (2nd largest, 15%

stake, 3-yr lock-up period) by issuing 769m new A shares. GE partnership will

provide China XD with direct exposure of its global customer network to sell

primary equipment under either GE’s or China XD’s brand name. The

cooperation is still in its early stage and may take some time to bear fruit.

China XD derives c.11% of revenue from the overseas market (mostly through

EPC projects), with a target of 30% by 2020.

China XD-GE cooperation on secondary equipment

Besides exports, China XD is strengthening its secondary equipment capability

through co-investing with GE in secondary equipment sales in China. A JV

named XD GE was established by China XD and GE, with 59% and 41% stake,

respectively. XD GE will become the sole platform for both companies to

produce and sell secondary T&D equipment (mainly relay protection) in China

through exclusive technology transfer from GE. We have modeled revenue of

Rmb105m in 2017E, up from Rmb51m/Rmb73m in 2013/14.

16 September 2015

Manufacturing



Operation efficiency needs to improve

When compared with other primary T&D equipment companies such as TBEA

and Pinggao, China XD has generated significantly lower asset return

historically (Figure 179), partially attributable to higher SG&A expenses. While

both TBEA and Pinggao have achieved declining SG&A/revenue ratio over the

past three years, China XD’s SG&A expense has remained well above the

average at 18-19% of total revenue despite 25% revenue growth through the

period.

We have incorporated 2.4ppt reduction in SG&A/revenue ratio from 19.2% in

2014 to 16.8% in 2017. If China XD can achieve further improvement, there is

significant upside to our forecast. For every 1ppt SG&A ratio reduction, there

would be a 10% earnings upside. However, management needs to

demonstrate more effective cost cutting efforts than in previous years.

Figure 179: Peer comparison of ROA Figure 180: Peer comparison of SG&A % of revenue

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2011 2012 2013 2014

China XD Pinggao Electric TBEA

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2011 2012 2013 2014

China XD Pinggao Electric TBEA



16 September 2015

Manufacturing



Financial outlook


We summarize the financial outlook by segment as below.

Switchgears segment:

Figure 181: Switchgears segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 4,309 4,264 4,552 4,643 5,665 5,948 One of the key sales drivers and the most significant gross profit contributor (c.40% in 2014)

We estimate c.30% of segment revenue was contributed by UHV products in 2014

We expect segment growth to accelerate from 2016, mainly driven by UHV AC GIS deliveries with strong order backlogs

GPM to further expand on more UHV product deliveries - GPM of UHV GIS at c.40% vs. regular voltage products at c.18%

yoy gr. % 25% -1% 7% 2% 22% 5%

Gross profit 1,042 1,009 1,293 1,486 1,869 2,022

yoy gr. % 81% -3% 28% 15% 26% 8%

GPM % 24.2% 23.7% 28.4% 32.0% 33.0% 34.0%


Transformers segment:

Figure 182: Transformers segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 4,207 4,834 5,046 4,137 4,965 5,362 We estimate over 15% of segment revenue was contributed by UHV products in 2014

We expect segment revenue to decline by 18% in 2015 (1H15: -28%) due to order contraction and delivery delay, but segment growth should resume from 2016 on UHV deliveries

On rising oriented silicon steel price, we believe that GPM of regular voltage products could be under pressure but overall margin will slightly edge up due to more UHV contributions

Higher GPM for UHV transformers (AC at 20-23% and DC at c.30%)

yoy gr. % -1% 15% 4% -18% 20% 8%

Gross profit 720 929 941 848 1,067 1,206

yoy gr. % 55% 29% 1% -10% 26% 13%

GPM % 17.1% 19.2% 18.7% 20.5% 21.5% 22.5%


Power electronics, EPC & Trading segment:

Figure 183: Power electronics, EPC & Trading segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 2,717 2,506 2,693 2,870 3,826 4,591 We estimate c.30% of segment revenue was contributed by UHV products in 2014

Segment growth in 2016-17 should be mainly driven by power electronics with more UHV DC converter valves to be recognized

EPC & Trading will also keep good growth with several key overseas orders (Sudan, Egypt, etc.) under delivery

