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Deutsche Bank Markets Research
Asia
China
Industrials
Manufacturing
Industry
Shanghai Electric
Date
25 March 2017
Forecast Change
NDR takeaways – sailing through the power equipment downcycle
A resilient outlook painted during Hong Kong NDR (March 20-22)
________________________________________________________________________________________________________________
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) 057/04/2016.
Nick Zheng, CFA
Research Analyst
(+852 ) 2203 6198
nick.zheng@db.com
Sky Hong, CFA
Research Analyst
(+852 ) 2203 6131
sky.hong@db.com
Key Changes
Company Target Price Rating
2727.HK 3.50 to 3.60(HKD) -
601727.SS 3.00 to 3.20(CNY) -
Source: Deutsche Bank
Companies Featured
Shanghai Electric (2727.HK),HKD4.08 Hold
2016A 2017E 2018E
P/E (x) 19.4 23.4 21.7
EV/EBITDA (x) 2.1 2.6 2.9
Price/book (x) 0.9 1.0 1.0
Shanghai Electric (601727.SS),CNY8.42 Sell
2016A 2017E 2018E
P/E (x) 54.8 54.5 50.4
EV/EBITDA (x) 13.5 12.0 11.9
Price/book (x) 2.5 2.4 2.4
Source: Deutsche Bank
Sales breakdown by segment (2019E)
Coal10%
Gas4%
Wind13%
Nuclear5%
Modern service
25%
Elevators22%
Others21%
Source: Deutsche Bank estimates
Revenue breakdown (Rmb bn)
2016A 2019E 2017-19 CAGR
Total sales 79.1 87.2 3%
Coal 12.0 9.1 -9%
Gas 2.0 3.8 25%
Wind 8.7 11.4 9%
Nuclear 2.7 4.0 15%
Modern service 17.8 21.5 6%
Elevators 18.1 18.9 2%
Others 17.9 18.5 1%
Source: Company data, Deutsche Bank estimates
We hosted a post-results NDR with Shanghai Electric management in HK on March 20-22. The company expects its power equipment business to remain resilient, with rising offshore wind and nuclear equipment offsetting the coal-fired equipment downcycle. For non-power equipment, overseas EPC and basic parts business (through the upcoming asset injection) will likely be the two key drivers. We project an earnings CAGR of 6% over 2017-19. At current levels, valuation looks fair for H-shares (hence Hold) but rich for A-shares (hence Sell). In this note, we summarize managements responses to 20 FAQs.
Diminishing impact from coal-fired equipment downcycle The company sees manageable downside risk to its coal-fired equipment sales during 2017-18, as most of the projects to be delivered have already gone half way through their construction cycles, which means substantial losses for project owners if those projects get suspended. Management expects its coal-fired equipment sales to sustain at c.Rmb10bn toward 2020 (2016: Rmb12bn), which would account for only c.10% of its 2020 sales target of Rmb100bn. We are more cautious, expecting its coal-fired equipment revenue to drop by 8-10% in 2017-19 and account for 10% of its sales by 2019.
Key drivers for power equipment: wind (2017-18) and nuclear (2019-20) Despite disappointing 2020 development targets for wind power announced by the government, management believes its unique positioning in offshore wind power equipment (c.50% market share globally in 2016) should allow its wind turbine segment to sustain growth at least during 2017-18. Nuclear power projects should see concrete resumption this year, and more projects are expected to kick off construction ahead. This should drive accelerating nuclear revenue recognition starting in 2019. We project a CAGR of 9% and 15% for its wind and nuclear equipment sales, respectively, over 2017-19.
Key drivers for non-power equipment: overseas EPC and basic parts Elevator business should remain stable, with rising after-sales and escalator sales offsetting weakness in new sales for traditional elevators. Management expects the injection of SPM to bring immediate accretion (sales of Rmb7-8bn) and to strengthen its strategic positioning in the basic parts business, in light of the government’s strong push for localization of core components. For overseas EPC, it will mainly focus on the countries alongside the “One Belt One Road” and only undertakes projects that are on Sinosure’s list to manage risks. We project a 2017-19 CAGR of 3% for non-power equipment sales.
Tweaking estimates and target prices while retaining ratings; dividend; risks Incorporating the 2016 results and guidance, we lowered our earnings estimates by 7% for 2017/18 and introduced our 2019 forecasts. We raised our target prices for H-shares to HKD3.6 and for A-shares to Rmb3.2 as we slightly lift our target P/B to 0.90x (vs. 0.85x previously) to reflect the potential for ROE accretion from the announced asset injections. We expect Shanghai Electric to resume dividend payout this year after completing its A-share placement. This, along with the distribution of deferred dividends for 2015-16, should lead to a 2017 dividend yield of c.4% for H-shares. We maintain Hold for H-shares and reiterate Sell for A-shares. Key risks: faster-/slower-than-expected decline in coal-fired equipment sales and good/poor execution of asset injections.
Distributed on: 24/03/2017 21:57:26 GMT
25 March 2017
Manufacturing
Shanghai Electric
Page 2 Deutsche Bank AG/Hong Kong
20 Frequently Asked Questions (FAQs)
Overall outlook – revenue and margins
FAQ#1: What is the growth outlook for Shanghai Electric during the 13th Five-
Year-Plan period?
In short, the company expects to increase its sales to Rmb100bn by 2020, with
wind power equipment being a key driver in 2017-18 and nuclear power
equipment emerging as a key driver in 2019-20.
Shanghai Electric is expecting to grow its revenue to Rmb100bn by 2020
(2016: Rmb79bn). To accomplish this goal, the company expects:
Wind turbine business to remain a key growth driver during 2017-18
Nuclear power business to take off during 2019-20
Coal-fired power equipment business to sustain a revenue size of
Rmb10bn from 2019 onwards
Elevator business to remain steady, with rising after-sales service sales and
escalator sales offsetting the weakness in its traditional elevator business
Basic parts business to emerge as a new growth driver following its
acquisition of Shanghai Prime Machinery
Overseas EPC business to accelerate in light of China’s “One Belt One
Road” policy initiative
The company also aims to achieve profit growth that is faster than top-line
growth.
