Yum Cha 飲 茶 March 20, 2013

Source: Bloomberg

TALKING POINTS TIANNENG POWER [0819.HK, HK$5.50] — Gross margin of about 18% (based on original accounting treatment)

in 2H12 is largely in line with the historical low in 1H10. With 3%-4% hike in selling prices in early January, gross

margin should have already reached the bottom. Downside risk is limited based on 6.9x 2013E PER and 4.3%

dividend yield.

HUTCHISON TELECOM [215.HK, HK$3.68] — In line results as lower acquisition costs offset lower GM from

handset sales. Ray of light is lower capex next year and new fibre services in the fixed line segment. We think the

stock still holds 10% upside near term on news flow and upgrades.

SHENGUAN HOLDINGS [829.HK, HK$4.14] – 2H unexciting with earnings up 8.5%. Company entering a stable

growth phase with limited upside in both ASP and gross margin. Reiterate our Hold rating with target of HK$4.03.

WIND POWER SECTOR – The National Energy Administration (NEA) released officially yesterday the 3rd batch

of approved wind power project list for the 12th Five-year plan, with project size reaching 28.7GW. We see further

regional diversification but big players market share dropped.

INDICES Closing DoD%

Hang Seng Index

22,041.9

(0.2)

HSCEI

10,740.1

(0.5)

Shanghai COMP

2,257.4

0.8

Shenzhen COMP

924.5

0.2

Gold

1,612.5

(0.0)

BDIY

912.0

1.4

Crude Oil, WTI(US$/BBL)

92.2

0.0

Crude Oil, BRENT(US$/BBL)

107.6

0.1

HIBOR, 3-M

0.4

-

SHIBOR, 3-M

3.9

0.0

RMB/USD

6.22

0.0

Analyst: John Mulcahy, Managing Director, Research

CHART OF THE DAY—FDI UP, BUT MARKET CAUGHT IN HEADLIGHTS

Foreign direct investment (FDI) into China rose year-on-year (YoY) in February, the first in-

crease in nine months, although month-on-month FDI fell, due in part to the holiday distortion.

The FDI figures will not solve the current puzzle pointed out by our Beijing strategist, noting

that the market lacks direction currently as the dividing line between bulls and bears is the

direction of the economy. The bulls appeared to have won the argument by the end of 2012,

and showed this by a dramatic rally in A shares from early December until February. But the

macro data then began to falter, or at least raised some doubts, as exports continued to soar

in the early weeks of 2013, but imports were way below expectations, while inflation (as meas-

ured by the consumer price index) rose faster than expected in February. The People’s Bank

of China (PBoC) indicated that it would be on ―high alert‖ over inflation, signaling a more hawk-

ish attitude. The State Council then issued its stern warning on property, and the market has

retreated under all the weight. So, we await confirmation of macro data—is the economy re-

covering (our view) or has it run out of steam again? The FDI figures suggest multinationals

are confident, and the currency remains strong, but there is still not enough evidence of a

trend. With valuations back in attractive territory, the A-share and H-share markets are in the

buy zone again.

DIARY NOTES FOR THIS WEEK

March 14-19 February Actual FDI YoY%

[previous –4.8%]

March 21 March HSBC Flash Manufacturing

PMI [previous—50.9]

MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR

+

COMPANY / INDUSTRY NEWS

Analyst: Wong Chi Man, CFA

TIANNENG POWER [0819.HK, HK$5.50] – MARGIN PRESSURE WITHIN CONTROL IN 2H12; SET TO RECOVER IN 2013

Market Cap: US$786m; Free Float: 57.6%

TIANNENG POWER (0819.HK) 2012 results in line with expectation. Reported net profit grew

15% year-on-year (YoY) to RMB710m last year. Revenue surged

82% YoY to RMB98.9bn, driven by a 108% jump in volume to 88m

units. The average selling price (ASP) dropped 11% YoY to

RMB104 due to more aggressive sales rebates. As a result, gross

margin declined from 26.4% in 2011 to 18.8% in 2012 (more out-

sourcing was also a reason).

2H12 gross margin at acceptable level. Gross margin in 2H12

was 16.1%, far below the 23% level in 1H12. However, the compa-

ny adjusted its accounting policy to include warranty provisions in

cost of goods sold. Based on original accounting treatment, we esti-

mate gross margin in 2H12 was about 18%, which is in line with the

historical low of 18.3% in 1H10.