Segment GPM is likely to decline in 2015 due to higher EPC & Trade contribution during the period, which normally has a lower margin (15-18%) than power electronics (25-35%)

We forecast a segment GPM expansion in 2016-17, mainly driven by higher mix of high-margin UHV DC converter valves (c.40%)

yoy gr. % 31% -8% 7% 7% 33% 20%

Power Electronics 1,073 1,287 1,401 1,191 1,727 2,073

yoy gr. % 143% 20% 9% -15% 45% 20%

EPC & Trade 1,644 1,220 1,292 1,679 2,099 2,518

yoy gr. % 1% -26% 6% 30% 25% 20%

Gross profit 483 516 700 600 982 1,179

yoy gr. % 32% 7% 36% -14% 64% 20%

GPM % 17.6% 20.6% 26.0% 20.9% 25.7% 25.7%

Power Electronics 23.5% 24.3% 33.4% 25.0% 35.0% 35.0%

EPC & Trade 14.0% 16.6% 18.0% 18.0% 18.0% 18.0%


16 September 2015

Manufacturing



Capacitors, insulators & arrestors segment:

Figure 184: Capacitors, insulators & arrestors segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 883 892 954 878 922 968 We forecast that segment revenue growth should be largely in line with overall grid investment

UHV deliveries will also contribute to the growth but not to a significant extent given UHV contribution was only c.10% of total segment revenue in 2014

GPM should remain largely stable

yoy gr. % -5% 1% 7% -8% 5% 5%

Gross profit 141 224 253 219 240 252

yoy gr. % -20% 59% 13% -13% 9% 5%


R&D and testing segment:

Figure 185: R&D and testing segment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 203 258 251 276 304 334 We expect revenue growth and GPM to grow steadily with more testing business for UHV products

yoy gr. % 6% 27% -3% 10% 10% 10%

Gross profit 92 132 92 116 127 140

yoy gr. % -1% 44% -30% 26% 10% 10%


Secondary equipment segment:

Figure 186: Secondary equipment – financial outlook

2012 2013 2014 2015E 2016E 2017E Comments

Revenue 0 51 73 73 87 105 This segment reflects the performance of XD/GE joint venture

Segment revenue should register strong growth during next few years with orders and production ramp-up

GPM should gradually expand with increasing sales. Referring to peers, GPM of secondary equipment should be at c.30% level

yoy gr. % na na 42% 0% 20% 20%

Gross profit 0 12 14 15 19 24

yoy gr. % na na 20% 1% 32% 25%

GPM % na 23.4% 19.8% 20.0% 22.0% 23.0%


Revenue mix trend:


2012 2013 2014 2015E 2016E 2017E

Switchgears 34% 32% 32% 35% 35% 33%

Transformers 33% 37% 36% 31% 30% 30%

Power Electronics, EPC & Trading 22% 19% 19% 21% 23% 25%

Capacitors, Insulators & Arresters 7% 7% 7% 7% 6% 5%

R&D and testing 2% 2% 2% 2% 2% 2%

Secondary equipment 0% 0% 1% 1% 1% 1%


16 September 2015

Manufacturing





2012 2013 2014 2015E 2016E 2017E

Switchgears 40% 34% 36% 42% 41% 39%

Transformers 28% 31% 26% 24% 23% 23%

Power Electronics, EPC & Trading 18% 17% 20% 17% 21% 23%

Capacitors, Insulators & Arresters 5% 7% 7% 6% 5% 5%

R&D and testing 4% 4% 3% 3% 3% 3%

Secondary equipment 0% 0% 0% 0% 0% 0%




Expecting revenue to grow 22%/10% in 2016/17E on UHV deliveries

We expect China XD to see a slight decline in revenue (-5%) in 2015, mainly

dragged by order/recognition delay of the transformer segment. Meanwhile in

2016/17, we forecast revenue growth at 22%/10% (Figure 189) driven by UHV

order deliveries.

Revenue mix is likely to stay largely stable given UHV products are reflected in

all major segments including transformers, switchgears and power electronics.

By 2017, we expect that switchgears and transformers will remain as the two

largest contributors, while the proportion of power electronics, EPC & Trading

segment will expand to 25% in 2017E from 19% in 2014 (Figure 187).