FAQ#2: What is the GP margin outlook in the coming years?
In short, Shanghai Electric expects a stable GP margin in the coming years.
Management expects its GP margin:
For the new energy and environment protection segment to expand, with
volume ramping up for both wind and nuclear island equipment
For the high-efficiency and clean energy equipment segment to see a
slight decline driven by coal-fired power equipment
For the industrial equipment segment to remain steady
For the modern service segment to remain stable
Strength in new energy
business should cushion
thermal downcycle
Basic parts and overseas EPC
will likely be the two growth
drivers for the non-power-
equipment segment
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 3
High-efficiency and clean energy equipment segment
FAQ#3: What are the implications for the company’s coal-fired power
equipment business from the government’s tightening control on thermal
power supply? Does the company see any near-term impact from the
suspension of 50GW coal power projects announced earlier this year?
In short, the impact to 2017-18 revenue should be limited, but it may negatively
affect the revenue outlook for 2019 and onwards.
Based on the company’s on-the-ground checks, the announced 50GW thermal
project suspension did not come with details – i.e. it has not yet been finalized
as to which project would be affected.
According to the company’s production plan, Shanghai Electric is still
expecting mild volume growth for 2017-18. In terms of revenue, the company
does not expect big drop in sales for the coming two years (2017-18), and the
sales decline is expected to be milder than what was seen in 2016 (i.e. down
14% yoy).
The typical construction cycle for a coal power plant is three to four years.
Most of the projects to be delivered in 2017-18 have already gone half way
through the cycle (one to two years), which means substantial losses for
project owners if those projects are suspended. This is unlikely, in
management’s view.
For 2019, the impact could be bigger, but the company expects its revenue for
coal-fired power equipment to sustain at c.Rmb10bn (vs. Rmb12bn in 2016)
from 2019 onwards. This, along with the company’s sales target of Rmb100bn
by 2020, means that coal-fired equipment will likely account for only c.10% of
its revenue by 2020 (Figure 1).
As of end-2016, total order backlog for coal-fired power equipment amounted
to Rmb97.2bn, of which Rmb47.3bn (Figure 2) has already come into effect
(covering 3.4x 2016 coal-fired equipment sales).
FAQ#4: What is the pricing trend in recent years for coal-fired power
equipment? How does the company plan to mitigate the margin pressure from
rising raw material costs?
In short, management sees mild pricing declines for its focused coal-fired
equipment (i.e. generators and turbines).
Rising raw materials may adversely affect its margin from 2019, but Shanghai
Electric is striving to mitigate the impact by 1) undertaking more high-margin
overseas projects; and 2) implementing more stringent cost-control measures.
Management noted that pricing competition is much fiercer for boilers
because of the pricing war initiated by Dongfang Electric and Harbin Electric.
As a result, most of Shanghai Electric’s boiler orders were in fact loss-making
in recent years. To avoid this, the company has been more disciplined in taking
boiler orders, and the percentage of boiler orders has been declining.
In the meantime, Shanghai Electric has been focusing more on generators and
turbines, in which the company believes that it has visible competitive
Figure 1: Management expects coal-
fired equipment sales to account for
only c.10% of sales by 2020
49
67
90
23
12
10
-
20
40
60
80
100
120
2011 2016 2020 (Target)
Sale
s (
Rm
b b
n)
Others Coal-fired power equipment
Source: Company data, Deutsche Bank
Figure 2: Order backlog breakdown
for coal-fired power equipment (end-
2016)
Orders not yet coming into effect; 49.9; 51%
Orders coming into effect; 47.3;
49%
Source: Company data, Deutsche Bank. Note: In Rmb billion.
Shanghai Electric’s boiler
factory generated a net loss of
Rmb233m in 2016
25 March 2017
Manufacturing
Shanghai Electric
Page 4 Deutsche Bank AG/Hong Kong
advantages over its local peers. Pricing decline for these two products has
been around 5% in recent years.
The recent hike in raw material pricing should only affect its GP margin from
2019, as the orders to be delivered in coming years were signed two to three
years ago and the pricing was locked in. In addition, the price hike for specialty
steel should be much milder than that for conventional steel.
To mitigate the cost pressure:
The company plans to undertake more overseas power EPC projects
(alongside “One Belt One Road”), as these projects typically generate
higher GPM (vs. domestic projects) for the equipment part.
Shanghai Electric will continue to strengthen its cost controls by raising
local contents.
In the mid-term to long term, the company believes that the sustainable GP
margin level for coal-fired power equipment should be slightly below 20%.
FAQ#5: How does the company see its gas turbine business evolving in the
longer term?
In short, its gas turbine sales will continue to grow off a low base in the near
term. Profitability should keep improving with volume ramping up. In the longer
term, its strategic partnership with Ansaldo (AEN) should bear fruit.
Shanghai Electric’s sales of gas turbines jumped by 84% yoy (to Rmb2bn) in
2016. Its GP margin also improved significantly to 8.6% (vs. -3.5% in 2015),
with volume ramping up rapidly. Its order intake also stayed at a high level in
2016 (Rmb3.6bn).
Partnering with AEN and Posteitaliane, Shanghai Electric is currently
developing H-class gas turbine technology, which is considered the highest
technology standard for gas turbines.
In addition, AEN’s competitive position has been further strengthened after it
acquired Alstom’s heavy-duty gas turbine assets, as required by European
regulators (avoiding monopoly following GE’s acquisition of Alstom’s energy
business).
New energy and environment protection segment
FAQ#6: The Chinese government’s 2020 capacity target for wind power looks a
bit disappointing; why is the company still upbeat on its wind power business?
