Weekly A-Share Picks Nov 9, 2015 (Note: This is selected translation from the Chinese version of our A-share research notes) A-Share Market (1) Pinggao Electric (600312.SH): Injecting the Group's Main Contractor Asset of MV and Overseas Projects in the making of a Leading Enterprise in Full-voltage Grade Switches. (P.1) (2) NBTM New Material Group Co., Ltd. (600114.SH): Proposed Private Placement for New Energy Automobiles and Vehicle Environmental Protection to Create Rerating Potential; Maintain Recommend Rating (P.2) Pinggao Electric (600312.SH): Injecting the Group's Main Contractor Asset of MV and Overseas Projects in the making of a Leading Enterprise in Full-voltage Grade Switches. 1. Events Q3 2015 results: the company achieved revenue of RMB3.129bn in the first three quarters in 2015, up 25.75% year-on-year (YoY) with a net profit of RMB509m, up 19.74% YoY. Net profit after deducting non-recurring profit and loss achieved RMB493m, up 24.40% YoY. At the same time, the company announced a private placement plan to raise RMB4.9bn from institutional investors at a price of RMB22.33 per share to acquire the stakes in five companies under the parent company (for example, Shanghai Tianling Switchgear) and inject capital to some target companies and invest to build plants in India. 2. Analysis and Views (I) Earnings grew in a stable improving rate Wong Chi Man Head of Research (852) 3698-6317 cmwong@chinastock.com.hk Net profit grew 19.7% for 9M2015, a significant increase compared with 14.2% in 1H15. We remain optimistic to the results of Q4 because the company delivered 10 UHV GIS intervals in 9M2015, equal to the same period of last year. And it is estimated that the company will deliver 10 intervals in Q4, equivalent to the total delivery in 9M2015. Compared to the delivered seven intervals in Q4 2014, we can conclude that the company s results will maintain stable improvement. (II) Marked improvement in gross margin and stable expenses Gross margin in the first three quarters of the company was 32.7%, up 4.4 ppt YoY. The main reasons were as follows: first, the Henan Pingzhi High Voltage Switchgear, newly merged in the company this year, attained a higher product price and higher gross margin in 550kV composite apparatus than the rest of the company, and enhance the overall gross margin. Second, revenue contribution from UHV composite apparatus with full intellectual property increased. Most parts for these apparatus are self-made, and improved the structure and materials based on products of Toshiba while reducing costs substantially. Expense ratio in first three quarters of the company was 11.9%, up 0.38 ppt YoY. Sales expense was controlled well and only increased a little while the operating revenue 1
increased sharply YoY while the expense ratio decreased 0.5 ppt YoY. But the administrative expense ratio was up by 0.2 ppt due to the increased expense on the amortization of intangible assets (R&D expenditure and the merger of Pingzhi increased the intangible assets) and staff wages. However, the finance expense ratio substantially increased to 0.7 ppt. The main reason was both short-term borrowing and payable bonds increased, and therefore the interest expenses. (III) High prepayments from customers and inventories, suggesting strong momentum in future The Q3 results showed stable financial indicators and considerable growth in prepayments from customers and inventories, indicating promising results of the company in future. The prepayments increased from RMB364m at the end of 2014 to RMB864m. And the inventories increased largely from RMB1.31bn at the end of 2014 to RMB2.13bn. (IV) Injecting the group's main contractor asset of MV and overseas projects for improving its value chain coverage The company proposed to raise RMB4.9bn from the investors at RMB 22.33 per share to acquire the stakes in 5 companies including Shanghai Tianling Switchgear and inject capital to some target companies and construct plants in India. The acquisition and injection of capital to some projects are aimed at improving the coverage along the industry chain. Firstly, major products of the company were the 110kV and the above highvoltage switchgear and the medium voltage (MV) switchgear were not involved. The commencement of operation of Tianjin Medium Voltage Base will fill the gap to some extent. However, Tianjin Medium Voltage Base regarded the vacuum interrupter as its main business instead of providing complete medium voltage switchgear products. The company proposed to acquire the assets of medium voltage switch including Pinggao GE and Shanghai Tianling Switchgear will make up for the weakness in the medium voltage field, diversified the product type and promoted the supply capacity of core parts and components, and all these will prepare the company to be an integrated solution provider. Secondly, the company moved from a single equipment supplier to the upstream industry, i.e. striving to be a main contractor for EPC segment has been a consensus among power transmission and distribution equipment enterprises. EPC main contractor provides comprehensive project solutions to the owners and has equipment purchasing right to drive its own equipment sales. The injection of international engineering company and overseas plant construction are to drive development of high-end power equipment through overseas EPC and plant building. 3.Investment Recommendation The UHV composite apparatus maintained a stable and leading role and its orders have been in a concentrated delivery period, which ensured high growth of earnings this year and next year. Tianjin Medium Voltage Base is expected to achieve RMB1bn revenue next year except UHV. In addition, injecting the group's main contractor asset of MV and overseas projects improved the company s value chain coverage and equipped the company with the supply capacity for full voltage grade switch and core parts and components, which helps build the company to an integrated solution provider from a single equipment supplier. It is estimated that the company will deliver EPS of RMB 0.78 and RMB 1.00 in 2015 and 2016 respectively and maintain our Recommend rating. NBTM New Material Group Co., Ltd. (600114.SH): Proposed Private Placement for New Energy Automobiles and Vehicle Environmental Protection to Create Re-rating Potential; Maintain Recommend Rating 2