Gross margin should have reached bottom. The track record

shows that Tianneng is a sensible market player. In 1H10, it pushed

its gross margin to 18.3% to gain market share, i.e. revenue surged

71% YoY. However, it raised prices in 2H10 after reaching its goal

and gross margins rebounded to 27%. We believe the ASP hike of

3%-4% in early January suggests Tianneng believes it has

achieved its market share goal and has re-focused on profitability.

Potential upside in our 2013E forecasts. We expect flat earnings

growth in 2013 by assuming gross margins recover from 16.1% in

2H12 to 17.8% in 1H13 and to 19.2% in 2H13 (based on new ac-

counting treatment), after taking potential weakness in 2Q and 4Q

into account, i.e. low season. Yet under the bull case scenario

(similar to the strong recovery from 1H10 to 2H10), we see 39%

upside from our existing 2013E profit forecast if gross margin reach-

es 21.3% (about 23% based on original accounting treatment). In

addition, we have not considered potential cost savings from the

lead battery recycling plant, which is still under trial operation.

Proposed issue of US$ senior notes. Interest rate and fund rais-

ing size have not been determined yet. Given that about 95% of the

company’s loan is short-term debt, issuing senior notes to achieve a

more balanced financing structure is reasonable, in our view.

Limited downside with 4.3% yield and favourable 2014 outlook.

The company is trading at 6.9x 2013E EPS. Although flat earnings

growth this year seems unexciting, we believe a dividend yield of

>4% should offer some downside protection. Furthermore, we are

forecasting 41% EPS growth in 2014, as we believe the margin

should move closer to the normal level once the Lead-acid Battery

Industry Entry Requirement becomes fully effective at the end of

this year. (Note: 1H13E net profit is likely to record a decline YoY

due to high base in 1H12.)

Source: CGIHK Research

(Detailed financial model on next page.)

RMB'000 1H12A 2H12A

HoH

Change (%) FY11 FY12

YoY Change

(%)

Revenue 3,824,540 6,063,101 59 5,438,392 9,887,760 82

COGS (2,945,661) (5,086,942) 73 (4,003,204) (8,032,602) 101

Gross profit 878,879 976,159 11 1,435,117 1,855,039 29

Other operating income 43,712 86,142 97 91,005 129,854 43

Operating expenses (487,668) (461,984) -5 (617,259) (949,652) 54

Operating profit 434,923 600,317 38 908,863 1,035,241 14

Finance costs (67,905) (54,480) -20 (78,817) (122,385) 55

Income before tax 366,845 545,571 49 829,705 912,417 10

Income tax expense (97,543) (105,573) 8 (213,698) (203,116) -5

Net income 269,302 440,736 64 616,007 710,039 15

Recurring net income 274,122 440,736 61 649,001 714,859 10

EPS (recurring) RMB 0.249 0.401 61 0.596 0.650 9

Battery ASP (RMB) 111.7 100.3 -10 117.3 104.4 -11

Battery sales vol. ('000) 31,700 56,729 79 42,404 88,429 109

Overall gross margin 23.0% 16.1% 26.4% 18.8%

Note: For half-year results, YoY comparison is not provided as the company

has adjusted accounting policy.

Y/E Dec 31 2010 2011 2012 2013E 2014E

Revenue (RMB m) 3,753 5,438 9,888 11,527 12,805

% Change 66 45 82 17 11

Net profit (RMB m) 347 649 715 706 995

EPS(RMB) 0.32 0.60 0.65 0.64 0.91

% Change 28 86 9 (1) 41

PER (x) 15.2 7.8 6.9 6.9 4.8

Gross margin (%) 23.2 26.4 18.8 18.6 20.5

Net debt/equity (%) 2.8 17.7 59.4 60.2 44.4

COMPANY / INDUSTRY NEWS Tianneng Power (00819.HK)

Income Statement

(RMB'000, except for per share amount)

Year ended 31 Dec 1H 2H 1H 2H 1H 2H 2010 2011 2012 2013E 2014E

Lead-acid battery for electric bike 3,541,095 5,690,786 4,573,272 6,180,668 5,326,650 6,572,720 3,527,000 4,974,000 9,232,000 10,753,940 11,899,370

Pure electric car battery# 196,395 197,084 237,120 321,360 284,544 385,632 118,271 276,432 393,479 558,480 670,176

