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China XD:Comprehensive product offering;initiating with Hold on valuation

发布时间:2015-09-16    研究机构:德意志银行

Earnings growth but no valuation upside; initiating with Hold

With the broadest product portfolio in the power equipment sector, apartnership with GE and a well developed export business, China XD ranks asone of the leading UHV equipment makers. Close to 20% of revenue comesfrom UV products, which will contribute to earnings rising 130% by 2017, butvaluations appear fair, with a P/E of 20x looking out two years. RoE is also lowat 7.2% for the next year, while expense control remains a challenge. Initiatingwith 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 acceleratedUHV transmission line constructions with revenue expected to grow 28% in2014-17. GE is a strategic shareholder with a 15% stake. The company targets30% 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 higherthan our forecasts for revenue expansion, as we model a marked improvementin expense control where it ranks poorly against its peers. Operating marginshave the potential to improve more than our 2.4ppt forecast reduction inSG&A/revenue ratio but we refrain from counting this further upside untilmanagement shows evidence of delivering on this front.

Valuation and risks

We value China XD based on DCF through 2025E (WACC: 7.9%, tgr: 1%). Ourtarget price translates into 26x/22x 2016/17E EPS. Key risks includehigher/lower-than expected grid investment (incl. UHV); market share gain/lossin UHV and regular products; variance in gross margin; and higher/lower-thanexpectedSG&A expense.

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