In short, Shanghai Electric will continue to focus on the offshore wind power
equipment business and maintain its dominance. It will remain a key growth
driver in 2017-18.
Indeed, the 2020 wind capacity target of 210GW appears a bit disappointing,
as it suggests a visible decline in annual capacity addition in the coming years.
However, of the 210GW target, 5GW will be for offshore wind power capacity,
compared with 1.63GW as of end-2016 (Figure 3). This translates into an
annual capacity addition of 842.5MW in the coming four years (vs. capacity
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 5
addition of 592.2MW in 2016). Investment density for offshore wind power
capacity is higher at >Rmb7,000/KW compared to onshore capacity.
Figure 3: Offshore wind power capacity in China (2010-16)
0.14 0.11 0.130.06
0.23
0.36
0.59
0.15
0.26
0.390.45
0.68
1.04
1.63
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2010 2011 2012 2013 2014 2015 2016
GW
Capacity addition(GW) Year-end capacity (GW)
Source: CWEA, Deutsche Bank
Moreover, according to CWEA, Shanghai Electric dominated the domestic
offshore wind turbine market, with >80% share in 2016’s capacity addition
(Figure 5) and c.60% share in China’s total installed offshore wind capacity as
of end-2016 (Figure 4). The company also ranked number one globally in 2016,
with 48% market share.
Figure 4: Installed offshore wind power capacity by
manufacturer (end-2016)
Figure 5: Offshore wind power capacity addition by
manufacturer (2016)
Shanghai Electric
58%
Envision11%
Sinovel Wind11%
Gold Wind10%
XEMC Wind Power
4%
United Power
2%
HZ Wind Power
2%
Others2%
Shanghai Electric
83%
Envision8%
Gold Wind8%
HZ wind power
1%
Source: CWEA, Deutsche Bank
Source: CWEA, Deutsche Bank
Overall, management expects its wind turbine sales to exceed Rmb10bn in
2017 (or c.15% yoy growth vs. 2015’s Rmb87bn). The company also aims to
grow its new order for wind turbines by Rmb1bn to Rmb14bn in 2017 (or +8%
yoy).
25 March 2017
Manufacturing
Shanghai Electric
Page 6 Deutsche Bank AG/Hong Kong
Figure 6: Wind turbine sales
breakdown – onshore vs. offshore
(2015-16)
Figure 7: Wind turbine new order
breakdown – onshore vs. offshore
(2015-2016)
Figure 8: Wind turbine order backlog
breakdown – onshore vs. offshore
(2015-16)
20%
38%
81%
62%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015 2016
As %
of w
ind turb
ine s
ale
s
Offshore Onshore
33%
61%
67%
39%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015 2016
As %
of w
ind turb
ine n
ew
ord
er
Offshore Onshore
43%
70%
57%
30%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015 2016
As %
of w
ind turb
ine b
acklo
g
Offshore Onshore
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
Source: Company data, Deutsche Bank
FAQ#7: What are the company’s views on the economics of offshore wind
power projects?
In short, management believes that the economics of offshore wind power
projects should improve with volume gradually ramping up.
The economics for offshore power projects are not optimal at the moment, but
management believes that key competitive advantages include 1) proximity to
coastal regions where the economy is typically more developed; 2) higher
power generation capacity (mainstream type of onshore wind turbine is ≤2MV
vs. 4MV for offshore wind turbine); 3) a more stable source of wind power; 4)
easy connection to the grid; and 5) less land occupation. Upfront investment is
typically substantial, but management expects the economics to improve with
volume gradually ramping up.
FAQ#8: What is the outlook for nuclear power business?
In short, management believes that nuclear power equipment will emerge as a
meaningful growth driver from 2019 as project approvals accelerate. Scope for
market share gains exists with its likely certification of CAP1000 technology.
2017 is the year that will likely see concrete resumption of nuclear power
projects. Management expects a total of eight nuclear projects to receive
green lights from the government and kick start construction in 2017.
The company aims to grow its new orders for nuclear island to >Rmb3bn in
2017 (vs. 2016’s Rmb2.15bn). In terms of revenue, the company guides for
10% growth in 2017. GP margin contraction in 2016 was mainly driven by
product mix and higher R&D expenses for fourth-generation nuclear
technology. Scope for margin expansion exists with volume ramping up.
Going forward, to meet the government’s development targets for nuclear
power by 2020, management expects six to eight nuclear projects to obtain
approvals every year.
Given Shanghai Electric adopts a percentage of completion method for nuclear
revenue recognition and the construction cycle is typically three to six years,
sales should see significant acceleration from 2019.
The company estimates that 1GW of nuclear power investment will translate
into Rmb2bn in orders for nuclear island equipment and Rmb1bn in orders for
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 7
nuclear conventional island equipment. Historically, Shanghai Electric has 40%
market share in nuclear island equipment and 30% market share in
conventional island equipment.
Shanghai Electric expects successful certification of its CAP1000 technology to
facilitate its market share gain in nuclear pumps, in which it currently only has
single-digit market share.
Industrial equipment segment
FAQ#9: What is the growth outlook for elevator business?
In short, management expects revenue for the segment to remain steady, with
strength in escalators and after-sale services offsetting weakness in new sales
for traditional elevators.
Management expects a stable outlook for the elevator segment.
Sales volume is expected to sustain positive growth, but revenue may
remain steady, as pricing will likely keep trending down amid intensifying
pricing competition.
Escalator sales should see higher growth driven by infrastructure projects.
That said, revenue size is relatively small at the moment, only around 1/11-
1/10 of its sales for traditional elevators.
After-sales services will be the key growth driver. Revenue was up 12%
yoy in 2016, with its contribution rising to 25% vs. 23% one year ago
(Figure 9).
Out of the total installed base of 600k units sold by Shanghai Mitsubishi,
only 250k units currently receive after-sales services from the OEM. The
company expects to grow its after-sales service base to 300k units in 2017.