Storage battery 22,383 36,976 35,000 40,000 40,000 45,000 18,903 42,258 59,359 75,000 85,000

Others 64,667 138,255 70,000 70,000 75,000 75,000 88,749 145,702 202,922 140,000 150,000

Revenue 3,824,540 6,063,101 4,915,392 6,612,028 5,726,194 7,078,352 3,752,923 5,438,392 9,887,760 11,527,420 12,804,546

COGS (2,945,661) (5,086,942) (4,041,820) (5,340,043) (4,573,379) (5,603,526) (2,881,481) (4,003,204) (8,032,602) (9,381,863) (10,176,906)

Gross profit 878,879 976,159 873,572 1,271,984 1,152,815 1,474,826 871,442 1,435,117 1,855,039 2,145,556 2,627,640

Other operating income 43,712 86,142 50,000 90,000 53,000 95,000 74,601 91,005 129,854 140,000 148,000

Operating expenses (380,701) (568,951) (498,912) (667,815) (581,209) (714,914) (502,980) (617,259) (949,652) (1,166,727) (1,296,122)

Operating profit 541,890 493,350 424,660 694,170 624,606 854,912 443,063 908,863 1,035,241 1,118,829 1,479,518

Finance costs (67,905) (54,480) (96,471) (117,909) (92,294) (112,804) (14,311) (78,817) (122,385) (214,379) (205,099)

Non-recurrent items - - - - - - - - - - -

Income before tax 473,812 438,604 327,989 575,961 532,081 741,758 428,752 829,705 912,417 903,950 1,273,839

Income tax expense (97,543) (105,573) (72,158) (126,711) (117,058) (163,187) (82,472) (213,698) (203,116) (198,869) (280,245)

Net income 376,269 333,769 256,331 449,749 415,724 579,271 346,280 616,007 710,039 706,081 994,995

Recurring net income 381,089 333,769 256,331 449,749 415,724 579,271 347,455 649,001 714,859 706,081 994,995

EPS (RMB) 0.342 0.304 0.233 0.409 0.378 0.527 0.320 0.565 0.646 0.642 0.905

Recurring EPS (RMB) 0.347 0.304 0.233 0.409 0.378 0.527 0.321 0.596 0.650 0.642 0.905

DPS (HK$) - 0.238 - 0.241 - 0.345 0.116 0.208 0.238 0.241 0.345

Depreciation and amortization 50,740 76,857 88,488 108,152 118,666 145,036 63,386 77,756 127,597 196,641 263,702

EBITDA 592,630 570,207 513,148 802,322 743,272 999,948 506,449 986,619 1,162,838 1,315,470 1,743,220

Battery ASP (RMB) 111.7 100.3 102.4 104.4 104.4 105.4 93.3 117.3 104.4 103.5 104.9

Gross profit per battery (RMB) 25.5 15.9 18.0 20.0 21.0 22.0 21.7 31.4 19.4 19.2 21.6

Battery sales vol. ('000) 31,700 56,729 44,668 59,212 51,030 62,370 37,800 42,404 88,429 103,880 113,400

Growth Rates:

Revenue 57% 102% 29% 9% 16% 7% 66% 45% 82% 17% 11%

EBIT 69% -16% -22% 41% 47% 23% 33% 105% 14% 8% 32%

EBITDA 66% -9% -13% 41% 45% 25% 32% 95% 18% 13% 33%

Core net income 68% -21% -33% 35% 62% 29% 28% 87% 10% -1% 41%

Recurring EPS 66% -22% -33% 35% 62% 29% 28% 86% 9% -1% 41%

Margins and Ratios:

Gross margin 23.0% 16.1% 17.8% 19.2% 20.1% 20.8% 23.2% 26.4% 18.8% 18.6% 20.5%

Net margin 10.0% 5.5% 5.2% 6.8% 7.3% 8.2% 9.3% 11.9% 7.2% 6.1% 7.8%

EBIT margin 14.2% 8.1% 8.6% 10.5% 10.9% 12.1% 11.8% 16.7% 10.5% 9.7% 11.6%

EBITDA margin 15.5% 9.4% 10.4% 12.1% 13.0% 14.1% 13.5% 18.1% 11.8% 11.4% 13.6%

Effective tax rate 21% 24% 22% 22% 22% 22% 19% 26% 22% 22% 22%

# Includes pure electric cars, electric forklif ts and electric patrol cars, etc.

2014E2013E2012

Balance Sheet Statement of Cash Flow

(RMB'000 , except for per share amount)