1. Event NBTM proposed a private placement to issue no more than 49m shares to no more than 10 specific persons (issue price of no less than RMB12.16/share) for no more than RMB600m in total for new projects including technological transformation of 12,000t powder metallurgy new materials production capacity for automobile power system and new energy industry, renovation of nationalclass enterprise technical center, and working capital purposes. 2. Our Analysis and Views This time, the capital raised is mainly used for the new technological transformation of 12,000t powder metallurgy new materials production capacity for automobile power system and new energy industry, so as to provide auxiliary products for the auto industry and the new energy industry. Core products of the project include powder metallurgy parts for the automatic power system (parts for automobile engine and gearbox) and powder metallurgy parts in the new energy industry (magnetic materials and fuel cell connectors for electric automobile parts and high efficiency motor of electric automobiles). (1) Industrialization of R&D of new automobile powder metallurgy parts to further consolidate its leading industry position Automobile powder metallurgy parts can reduce the weight of automobiles, lower manufacturing costs, optimize products manufacturing process in the auto industry and improve competitiveness, so such parts have become important basic parts for manufacturing of automobiles and auto parts. In recent years, under the trend of environmental protection in the auto industry, demand for automobile powder metallurgy parts of the market have greatly increased in order to adapt to the requirements of environmental protection, energy saving, manufacturing cost reduction and performance improvement. NBTM s VVT/VCT powder metallurgy parts, vacuum pumps and variable pump powder metallurgy parts still remain a high growth of over 50% amid economic downturn. The powder metallurgy parts for the automobile power system of the auto industry invested by the Company were mainly automobile engine parts and reduction gearbox, which were all important parts to be upgraded for environmental protection of the auto industry with vast market for overseas and domestic imported substitutes. It would enrich automobile powder metallurgy parts series of the Company, which may further establish the Company s industrial leading position as a powder metallurgy platform company, gradually promoting the industrialization of the Company s R&D of new products and ensuring continuous release of high-end new products. Continuous technical reserves, R&D and launch of new products are exactly the most important elements to maintain long-term growth of the Company s earnings. (2) Occupying the new energy auto industrial chain to define new growth driver New energy auto industry has become one of the industries in future with the highest potential and certainty in China with the support of national policies. And the technical level of critical parts and the localization requirements for the scale of production would provide huge market for relevant industries. Electric automobile powder metallurgy parts in the project invested by the Company were mainly used for inverter gearbox housing matched with electric automobiles and motor terminal housing. Magnetic material products in the project are mainly used in the high efficiency motor (for electric automobiles and high efficiency household appliances), charging posts and other fields, which would all benefit from the rapid development of the new energy automobile industrial chain. 3
However, after several years of preliminary attempt (NBTM and Zhejiang NBTM KEDA Magnetoelectricity Co., Ltd. (KDM) stepped into the supply chain system of Tesla successfully in 2014), the Company determines to step in the new energy automobile industrial chain in a large scale this time, which probably indicates that the Company has entered the mature period of its technical reserves, product R&D and client relations in the new energy automobile field, and the process of industrialization is accelerated. The Company s layout achievements previously in the new energy auto industry began to appear, and the company was about to enter the harvest period and target at its new growth drivers in future earnings. 3. Investment Recommendation With rapid development of the auto industry and the new energy industry in recent years as well as the constantly increased promotion of China in energy saving, emission & consumption reduction and environmental protection, the Company would launch additional private placement plans in a timely manner, positively engage in automobile environmental protection and new energy automobile industrial chain, and achieve industrialization of R&D new products to target for new growth drivers to drive future earnings. The valuation cap of the Company is raised, and there will be more growth upside. We estimated that the EPS in 2015 and 2016 will be RMB0.48 and 0.70, correspondingly the PER in 2015 and 2016 will be 29.56x and 20.27x which are lower than its long-term average of 30x, thus maintaining the Recommend rating. 4. Risk Factors 1) High pressure from the macroeconomic downturn, and sharp decline of traditional services of the Company; 2) Decline of sales growth of VVT/VCT powder metallurgy parts, vacuum pumps, variable pump powder metallurgy parts and other new products; 3) Progress of additional targeted issue of the Company is slower than expectation. 4
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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888. 5