13%

4%6%

-5%

22%

10%

-10%

-5%

0%

5%

10%

15%

20%

25%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2012 2013 2014 2015E 2016E 2017E

Switchgears TransformersPower Electronics, EPC & Trading Capacitors, Insulators & ArrestersR&D and testing Secondary equipment

Source: Deutsche Bank estimates, Company data ,Note: non-primary business revenue not shown here

Expecting net profit to grow 26%/59%/19% in 2015/16/17E

We expect China XD’s net profit to grow by 26%/59%/19% in 2015/16/17E

with net margin improving by 4.2ppt to 9.1% by 2017 (Figure 190). As a result,

we estimate ROE/ROA to improve to 8.1%/4.6% from 3.8%/2.2% in 2014

(Figure 191).

The expected strong profit growth and substantial return improvement is

mainly due to GPM improvement on increasing contribution from high-margin

UHV products as well as operating leverage.

16 September 2015

Manufacturing



As we discussed, China XD’s SG&A expenses accounted for c.19% of total

revenue in 2014, much higher than peers at 10-15%. We expect absolute

SG&A expenses to moderately increase with further expenditure on staff

remuneration rise, R&D, non-grid customer sales and overseas expansion. But

the increase should be slower than revenue growth.

Figure 190: Net profit (Rmb m) and yoy growth Figure 191: Return analysis

-123%

184%

105%

26%

59%

19%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2012 2013 2014 2015E 2016E 2017E


0.9%

2.5%

4.9%

6.4%

8.4%9.1%

0.8%

1.9%

3.8%

4.7%

7.2%

8.1%

0.4%1.0%

2.2%2.8%

4.1%4.6%

0%

2%

4%

6%

8%

10%

2012 2013 2014 2015E 2016E 2017E

Net margin ROE ROA



Figure 192: SG&A expenses as a percentage of total revenue

18.1%18.3%

19.2%19.0%

17.5%

16.8%

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

2012 2013 2014 2015E 2016E 2017E



Profit contribution from finance service to decline

China XD made a profit of Rmb204m in 2014 by providing financial services

(i.e. settlement) to other group companies. The net income from financial

service accounted for over 25% of PBT in 2014. We expect the financial service

income to remain largely stable but the percentage contribution to PBT to

continuously decline. Thus, earnings quality should turn better.

16 September 2015

Manufacturing



Figure 193: Net income from financial service

58.2%

35.5%

24.8% 22.8%

15.4% 14.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

-

50

100

150

200

250

300

350

2012 2013 2014 2015E 2016E 2017E

Net income from financial service as % of PBT


Net cash position with leveraging potential; stable working capital

China XD had Rmb7.9bn net cash on book as of end-2014. We expect it to

keep the net cash position going forward with moderate capex requirement

(c.Rmb400m in 2015-16E, of which c.Rmb200-300m p.a. for XD Changzhou

Transformer Co.’s UHV plant upgrade).

Though the account receivable turnover period stays long at c.200 days, we

expect some modest improvement in the future due to more UHV products

deliveries, which would have more favorable prepayment terms than regular

products.

Figure 194: Cash flow and net gearing Figure 195: Working capital analysis

-36%

-46%

-42% -43% -41% -41%

-50%

-40%

-30%

-20%

-10%

0%

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2012 2013 2014 2015E 2016E 2017E


100

150

200

250

2012 2013 2014 2015E 2016E 2017E

Inventory days Receivable days


Source: Deutsche Bank estimates, company data


16 September 2015

Manufacturing



Deutsche Bank vs. consensus; sensitivity analysis



China XD 601179.SS HKD6.90



2015 13,446 14,912 -10%

2016 16,399 17,982 -9%

2017 18,007 20,658 -13%


2015 1,356 1,487 -9%

2016 2,095 2,164 -3%

2017 2,477 2,574 -4%


2015 865 1,014 -15%

2016 1,374 1,496 -8%

2017 1,631 1,803 -10%


5 1 0

9.9%

1.1%0.6%

9.9%8.9%

1.0% 0.6%

8.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Blended GPM Revenue of Switchgear

segment

Revenue of Transformers

segment

SG&A ratio

2016E 2017E

Source: Deutsche Bank estimates, Bloomberg Finance LP

Source: Deutsche Bank estimates

Sensitivity analysis Blended GPM: each 1% hike in blended GPM would increase China XD’s

2016E/17E PBT by 9.9%/8.9%.