As at 31 Dec 2010 2011 2012 2013E 2014E Year ended 31 Dec 2010 2011 2012 2013E 2014E

Inventories 818,774 1,124,737 1,953,846 2,100,000 2,300,000 Profit before tax 428,752 829,705 912,417 903,950 1,273,839

Trade receivables 231,257 276,987 587,923 700,000 770,000 Depreciation & Amortization 63,386 77,756 125,575 196,641 263,702

Bills receivable 184,111 356,428 621,269 730,000 800,000 Change in w orking capital (374,398) (328,764) (994,043) (239,800) (262,151)

Others 286,556 396,223 524,085 575,798 616,298 Others / adjustments (56,566) (166,507) (216,091) (170,406) (249,865)

Bank balances and cash 424,303 862,885 973,669 793,538 607,240 Net operating cash f low 61,174 412,190 (172,143) 690,384 1,025,526

Total current assets 1,945,001 3,017,260 4,660,792 4,899,336 5,093,538

Capex (334,359) (679,626) (835,833) (800,000) (600,000)

PPE, net 981,644 1,583,479 2,383,091 2,966,450 3,282,748 Others (7,566) (230,614) (70,514) - -

Prepaid lease payments 97,276 102,241 157,532 156,652 155,772 Net investing cash f low (341,925) (910,240) (906,347) (800,000) (600,000)

Others 60,604 79,871 243,796 243,796 243,796

Total non-current assets 1,139,524 1,765,591 2,784,419 3,366,898 3,682,316 Change in debt 425,000 925,391 1,357,405 142,204 (400,000)

Change in equity 3,567 6,583 (29,233) - -

Total assets 3,084,525 4,782,851 7,445,211 8,266,234 8,775,854 Dividends (83,850) (105,342) (188,898) (212,719) (211,824)

Others - - - - -

Trade payables 271,591 293,088 533,863 600,000 650,000 Net f inancing cash f low 344,717 826,632 1,139,274 (70,515) (611,824)

Other payables 252,673 384,583 703,556 800,000 850,000

Bank and other borrow ings 515,000 1,470,391 2,357,796 2,500,000 2,500,000 Increase / Decrease in cash 63,966 438,582 110,784 (180,131) (186,298)

Others 59,099 116,260 561,167 585,044 212,893 Net cash/(debt) (55,714) (441,406) (1,812,415) (2,134,750) (1,921,048)

Total current liabilities 1,098,363 2,264,322 4,156,382 4,485,044 4,212,893

Finance Ratios

Bank and other borrow ings 30,000 - 70,000 70,000 70,000

Others - 18,055 96,486 96,486 96,486 2010 2011 2012 2013E 2014E

Total non-current liabilities 30,000 18,055 166,486 166,486 166,486 Valuation

PE(x) 15.2 7.8 6.9 6.9 4.8

Total liabilities 1,128,363 2,282,377 4,322,868 4,651,530 4,379,379 EPS grow th (%) 28 86 9 1- 41

Yield (%) 2.1 3.7 4.3 4.3 6.2

Shareholders' equity 1,956,162 2,500,474 3,052,895 3,546,256 4,329,427 PEG (x) 0.54 0.09 0.76 -5.63 0.12