Globally, after-sales services typically generate higher margin (vs. new
sales), but this is not the case in China due to fierce competition with
independent contractors.
However, this (low profitability for after-sales services) is set to improve
with the enforcement of safety regulations for special equipment, which
should give OEMs more competitive advantages. Volume ramp-up should
also facilitate margin expansions.
Figure 9: Elevator revenue
contribution by after-sales services
80% 77% 75%
20% 23% 25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014 2015 2016A
s %
of ele
vato
r sale
s
New sales After-sales service
Source: Company data, Deutsche Bank
25 March 2017
Manufacturing
Shanghai Electric
Page 8 Deutsche Bank AG/Hong Kong
FAQ#10: What does the company expect the acquisition of Shanghai Prime
Machinery (SPM) to bring to this segment?
In short, immediate profit accretion and the import substitution potential for key
components in the future.
In addition to immediate revenue accretion of Rmb7-8bn, management
expects the acquisition of SPM to strengthen its strategic positioning in basic
parts business. Localization of core components is one of the Chinese
government’s priorities under the “Made in China 2025” initiative.
SPM has four business segments (Figure 10):
Turbine blade: Profitability has been improving, driven by the internal
restructuring and rising export sales. The segment is a high-end
manufacturing business and is asset heavy in nature. Management,
however, does not expect high growth and expects sales revenue to be
largely capped at Rmb1bn going forward.
Cutting tool: SPM is the technology leader in the domestic market, but its
technology gap compared to global leaders is still substantial. Of its
revenue, 70% is derived from low-end products, as the high-end market is
currently dominated by foreign players. Revenue size is expected to be
around Rmb600-800m. Future growth will likely be driven by business
model innovation and consolidation of distribution channels, which are the
two priorities for Shanghai Electric following the acquisition.
Bearing: SPM has three production plants for this business: 1) large-scale
bearing (for wind power and rolling stocks); 2) automotive bearing; and 3)
precision bearing (for aviation and aerospace). These businesses, however,
are largely niche-market focused.
Fastener: This is by far the biggest segment for SPM. SPM recently
acquired Nedschroef, which supplies fasteners to big auto makers like
BMW and Mercedes-Benz. In the domestic market, auto fastener is
dominated by foreign makers. This should present huge opportunities for
SPM if the synergy is achieved as expected.
FAQ#11: What is the company’s strategy for industrial automation business?
In short, acquisitions will be the key driver, and automation system integrators
with a niche vertical focus will be Shanghai Electric’s key targets.
The expansion of its industrial automation business will be driven by
acquisitions, which will focus on automation system integrators for niche
verticals. This is in line with what the company has been doing lately
(acquisition of Manz, a leading new energy automation solution provider, and
Broetje Group, a leading automation solution provider for the aerospace
industry).
After these acquisitions, the company intends to further consolidate these
companies and help them penetrate into domestic markets. At the moment,
Shanghai Electric does not have plans to make big acquisitions in the industrial
robotics area.
Figure 10: SPM – revenue
breakdown (2016)
Bearing; 762 ; 10%
Blade; 958 ; 13%
Tool; 498 ; 6%
Fastener; 5,429 ; 71%
Source: Company data, Deutsche Bank. Note: in Rmb millions.
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 9
Modern service segment
FAQ#12: Why did the segment’s operating profit margin drop in 2016?
The OPM contraction was mainly because of: 1) higher investment gains for
financial services in 2015; and 2) higher contribution of low-margin
photovoltaic EPC projects.
FAQ#13: What are the key opportunities for overseas EPC business, and how
does the company manage risks?
In short, Shanghai Electric will focus on the countries alongside the “One Belt
One Road,” and it only undertakes those projects that are on Sinosure’s list to
manage risks.
EPC is a more popular form of contract for power projects in the overseas
markets compared to the domestic market. For Shanghai Electric, overseas
EPC projects typically generate higher equipment margin (these projects
typically procure Shanghai Electric’s equipment) compared with domestic
projects. In light of the thermal downturn in the domestic market, the company
intends to undertake more overseas power EPC projects to mitigate the
negative impact.
Of the Rmb22.17bn new EPC orders signed in 2016, 85% are overseas EPC
projects.
Of the Rmb59.7bn EPC order backlog as of end-2016, 75% is overseas EPC
projects. Rmb45bn has not yet come into effect.
Currently, major overseas EPC projects signed or likely to be signed include:
The Pakistan project is expected to kick off contract signing this year after
signing the cooperative agreement in April 2016. Total size of this project
is expected to be USD1.8bn.
Shanghai Electric has been closely monitoring a number of EPC projects in
Iran and Iraq, which if secured could bring out billions of USD contracts.
The Egypt project (Rmb17.9bn) has not yet come into effect, as
prepayment has not yet received.
To manage risks, Shanghai Electric will mainly focus on the countries
alongside the “One Belt One Road,” and it only undertakes those projects that
are on Sinosure’s list.
FAQ#14: What are the key opportunities and challenges for revamping existing
coal-fired power plants?
In short, stricter emission requirements should drive power plant service
business, and the company targets to grow the business by 50% yoy per annum.
Shanghai Electric expects stricter regulation for environmental protection to
drive revamping opportunities for existing coal-fired power plants. This
business is included in its power plant service segment.
Currently, average coal consumption for coal-fired power plants is 310g/KW,
and the government intends to lower it to <300g/KW for >600MW power
plants in five years. Shanghai Electric’s 1000MW ultra-supercritical second
reheat technology can lower the coal consumption to only 254g/KW, which is
the leading level in China. In the coming years, the company aims to grow this
25 March 2017
Manufacturing
Shanghai Electric
Page 10 Deutsche Bank AG/Hong Kong
business by 50% yoy per annum. The key challenge is the competition with
IPPs’ internal engineering arms.
SOE reform and industry consolidation
FAQ#15: What is the SOE reform potential for Shanghai Electric?