Revenue of Switchgears segment: each 1% increase in revenue of Switchgear segment would increase China XD’s 2016E/17E PBT by 1.1%/1.0%.

Revenue of Transformers segment: 1% increase in revenue of Transformer segment would bring 0.6% upside to China XD’s 2016-17E PBT.

SG&A ratio (as % of revenue): a 1% lower SG&A expense as a percentage of total revenue would increase China XD’s 2016E/17E PBT by 9.9%/8.9%.

16 September 2015

Manufacturing




Figure 198: China XD – key assumptions and metrics (2011-17E)

Operating assumptions 2011 2012 2013 2014 2015E 2016E 2017E

Revenue growth -13.0% 12.0% 4.7% 6.7% -4.5% 22.0% 9.8%

Primary business -14.4% 13.1% 3.9% 6.0% -5.1% 22.4% 9.8%

Switchgears -12.3% 24.9% -1.0% 6.7% 2.0% 22.0% 5.0%

Transformers -9.4% -1.1% 14.9% 4.4% -18.0% 20.0% 8.0%

Power Electronics, EPC & Trading -23.1% 31.2% -7.8% 7.5% 6.6% 33.3% 20.0%

Capacitors, Insulators & Arresters 9.1% -4.6% 0.9% 7.0% -8.0% 5.0% 5.0%

R&D and testing -65.0% 6.0% 26.9% -2.7% 10.0% 10.0% 10.0%

Secondary equipment NA NA NA 41.6% 0.0% 20.0% 20.0%

Non-primary business * 46.5% -32.2% 52.2% 22.4% 10.0% 10.0% 10.0%

Gross margin 16.6% 20.8% 22.6% 25.3% 26.3% 27.9% 28.5%


Switchgears 16.7% 24.2% 23.7% 28.4% 32.0% 33.0% 34.0%

Transformers 10.9% 17.1% 19.2% 18.7% 20.5% 21.5% 22.5%

Power Electronics, EPC & Trading 17.7% 17.8% 20.6% 26.0% 20.9% 25.7% 25.7%

Capacitors, Insulators & Arresters 19.1% 16.0% 25.1% 26.6% 25.0% 26.0% 26.0%

R&D and testing 48.5% 45.2% 51.2% 36.7% 42.0% 42.0% 42.0%

Secondary equipment NA NA 23.4% 19.8% 20.0% 22.0% 23.0%


Other assumptions

Distribution Cost / Revenue -8.6% -8.7% -7.8% -7.4% -7.1% -6.8% -6.5%

Administrative Expenses / Revenue -10.1% -9.4% -10.5% -11.9% -11.9% -10.7% -10.3%

Capex (738) (544) (696) (459) (400) (350) (350)

Receivable turnover days 227 217 212 183 201 183 183 Source: Deutsche Bank estimates, Company data, Note: *Non-primary business incl. income from financial service; GPM excl. business tax and surcharges

16 September 2015

Manufacturing



Figure 199: China XD – income statement (2011-17E)

Rmb m 2011 2012 2013 2014 2015E 2016E 2017E

Sales Revenue 11,250 12,604 13,198 14,082 13,446 16,399 18,007


Switchgears 3,450 4,309 4,264 4,552 4,643 5,665 5,948

Transformers 4,253 4,207 4,834 5,046 4,137 4,965 5,362

Power Electronics, EPC & Trading 2,070 2,717 2,506 2,693 2,870 3,826 4,591

Capacitors, Insulators & Arresters 926 883 892 954 878 922 968

R&D and testing 192 203 258 251 276 304 334

Secondary equipment - - 51 73 73 87 105

Non-primary business * 359 285 392 514 569 631 699

Cost of Sales (9,379) (9,987) (10,209) (10,522) (9,916) (11,817) (12,872)