Minority interests - - 69,448 68,448 67,048 EV/EBITDA (x) 13 7 6 5 4

PB(x) 2.7 2.0 1.6 1.4 1.1

Operational

Revenue grow th (%) 66 45 82 17 11

Gross margin (%) 23.2 26.4 18.8 18.6 20.5

Net profit margin (%) 9.3 11.9 7.2 6.1 7.8

Days receivables 29 35 34 42 43

Days payables 34 27 24 23 23

Days inventories 104 103 89 82 82

Current ratio (x) 1.8 1.3 1.1 1.1 1.2

Quick ratio (x) 0.8 0.7 0.5 0.5 0.5

Asset/Equity (x) 1.6 1.9 2.4 2.3 2.0

Net debt/equity (%) 3 18 59 60 44

Core ROE (%) 19.1 29.1 25.7 21.4 25.3

Sources: Company data, CGIHK Research estimates

COMPANY / INDUSTRY NEWS

Analyst: Eric Tomter, CFA

HUTCHISON TELECOM [0215.HK, HK$3.68] — RESULTS IN LINE; MODEST GROWTH AHEAD

Hutchison Telecom reported in-line earnings growth of 20% to

HK$1.227bn on 16% revenue growth led by handset sales of

HK$6.9bn (+39.7%). The gross margin fell to 58% from 65%

reflecting the increased contribution from handsets (44% of reve-

nue vs 36% in 2011). We calculate average revenue per user

(ARPU) for mobile service fell 7.6% to HK$125 as service reve-

nue was flat at HK$5.4bn with subscribers up 7.7% to 3.776m.

3G subs accounted for 87% of at 3.28m. The company focused

on migration of its own 2G subs ( now at 0.497m) to 3G instead of

aggressively pursuing subs outside, reducing acquisition costs

HK$447m and helping preserve EBITDA at 19.4% despite the fall

in gross margin.

At the analyst briefing, the company expressed optimism over

sales of fibre-to-the-home (FTTH) as a growth driver for fixed line

revenue. The network covers 1.6m homes passed and a corpo-

rate customer base covering the financial and government sec-

tors. We expect future capex to drop to HK$500m in 2014 follow-

ing completion of the fibre network and spectrum purchases. The

telecom authority simultaneously announced results of the 4G

spectrum auction, which favours Hutch Tel in terms of adjacent

location and a price believed to be about HK$300m.

HUTCHISON TELECOM [0215.HK]

Market cap: US$2285m Free float:25.5 %

A transition to new revenue streams and lower capex for fixed

line in future provides a bright spot in an otherwise tough mar-

ket for mobile. The other growth driver is the remaining half

million 2G subs still to migrate to 3G, although the outlook for

ARPU remains weak in an intensively competitive market. As

3G hasn’t materially improved ARPU in the last two years, we

doubt 4G will provide a major enhancement. The stock will

likely be news driven near term (spectrum, 4G handsets, pos-

sible JVs) and high yields supported by higher cash flows in

the HK$2bn range next year indicate further upside in the

stock. We suggest investors hold for 10% upside to over

HK$4.00.