In short, asset restructuring is coming to an end. Employee stock ownership
may not be the best option for Shanghai Electric to incentivize its employees
given the variety of its business operations.
After the two rounds of asset injections in 2015-16, its parent company’s
group restructuring is coming to an end, with most of its high-end
manufacturing assets having been injected into the listco. The priority for
Shanghai Electric in the coming years will be to further consolidate these
businesses through internal restructuring.
Employee stock ownership is a big part of SOE reform, but management
believes at the moment that it may not be the best option for Shanghai
Electric, as the company has so many business operations that having a
centralized stock ownership platform may not be a best way to incentivize
employees at each business segment level.
FAQ#16: What’s the company’s view on the possible merger between
Dongfang Electric and Harbin Electric?
In short, Shanghai Electric welcomes the merger and sees scope for market
share gain if the deal were to take place.
Shanghai Electric welcomes industry consolidation. The company believes
that, if the merger between Dongfang and Harbin materializes, Shanghai
Electric could be the key beneficiary, as the company believes that it would be
easier for two parties to reach consensus than for three parties. Moreover, if
the merger were to take place, Shanghai Electric is confident that it can
increase its market share to 50% from the current level of one-third.
Miscellaneous
FAQ#17: Why did the company decide not to pay a dividend in the past two
years?
According to CSRC regulation, dividend payout is not allowed when the listed
company is planning for equity placement. This was the case for Shanghai
Electric, as the company did back-to-back asset injections through A-share
placement over the past two years.
That said, dividend payout could be resumed once asset injection and A-share
placement finalize. However, the payout ratio will depend on its further capex
needs. Shanghai Electric’s stipulated dividend payout ratio is 20-30%.
FAQ#18: How does the company plan to manage and deploy its cash given its
strong cash position?
The company now holds Rmb30bn cash on hand. However, given SEC’s
holding structure, part of cash was held by its non-wholly-owned subsidiaries,
which SEC cannot use at will. Moreover, the cash balance also includes
prepayment from customers, which totaled Rmb43.6bn, and is deployed for
working capital.
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 11
FAQ#19: What exactly was the Rmb440m provision associated with AEN for?
Shanghai Electric had acquired AEN’s 40% equity stake in 2014. AEN
generated NP of EUR60m in 2016 (or share profits of EUR24m to Shanghai
Electric). However, stripping out the negative goodwill of EUR69.59m
generated from its acquisition of Alstom’s heavy-duty gas turbine business
(total consideration was less than net asset value), AEN was actually loss
making in 2016.
This has resulted in discrepancy between AEN’s actual financial results and
Shanghai Electric’s earnings estimates when it acquired AEN. To be
conservative, the company decided to book one-off provision for this, after
discussion with its auditors. Management noted that the disappointing
financial result for AEN was mainly driven by unexpected project delays in Iran.
FAQ#20: Why did the large forging business continue to generate losses after
the restructuring?
Following the restructuring of Shanghai Heavy Machinery, the company only
retained the large forging business while disposing the grinding equipment
businesses (back to its parent company). The transaction was completed in
August last year.
Those orders signed in the past were no longer on the new business entity’s
book, while new orders were relatively small last year. According to the
accounting standards, profit estimates for these new contracts for the new
business entity will be based on the pricing for historical orders, which has led
to the loss for almost all the new orders.
This, along with one-off restructuring costs, has led to a net loss of Rmb250m
in 2016 (vs. Rmb830m in 2015). However, with volume ramping up (especially
for nuclear power equipment), management expects profitability for this
business to recover gradually in the coming years.
25 March 2017
Manufacturing
Shanghai Electric
Page 12 Deutsche Bank AG/Hong Kong
Valuation and risks
P/B-based target price of HKD3.6 for H-shares and Rmb3.2 for A-shares; reiterating Hold on H-shares, Sell on A-shares
Incorporating the latest results and guidance, we lowered our earnings
estimates by 7% for 2017/18 and introduced our 2019 forecasts. We raised our
target price for H-shares to HKD3.6 (HKD3.5 previously) and our target price
for A-shares to Rmb3.2 (Rmb3.0 previously) as we slightly lift our target P/B to
0.90x (vs. 0.85x previously) to reflect the potential for ROE accretion from the
announced asset injections. Lacking earnings growth and trading at 1x BV
against c.5% ROE, valuation looks fair for H-shares (hence Hold) and rich for
A-shares (hence Sell).
Figure 11: Shanghai Electric-H – 1-year forward P/E Figure 12: Shanghai Electric-H – 1-year forward P/B vs.
ROE
16.4x
21.2x
11.6x
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
P/E
(x)
1yr fwd P/E (x) Avg P/E
+1 STDEV -1 STDEV
1.6x
2.3x
0.9x
0.0
5.0
10.0
15.0
20.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
RO
E (
%)
P/B
(x)
1yr fwd P/B (x) Avg P/B
+1 STDEV -1 STDEV
1yr fwd ROE (RHS, %)
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Figure 13: Shanghai Electric-A – 1-year forward P/E Figure 14: Shanghai Electric-A – 1-year forward P/B vs.
ROE
38.9x
56.8x
20.9x
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
P/E
(x)
1yr fwd P/E (x) Avg P/E
+1 STDEV -1 STDEV
2.7x
3.9x
1.6x
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0.0
2.0
4.0
6.0
8.0R
OE
(%
)
P/B
(x)
1yr fwd P/B (x) Avg P/B
+1 STDEV -1 STDEV
1yr fwd ROE (RHS, %)
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 13
Risks
Shanghai Electric-H
Key risks: 1) better-/worse-than-expected delays/cancellations in thermal
power projects; 2) slower-/faster-than-expected progress in nuclear power
projects; 3) higher-/lower-than-expected provisions on receivables and onerous
contracts; and 4) good/poor execution of M&As and/or asset injections.