Gross Profit 1,743 2,517 2,889 3,452 3,428 4,457 4,997


Financial service cost (7) (7) (6) (8) (9) (10) (12)

Distribution expenses (967) (1,095) (1,034) (1,040) (957) (1,115) (1,170)

Administrative expenses (1,138) (1,190) (1,380) (1,669) (1,600) (1,746) (1,855)

Financial expenses (86) (14) (25) 60 49 39 28


Fair value change (1) 4 (6) 2 - - -

Investment income 6 42 58 113 110 60 60

Profit from Operation (550) 122 309 787 924 1,585 1,940



Profit before tax (495) 199 394 823 1,001 1,662 2,017


Effective tax rate -20.3% 54.7% 20.7% 19.6% 18.5% 18.0% 18.0%

Profit after tax (596) 90 312 661 836 1,374 1,665

Minority interest 78 27 22 23 29 - (33)

Net Profit Attributable to Shareholders (518) 118 334 684 865 1,374 1,631

Net margin -4.6% 0.9% 2.5% 4.9% 6.4% 8.4% 9.1%

yoy growth % -181% -123% 184% 105% 26% 59% 19%

EPS (0.12) 0.03 0.07 0.13 0.17 0.27 0.32

yoy growth % -182% -122% 177% 85% 27% 59% 19%

DPS - - 0.08 0.10 0.12 0.13 0.16

yoy growth % -100% NA NA 25% 18% 13% 19%

Dividend payout 0% 0% 123% 75% 70% 50% 50% Source: Deutsche Bank estimates, company data. Note: *non-primary business incl. income from financial service

16 September 2015

Manufacturing



Figure 200: China XD – balance sheet (2011-17E)

Rmb m 2011 2012 2013 2014 2015E 2016E 2017E


Property, plant and equipment 5,361 5,454 5,525 5,502 5,397 5,219 5,020

Investment in associates 263 377 376 383 383 383 383

R&D Expenses 42 159 255 314 314 314 314

Intangible assets 1,324 1,366 1,444 1,456 1,368 1,286 1,209

Investment properties 80 158 150 132 132 132 132


Others 157 188 149 298 298 298 298

Current Assets 21,845 21,399 24,028 22,665 23,193 25,749 27,975

Cash and cash equivalents 7,110 6,411 9,218 8,219 8,714 9,027 9,656

Prepayments 721 738 518 636 538 656 720


Other receivables 1,644 1,549 1,173 2,494 2,381 2,904 3,188

Inventories 5,364 5,191 5,445 4,248 4,165 4,963 5,406

Total assets 29,208 29,235 32,089 30,905 31,242 33,537 35,487


Issued capital 4,357 4,357 5,126 5,126 5,126 5,126 5,126

Share capital reserve 8,770 8,776 11,361 11,421 11,421 11,421 11,421

Other comprehensive income - - (74) (85) (85) (85) (85)

Special reserve - - 18 37 37 37 37


Risk reserve 11 12 19 28 28 28 28

Retained earnings 626 735 988 1,180 1,533 2,301 3,246

Total Shareholders Equity 13,947 14,071 17,684 18,026 18,378 19,147 20,091


Total equity 14,614 14,707 18,425 18,808 19,132 19,900 20,878

Non-current liabilities 2,873 1,900 1,223 1,287 1,501 1,795 2,051

Bank borrowings and other financial liability 210 60 59 23 263 473 683

Bond payables 1,610 696 - - - - -

Salaries payables - - 251 284 284 284 284

Deferred revenue - - 375 439 439 439 439

Special payables 441 554 470 465 438 522 569

Other non-current liabilities 612 590 69 77 77 77 77


Borrowing due within one year 8 114 19 277 277 277 277

Current portion of long-term liabilities 113 259 721 36 36 36 36


Deferred revenue 4,136 4,005 3,532 2,411 2,411 2,411 2,411

Dividend payable 41 41 30 21 513 606 687

Salaries payable 77 57 110 129 129 129 129

Tax payables (15) 38 203 235 235 235 235

Other current liabilities 1,887 1,784 1,459 1,060 1,060 1,060 1,060

Total shareholder equity and liabilities 29,208 29,235 32,089 30,905 31,242 33,537 35,487 Source: Deutsche Bank estimates, company data