HK$ (m) 2010 2011 2012

First Half

3G + 4G subs 1777 2365 2872

YoY 33.1% 21.4%

2G subs 1275 988 770

YoY -22.5% -22.1%

Total subscribers 3052 3353 3642

YoY 9.9% 8.6%

Net Adds 301 289

Mobile Telecom 2516 2676 2730

YoY 1.7% 6.4% 2.0%

ARPU 139 130

Fixed Line Telecom 1457 1468 1491

YoY -10.2% 0.8% 1.6%

Handsets 310 1874 2509

YoY 504.5% 33.9%

Total Revenue 4283 6018 6730

YoY 0 40.5% 11.8%

HK$ (m) 2010 2011 2012

Second Half

3G + 4G subs 2055 2614 3279

YoY 27.2% 25.4%

2G subs 1145 891 497

YoY -22.2% -44.2%

Total subscribers 3200 3505 3776

YoY 9.5% 7.7%

Net Adds 305 271

Mobile Telecom 2631 2788 2750

YoY 6.0% -1.4%

ARPU 139 126

Fixed Line Telecom 1484 1536 1664

YoY 0 3.5% 8.3%

Handsets 1482 3065 4392

YoY 106.8% 43.3%

Total Revenue 5597 7389 8806

YoY 32.0% 19.2% Source: CGIHK Research

COMPANY / INDUSTRY NEWS

Analyst: Eric Tomter, CFA

HUTCHISON TELECOM [0215.HK, HK$3.68] — RESULTS IN LINE; MODEST GROWTH AHEAD

Income Statement (HK$ m) 2011 2012 2013E 2014E

Mobile 5464.0 5480.0 5675.0 5875.0

Fixed Line 3004.0 3155.0 3325.0 3525.0

Handset 4939.0 6901.0 6750.0 6250.0

Total Revenue 13407.0 15536.0 15750.0 15650.0

Gross profit 8744.0 9028.0 9213.8 9311.8

Gross margin 65.2% 58.1% 58.5% 59.5%

EBITDA 2611.0 3020.0 2913.8 3004.8

EBITDA margin 19.5% 19.4% 18.5% 19.2%

D & A 1179.0 1282.0 1250.0 1225.0

EBIT 1432.0 1738.0 1663.8 1779.8

EBIT margin 10.7% 11.2% 10.6% 11.4%

Net interest Expense 118.0 154.0 145.0 130.0

Interest Exp Cover (x) 12.1 11.3 11.5 13.7

Non-operating income -4.0 -3.0 0.0 0.0

Non–recurring (EOI) 0.0 0.0 0.0 0.0

Profit before Tax 1310.0 1581.0 1518.8 1649.8

Tax / Minority Interest 192.0 246.0 59.3 54.0

Net Income (before EOI) 1020.0 1227.0 1338.0 1463.8

Net margin 7.6% 7.9% 8.5% 9.4%

Shares Outstanding (m) 4818.0 4818.9 4818.9 4818.9

EPS (HK$) 0.21 0.25 0.28 0.30

YoY 35.0% 20.3% 9.0% 9.4%

Dividend Payout ratio 75.0% 75.0% 75.0% 75.0%

DPS (HK$) 0.16 0.19 0.21 0.23

NOPAT 1142.0 1384.0 1483.0 1593.8

3 year CAGR 36.7% 27.7% 18.2% 11.8%

Cash Flow (HK$ m) 2011 2012 2013E 2014E

Net income 1020.0 1227.0 1338.0 1463.8

D & A 1179.0 1282.0 1250.0 1225.0

Change in working capital 201.0 91.0 -194.5 -171.9

Cash from Operations 2400.0 2600.0 2393.5 2516.9

Capital expenditure -1138.0 -1604.0 -1000.0 -500.0

% of revenue 8.5% 10.3% 6.3% 3.2%

Cash before Financing 1262.0 996.0 1393.5 2016.9

Free Operating Cash Flow 1384.0 1153.0 1538.5 2146.9

Change in Cash 2.0 0.0 294.0 669.1

Cash Flow Adequacy 213.4% 168.0% 51.6% 125.1%

Balance Sheet (HK$ 2011 2012 2013E 2014E

Cash 182.0 182.0 476.0 1145.1

Accounts Receivable 1787.0 2040.0 2079.0 2065.8

% of revenue 13.3% 13.1% 13.2% 13.2%

Inventory 299.0 201.0 220.5 219.1

% of revenue 2.2% 1.3% 1.4% 1.4%

Other current 0.0 0.0 0.0 0.0

Total Current Assets 2268.0 2423.0 2775.5 3430.0

Non-current Assets 17818.0 18477.0 17890.0 17165.0

Total Assets 20086.0 20900.0 20665.5 20595.0

Accounts Payable 4615.0 4861.0 4725.0 4538.5

% of revenue 34.4% 31.3% 30.0% 29.0%

Short term debt 3853.0 0.0 0.0 0.0

Other current liabilities 10.0 13.0 13.0 13.0

Total Current Liabilities 8478.0 4874.0 4738.0 4551.5

Long term debt 0.0 3746.0 3650.0 3400.0

Deferreds 1195.0 1189.0 1189.0 1189.0

Total Liabilities 9673.0 9809.0 9577.0 9140.5

Retained Earnings -1375.0 -956.0 -621.5 -255.5

Net Equity Issue 0.0 0.0 0.0 0.0

Other -64.0 -41.0 0.0 0.0

Total Equity 10584.0 10962.0 11296.5 11662.5

Book Value/share (HK$) 2.20 2.27 2.34 2.42

Net Cash -3671.0 -3564.0 -3174.0 -2254.9

Working Capital -2529.0 -2620.0 -2425.5 -2253.6

Enterprise Value (HK$) 21497.6 21393.9 21003.9 20084.9

Valuation Metrics 2011 2012 2013E 2014E

Price / Sales 1.33 1.15 1.13 1.14

Price / Earnings 17.48 14.53 13.33 12.18

PER / Growth 0.50 0.72 1.47 1.30

Dividend Yield 4.3% 5.2% 5.6% 6.2%

Sustainable Growth 2.4% 2.8% 3.0% 3.1%

EV / Free Cash Flow 17.03 21.48 15.07 9.96

EV / Book 2.03 1.95 1.86 1.72

Net Cash / share -0.76 -0.74 -0.66 -0.47

ROE 10.1% 11.4% 11.8% 12.5%

COMPANY / INDUSTRY NEWS

Analyst: Vicky Lai

SHENGUAN HOLDINGS [0829.HK, HK$4.14] – UNEXCITING 2H; BEGINNING OF A STABLE GROWTH ERA

Market Cap: US$1773m; Free Float: 32.9%

SHENGUAN HOLDINGS [0829.HK] We reiterate a HOLD rating on the stock as we believe the company has