Shanghai Electric-A
Key upside risks: 1) better-than-expected delays/cancellations in thermal power
projects; 2) faster-than-expected progress in nuclear power projects; 3) lower-
than-expected provisions on receivables and onerous contracts; and 4) value-
accretive M&As and/or asset injections.
25 March 2017
Manufacturing
Shanghai Electric
Page 14 Deutsche Bank AG/Hong Kong
Model updated:24 March 2017
Running the numbers
Asia
China
Manufacturing
Shanghai Electric Reuters: 2727.HK Bloomberg: 2727 HK
Hold Price (24 Mar 17) HKD 4.08
Target Price HKD 3.60
52 Week range HKD 3.12 - 4.21
Market Cap (m) HKDm 54,799
USDm 7,055
Company Profile
Shanghai Electric Group Company Limited designs, manufactures, sells, and services a wide range of products and services in the power equipment, electromechanical equipment and environmental system industries. The company (through its JV with Siemens) is one of the top three power equipment companies in China, together with Harbin Electric and Dongfang Electric.
Price Performance
2
3
5
6
8
9
Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16
Shanghai ElectricHANG SENG INDEX (Rebased)
Margin Trends
5.0
6.0
7.0
8.0
9.0
10.0
14 15 16 17E 18E 19E
EBITDA Margin EBIT Margin
Growth & Profitability
0
2
4
6
8
-4
-2
0
2
4
6
14 15 16 17E 18E 19E
Sales growth (LHS) ROE (RHS)
Solvency
0
100
200
300
400
500
600
-50
-40
-30
-20
-10
0
14 15 16 17E 18E 19E
Net debt/equity (LHS) Net interest cover (RHS)
Nick Zheng, CFA
+852 2203 6198 nick.zheng@db.com
Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E
Financial Summary
DB EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18
Reported EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18
DPS (CNY) 0.06 0.00 0.00 0.14 0.05 0.05
BVPS (CNY) 2.7 3.0 3.4 3.5 3.5 3.7
Weighted average shares (m) 12,824 13,150 13,244 13,431 13,431 13,431
Average market cap (CNYm) 33,699 56,923 39,174 48,601 48,601 48,601
Enterprise value (CNYm) 20,188 41,959 13,044 17,568 20,434 16,955
Valuation Metrics P/E (DB) (x) 13.4 27.2 19.4 23.4 21.7 20.0
P/E (Reported) (x) 13.4 27.2 19.4 23.4 21.7 20.0
P/BV (x) 1.23 1.12 0.87 1.03 1.02 0.99
FCF Yield (%) 11.5 13.0 22.0 9.4 9.9 11.6
Dividend Yield (%) 2.2 0.0 0.0 3.8 1.4 1.5
EV/Sales (x) 0.3 0.5 0.2 0.2 0.2 0.2
EV/EBITDA (x) 3.0 5.7 2.1 2.6 2.9 2.2
EV/EBIT (x) 4.1 7.4 2.8 3.4 3.8 2.9
Income Statement (CNYm)
Sales revenue 76,785 79,461 79,078 81,026 83,783 87,174
Gross profit 14,366 14,436 14,755 15,164 15,656 16,264
EBITDA 6,779 7,353 6,239 6,859 7,156 7,546
Depreciation 1,706 1,434 1,302 1,353 1,409 1,465
Amortisation 167 268 225 327 327 328
EBIT 4,906 5,652 4,713 5,180 5,420 5,753
Net interest income(expense) 0 -202 -235 -373 -172 -12
Associates/affiliates 533 550 797 610 610 610
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 5,439 6,000 5,274 5,417 5,858 6,351
Income tax expense 895 1,298 1,113 1,138 1,230 1,334
Minorities 2,033 2,608 2,144 2,204 2,384 2,584
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 2,511 2,093 2,018 2,075 2,244 2,433
DB adjustments (including dilution) 0 0 0 0 0 0
DB Net profit 2,511 2,093 2,018 2,075 2,244 2,433
Cash Flow (CNYm)
Cash flow from operations 4,411 8,359 9,949 5,578 5,857 6,659
Net Capex -532 -969 -1,319 -1,021 -1,021 -1,021
Free cash flow 3,879 7,389 8,631 4,557 4,836 5,638
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -2,373 0 0 0 -1,856 -673
Net inc/(dec) in borrowings 1,947 7,491 2,062 -2,411 -4,548 -498
Other investing/financing cash flows -612 -652 -14,493 -223 -22 138
Net cash flow 2,841 14,229 -3,800 1,923 -1,590 4,605
Change in working capital -2,147 5,972 7,299 6 81 597
Balance Sheet (CNYm)
Cash and other liquid assets 25,113 36,970 39,471 41,394 39,804 44,409
Tangible fixed assets 14,066 12,393 12,990 12,662 12,279 11,839
Goodwill/intangible assets 1,063 1,197 2,490 2,318 2,146 1,974
Associates/investments 11,613 15,750 18,875 19,485 20,095 20,705
Other assets 91,694 99,158 101,808 103,484 106,137 108,990
Total assets 143,551 165,468 175,634 179,343 180,461 187,917
Interest bearing debt 12,027 25,038 19,662 15,087 14,589 13,740
Other liabilities 86,099 88,442 98,325 102,330 101,174 105,135
Total liabilities 98,125 113,480 117,987 117,417 115,763 118,875
Shareholders' equity 34,236 39,269 45,093 47,168 47,556 49,316
Minorities 11,189 12,719 12,554 14,759 17,142 19,727
Total shareholders' equity 45,425 51,988 57,647 61,927 64,698 69,042
Net debt -13,087 -11,932 -19,809 -26,307 -25,215 -30,669
Key Company Metrics
Sales growth (%) -2.6 3.5 -0.5 2.5 3.4 4.0
DB EPS growth (%) 4.9 -18.7 -4.3 1.4 8.1 8.4
EBITDA Margin (%) 8.8 9.3 7.9 8.5 8.5 8.7
EBIT Margin (%) 6.4 7.1 6.0 6.4 6.5 6.6
Payout ratio (%) 30.0 0.0 0.0 89.4 30.0 30.0
ROE (%) 7.6 5.7 4.8 4.5 4.7 5.0
Capex/sales (%) 2.4 1.7 1.9 1.3 1.2 1.2
Capex/depreciation (x) 1.0 0.8 1.0 0.6 0.6 0.6
Net debt/equity (%) -28.8 -23.0 -34.4 -42.5 -39.0 -44.4
Net interest cover (x) nm 28.0 20.1 13.9 31.6 483.6
Source: Company data, Deutsche Bank estimates
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 15
Model updated:24 March 2017
Running the numbers
Asia
China
Manufacturing
Shanghai Electric Reuters: 601727.SS Bloomberg: 601727 CH
Sell Price (13 Oct 16) CNY 8.42
Target Price CNY 3.20
52 Week range CNY 7.28 - 13.59
Market Cap (m) CNYm 113,090
USDm 16,417
Company Profile
Shanghai Electric Group Company Limited designs, manufactures, sells, and services a wide range of products and services in the power equipment, electromechanical equipment and environmental system industries. The company (through its JV with Siemens) is one of the top three power equipment companies in China, together with Harbin Electric and Dongfang Electric.