16 September 2015

Manufacturing



Figure 201: China XD – cash flow statement (2011-17E)

Rmb m 2011 2012 2013 2014 2015E 2016E 2017E

Profit after tax (596) 90 312 661 836 1,374 1,665

Depreciation & provision 361 408 460 483 505 528 549

Amortisation 44 55 78 87 87 82 77


Adj. for assets disposal 5 (3) (7) 9 - - -

Change in working capital (105) 406 (745) (1,320) (261) (926) (835)

Change in deferred assets/liabilities 15 2 (33) 1 - - -

Net interest expense (23) (31) 25 (60) (49) (39) (28)

Investment income 55 97 (58) (113) - - -

Others 48 (22) 72 131 - - -

Total Operating Cashflow (97) 1,140 290 3 1,119 1,020 1,429

Capex (738) (544) (696) (459) (400) (350) (350)

Investment payment (1,428) (1,745) (3,413) (6,049) - - -

Investment income 1,693 1,314 3,228 5,715 - - -

Others (26) (62) (53) (43) - - -

Total Investment Cashflow (500) (1,037) (934) (836) (400) (350) (350)

Issuance/(Retirement) of new shares - - 3,448 53 - - -

Borrowings 837 115 52 342 240 210 210

Repayments of loans (441) (911) (385) (807) - - -


Others 109 193 97 109 - - -

Total Financing Cashflow 181 (709) 3,133 (781) (223) (357) (449)

Net cash flow (416) (606) 2,490 (1,614) 496 313 629


16 September 2015

Manufacturing



Company background

China XD Electric Co. Ltd. (China XD) is one of the largest domestic power

T&D equipment manufacturer. It also owns production capability of a complete

set of primary power equipment used for high/extra-high/ultra-high voltage

levels.

Its core products include transformers and switchgears, power electronics

products, capacitors, insulators and arrestors. In addition to primary

equipment, China XD is also strengthening its competitiveness in secondary

equipment products by introducing GE as its second largest shareholder (15%

stake) in 2013 and establishing a JV company XD GE. On the export front, it

has sold products in over 40 countries and regions.

Figure 202: Business segment introduction


Switchgears Production and sales of 126kV-1100kV GIS, high-voltage switchgears and circuit breakers as well as some mutual inductors.

Transformers Production and sales of 110kV -1000kV transformers, shunt reactors, converter transformers and other special transformers for industrial use.

Power Electronics, EPC & Trading

Power electronics are mainly high-voltage DC converter valves. EPC & Trading segment is mainly engaged in overseas EPC projects and trading of products for other segments. China XD reported power electronics and EPC &Trading in one segment as many parts of the power electronics products are involved with imports/exports.

Capacitors, Insulators & Arresters

Production and sales of captive voltage transformers (CVT), shunt capacitors, insulators and arrestors, etc.

R&D and testing Research, testing, consulting service of high-voltage T&D equipment. Xi’an High Voltage Apparatus Research Institute Co. is the key subsidiary company to provide such services.

Secondary equipment Production and sales distribution automation, protection, monitoring equipment through XD GE Co., which was set up in April 2013.


Brief history In 1959, Xi'an Electric Manufacturing Co, the predecessor of China XD

Group, was founded in Xi’an, Shaanxi province.

In 2003, China XD Group became the central SOE that was directly

supervised by the State-owned Assets Supervision and Administration

Commission (SASAC).

In 2008, China XD Group, Shaanxi Investment Group, China Cinda

Asset Management Co. and China Huarong Asset Management Co.

jointly set up China XD Electric Co. Ltd.

In 2010, China XD’s A-share (stock code: 601179 CH) was listed on

the Shanghai Stock Exchange.

In 2013, China XD introduced GE Small World (Singapore) Pte Ltd.

(GE) as the second-largest shareholder (15% stake) with new A-share

issuance of 769m.

16 September 2015

Manufacturing







Transformers Xi'an XD Transformers Transformers, mutual inductors, etc. 100% *3,982 12

Transformers Changzhou XD Transformers

Transformers, mutual inductors, etc. 90% NA *1.2

Transformers XD Jinan Transformers Transformers, mutual inductors, electric reactors etc.