Price Performance
4
8
12
16
20
24
28
Oct 14Jan 15Apr 15 Jul 15 Oct 15Jan 16Apr 16 Jul 16
Shanghai ElectricHANG SENG INDEX (Rebased)
Margin Trends
5.0
6.0
7.0
8.0
9.0
10.0
14 15 16 17E 18E 19E
EBITDA Margin EBIT Margin
Growth & Profitability
0
2
4
6
8
-4
-2
0
2
4
6
14 15 16 17E 18E 19E
Sales growth (LHS) ROE (RHS)
Solvency
0
100
200
300
400
500
600
-50
-40
-30
-20
-10
0
14 15 16 17E 18E 19E
Net debt/equity (LHS) Net interest cover (RHS)
Nick Zheng, CFA
+852 2203 6198 nick.zheng@db.com
Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E
Financial Summary
DB EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18
Reported EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18
DPS (CNY) 0.06 0.00 0.00 0.14 0.05 0.05
BVPS (CNY) 2.7 3.0 3.4 3.5 3.5 3.7
Weighted average shares (m) 12,824 13,150 13,244 13,431 13,431 13,431
Average market cap (CNYm) 57,262 174,654 110,660 113,090 113,090 113,090
Enterprise value (CNYm) 43,751 159,691 84,530 82,057 84,923 81,444
Valuation Metrics P/E (DB) (x) 22.8 83.4 54.8 54.5 50.4 46.5
P/E (Reported) (x) 22.8 83.4 54.8 54.5 50.4 46.5
P/BV (x) 3.08 3.86 2.47 2.40 2.38 2.29
FCF Yield (%) 6.8 4.2 7.8 4.0 4.3 5.0
Dividend Yield (%) 1.3 0.0 0.0 1.6 0.6 0.6
EV/Sales (x) 0.6 2.0 1.1 1.0 1.0 0.9
EV/EBITDA (x) 6.5 21.7 13.5 12.0 11.9 10.8
EV/EBIT (x) 8.9 28.3 17.9 15.8 15.7 14.2
Income Statement (CNYm)
Sales revenue 76,785 79,461 79,078 81,026 83,783 87,174
Gross profit 14,366 14,436 14,755 15,164 15,656 16,264
EBITDA 6,779 7,353 6,239 6,859 7,156 7,546
Depreciation 1,706 1,434 1,302 1,353 1,409 1,465
Amortisation 167 268 225 327 327 328
EBIT 4,906 5,652 4,713 5,180 5,420 5,753
Net interest income(expense) 0 -202 -235 -373 -172 -12
Associates/affiliates 533 550 797 610 610 610
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax 5,439 6,000 5,274 5,417 5,858 6,351
Income tax expense 895 1,298 1,113 1,138 1,230 1,334
Minorities 2,033 2,608 2,144 2,204 2,384 2,584
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit 2,511 2,093 2,018 2,075 2,244 2,433
DB adjustments (including dilution) 0 0 0 0 0 0
DB Net profit 2,511 2,093 2,018 2,075 2,244 2,433
Cash Flow (CNYm)
Cash flow from operations 4,411 8,359 9,949 5,578 5,857 6,659
Net Capex -532 -969 -1,319 -1,021 -1,021 -1,021
Free cash flow 3,879 7,389 8,631 4,557 4,836 5,638
Equity raised/(bought back) 0 0 0 0 0 0
Dividends paid -2,373 0 0 0 -1,856 -673
Net inc/(dec) in borrowings 1,947 7,491 2,062 -2,411 -4,548 -498
Other investing/financing cash flows -612 -652 -14,493 -223 -22 138
Net cash flow 2,841 14,229 -3,800 1,923 -1,590 4,605
Change in working capital -2,147 5,972 7,299 6 81 597
Balance Sheet (CNYm)
Cash and other liquid assets 25,113 36,970 39,471 41,394 39,804 44,409
Tangible fixed assets 14,066 12,393 12,990 12,662 12,279 11,839
Goodwill/intangible assets 1,063 1,197 2,490 2,318 2,146 1,974
Associates/investments 11,613 15,750 18,875 19,485 20,095 20,705
Other assets 91,694 99,158 101,808 103,484 106,137 108,990
Total assets 143,551 165,468 175,634 179,343 180,461 187,917
Interest bearing debt 12,027 25,038 19,662 15,087 14,589 13,740
Other liabilities 86,099 88,442 98,325 102,330 101,174 105,135
Total liabilities 98,125 113,480 117,987 117,417 115,763 118,875
Shareholders' equity 34,236 39,269 45,093 47,168 47,556 49,316
Minorities 11,189 12,719 12,554 14,759 17,142 19,727
Total shareholders' equity 45,425 51,988 57,647 61,927 64,698 69,042
Net debt -13,087 -11,932 -19,809 -26,307 -25,215 -30,669
Key Company Metrics
Sales growth (%) -2.6 3.5 -0.5 2.5 3.4 4.0
DB EPS growth (%) 4.9 -18.7 -4.3 1.4 8.1 8.4
EBITDA Margin (%) 8.8 9.3 7.9 8.5 8.5 8.7
EBIT Margin (%) 6.4 7.1 6.0 6.4 6.5 6.6
Payout ratio (%) 30.0 0.0 0.0 89.4 30.0 30.0
ROE (%) 7.6 5.7 4.8 4.5 4.7 5.0
Capex/sales (%) 2.4 1.7 1.9 1.3 1.2 1.2
Capex/depreciation (x) 1.0 0.8 1.0 0.6 0.6 0.6
Net debt/equity (%) -28.8 -23.0 -34.4 -42.5 -39.0 -44.4
Net interest cover (x) nm 28.0 20.1 13.9 31.6 483.6
Source: Company data, Deutsche Bank estimates
25 March 2017
Manufacturing
Shanghai Electric
Page 16 Deutsche Bank AG/Hong Kong
Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Shanghai Electric 2727.HK 4.08 (HKD) 24 Mar 17 14,15
Shanghai Electric 601727.SS 8.42 (CNY) 13 Oct 16 14,15 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. 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.
Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.
15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.
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. Nick Zheng
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 17
Historical recommendations and target price: Shanghai Electric (2727.HK) (as of 3/24/2017)
1 2
3
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
**Analyst is no longer at Deutsche Bank
1. 02/08/2015: Sell, Target Price Change HKD3.90 Michael Tong, CFA 3. 21/09/2016: Hold, Target Price Change HKD3.50 Nick Zheng, CFA
2. 18/11/2015: Upgrade to Hold, Target Price Change HKD4.00 Michael Tong, CFA
Historical recommendations and target price: Shanghai Electric (601727.SS) (as of 10/13/2016)
1
2
3
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
**Analyst is no longer at Deutsche Bank
1. 02/08/2015: Sell, Target Price Change CNY3.06 Michael Tong, CFA 3. 21/09/2016: Sell, Target Price Change CNY3.00 Nick Zheng, CFA
2. 18/11/2015: Sell, Target Price Change CNY3.50 Michael Tong, CFA
25 March 2017
Manufacturing
Shanghai Electric
Page 18 Deutsche Bank AG/Hong Kong
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.
Newly issued research recommendations and target prices supersede previously published research.
54 %
36 %
10 %17 % 17 % 21 %
050
100150200250300350400450500
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 19
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25 March 2017
Manufacturing
Shanghai Electric
Page 20 Deutsche Bank AG/Hong Kong
flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a
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Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk.
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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
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
incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable
for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized
Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the
website please contact your Deutsche Bank representative for a copy of this important document.
Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i)
exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by
numerous market factors, including world and national economic, political and regulatory events, events in equity and
debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed
exchange controls which could affect the value of the currency. Investors in securities such as ADRs, whose values are
affected by the currency of an underlying security, effectively assume currency risk.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the
investor's home jurisdiction. 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.
United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and
SIPC. Analysts located outside of the United States are employed by non-US affiliates that are not subject to FINRA
regulations.
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in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under
German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal
Financial Supervisory Authority.
United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester
House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the
Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial
Conduct Authority. Details about the extent of our authorisation and regulation are available on request.
Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch.
25 March 2017
Manufacturing
Shanghai Electric
Deutsche Bank AG/Hong Kong Page 21
India: Prepared by Deutsche Equities India Pvt Ltd, which is registered by the Securities and Exchange Board of India
(SEBI) as a stock broker. Research Analyst SEBI Registration Number is INH000001741. DEIPL may have received
administrative warnings from the SEBI for breaches of Indian regulations.
Japan: Approved and/or distributed by Deutsche Securities Inc.(DSI). Registration number - Registered as a financial
instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA,
Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks
involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by
multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to
losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional
losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories
of investment advice, products and services. Recommended investment strategies, products and services carry the risk
of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in
market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the
relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in
this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the
name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank
Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are
not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's
equity analysts are based on a 12-month forecast period.
Korea: Distributed by Deutsche Securities Korea Co.
South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register
Number in South Africa: 1998/003298/10).
Singapore: by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles
Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters
arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who
is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and
regulations), they accept legal responsibility to such person for its contents.
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research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without
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is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited,
Taipei Branch may not execute transactions for clients in these securities/instruments.
Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre
Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall
within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower,
West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related
financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre
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any appraisal or evaluation activity requiring a license in the Russian Federation.
Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the
Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall
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District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.
United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated
25 March 2017
Manufacturing
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Page 22 Deutsche Bank AG/Hong Kong
by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services
activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai
International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been
distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as
defined by the Dubai Financial Services Authority.
Australia: Retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product
referred to in this report and consider the PDS before making any decision about whether to acquire the product. Please
refer to Australian specific research disclosures and related information at
https://australia.db.com/australia/content/research-information.html
Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act and New Zealand Financial Advisors Act respectively.
Additional information relative to securities, other financial products or issuers discussed in this report is available upon
request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.
Copyright © 2017 Deutsche Bank AG
David Folkerts-Landau Group Chief Economist and Global Head of Research
Raj Hindocha Global Chief Operating Officer
Research
Michael Spencer Head of APAC Research
Global Head of Economics
Steve Pollard Head of Americas Research
Global Head of Equity Research
Anthony Klarman Global Head of Debt Research
Paul Reynolds Head of EMEA
Equity Research
Dave Clark Head of APAC
Equity Research
Pam Finelli Global Head of
Equity Derivatives Research
Andreas Neubauer Head of Research - Germany
Stuart Kirk Head of Thematic Research
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