54% NA *-18

Switchgears Xi'an XD High-voltage Switchgears

Mid to high voltage switchgears 100% NA 11

Switchgears Xi'an XD Switchgear Electric

Switchgears, etc. 100% 3,947 251

Power Electronics Xi'an XD Power System Power Electronics (DC transmission products like converter valves, etc.)

100% 1,401 250

EPC Xi'an XD International Engineering

Overseas EPC, trading, etc. 100% NA *8

Secondary equipment XD GE Secondary equipment including power automation control, protection, testing, etc.

59% NA *-16

Finance XD Finance Financing & settlement service 98% 287 120

Note: * represents 2013 figures; key subsidiaries with substantial profit contribution are shaded in blue Source: Deutsche Bank, Company data

16 September 2015

Manufacturing




Name Age Position Experience (in recent five years)

Mr. Zhang Yalin 51 Chairman Previously served as deputy general manager, general manager of Xi'an Electric Manufacturing Co., etc;

Currently serving as general manager of XD Group, Chairman & Party Secretary of China XD

Mr. Chen Yuankui 53 Board Director, General Manager, Head Accountant

Previously served as deputy general manager, Party Secretary of Xi'an Electric Manufacturing Co., etc.;

Currently serving as Party Secretary of XD Group; Board Director, general manager and chief accountant of China XD

Mr. Zhang Mingcai 54 Board director, Deputy General Manager

Previously served as deputy general manager of Xi'an Electric Manufacturing Co., etc.

Currently serving as Board Director and deputy general manager of the company

Mr. Tu Xiaoming 47 Board Director Previously served as financial analysis manager in Asia-Pacific plastic business department, COO in global polymer department, and CFO in resin petrochemical department of General Electric (GE);

Currently serving as Board Director of China XD, CFO in GE (China and Mongolia)

Mr. Yuan Xiaoning 54 Board Director Previously served as deputy general manager of Shaanxi Power Construction & Investment Co., Board Director and deputy general manager of Shaanxi Investment, general manager of Shaanxi Investment, etc.;

Currently serving as Board Director of China XD and Chairman of Shaanxi Energy Group

Mr. Pei Zhenjiang 51 Deputy General Manager Previously served as deputy general manager in Xi'an Electric Manufacturing Co., Chairman of Xi'an High Voltage Apparatus Research Institute Co. Ltd.;

Currently serving as deputy general manager of China XD

Mr. Ding Xiaolin 51 Deputy General Manager Previously served as chief engineer, Chairman, and general manager in Xi'an XD Switchgear Electric Co., Ltd., assistant general manager and head of development & planning department in Xi'an Electric Manufacturing Co., etc;

Currently serving as deputy general manager of China XD

Mr. Yang Baolin 54 Deputy General Manager Previously served as general manager and executive director in Xi'an Electric Engineering Co., Ltd., Chairman of XD GE and XD International, etc;

Currently serving as deputy general manager for the company and Chairman of XD GE

Mr. Tian Ximin 53 Board Secretary Previously served as chief accountant, Chairman of Xi'an XD Switchgear Electric Co., Ltd.;

Currently serving as Board Secretary of China XD and Chairman of XD Group Finance Co., Ltd.


16 September 2015

Manufacturing



Appendix 1

Important Disclosures

Additional information available upon request *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Michael Tong

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

52 %

37 %

11 %23 %18 % 15 %

0

50

100

150

200

250

300

350

400

450

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship


16 September 2015

Manufacturing


Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

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Additional Information

The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively

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also important to acknowledge that funding in a currency that differs from the currency in which coupons are

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The appropriateness or otherwise of these products for use by investors is dependent on the investors' own

circumstances including their tax position, their regulatory environment and the nature of their other assets and

liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar


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to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can

be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be

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and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation.

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Copyright © 2015 Deutsche Bank AG


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GRCM2015PROD034609

David Folkerts-Landau Group Chief Economist

Member of the Group Executive Committee

Raj Hindocha Global Chief Operating Officer

Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Steve Pollard Global Head

Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

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