entered a stable growth period due to larger base and already high penetra-

tion among its major customers. The new norm for its growth rate is in a low-

mid teens level (against 20% in the past). Going forward, we believe there is

limited upside on the gross margin due to cost pressure (especially raw ma-

terials). Positives are the more generous dividend payout (55.2% against

40.5%) owing to reduced capex (from ~RMB300m to RMB100-150m) in

coming years.

2012 result review: earnings miss with many one-off items. Net profit

grew 8.5% to RMB748m, 4% below expectation mainly due to: 1) lower than

expected top-line growth of 9.8%; 2) gross margin decline by 3.8ppt to

58.2% owing to new production lines installed and a switch to higher quality

raw materials. Severe margin erosion was partially subsidized by the follow-

ing one-off items (~7% of earnings): 1) government grants increased by

RMB25.6m; 2) disposal gain on a financial asset of RMB20.9m; 3) adminis-

trative expenses declined 20.3% owing to reduced bonuses for staff and

reversal of provision for inventories (RMB6.7m).

Slight decline in ASP; volume growth to moderate in 2013.

In 2012, average selling prices (ASP) decreased by about 3% as the

company saw orders shift to smaller-radius casing products and the

trend is likely to continue in 2013. The company also stated that it will

not raise its ASP in 2013 as the company wants to stay competitive in

the market.

Sales volume saw a 13% increase in 2012, mainly driven by new medi-

um to small scale customers. We believe the company’s existing large-

scale customer pool sets limitations on Shenguan’s growth in the future

owing to 1) major customers are seeing slower growth in top-line due to

larger base; 2) Shenguan already accounts for a big proportion, if not all

of its customers’ collagen casing supply. As a result, we believe SME

clients will be a new growth driver for the company. The 20% high

growth period for the company is nearly over with a new norm in the low

-mid teens level.

Unlikely to see significant gross profit margin recovery in 2013. The

one-off component in the gross margin erosion in 2012 was 1) relocation of

certain facilities in the production plant; and 2) 2-3 months of test trials for

each of its 80 new production lines. The situation is unlikely to repeat in 2013

as only 20 lines will be added, which will help improve the gross margin.

However, we believe this positive will be offset by cost increases in other

components, for example:

Raw materials costs: On per output unit basis, the cost increased by

18% where we believe more than 10% was attributable to facilities

relocation and test trials for new production lines. Seeing the supply

and demand situation in the upstream, the management expects raw

material price to increase in 2013. We expect a high single-digit in-

crease on a per unit basis while the impact will be partially offset by

more efficient production technology in new lines installed.

Utility and staff costs: The company sees pressures from utili-

ty and labor costs. Utility cost is likely to continue rising and the

company will try to mitigate the impact through production tech-

nology enhancement. Cost savings on labor on per output basis

in 2012 was due to changes in worker shift design. The compa-

ny will seek to rely more on automation and reduce headcount

on workers while maintaining a wage rise of about 5-7%.

Valuation: We trim our earnings forecast for FY13E-FY14E by 7-9%

owing to lower ASP and gross margin assumptions. We reiterate a

HOLD rating on the stock with a price target of HK$4.03, implying a

13x PER. Major upside risks include 1) higher than expected contri-

bution from Muslim casing sales in Malaysia; and 2) higher than ex-

pected gross margin recovery in 2013. Major downside risks include

1) worse than expected gross margin erosion due to higher raw mate-

rial and labor cost; 2) market share loss owing to intensified competi-

tion.

Source: CGIHK Research

COMPANY / INDUSTRY NEWS

Analyst: Vicky Lai

SHENGUAN HOLDINGS [829.HK, HK$4.14] – UNEXCITING 2H; THE BEGINNING OF STABLE GROWTH ERA

Source: CGIHK Research

COMPANY / INDUSTRY NEWS

Analyst: Vicky Lai

SHENGUAN HOLDINGS [829.HK, HK$4.14] – UNEXCITING 2H; THE BEGINNING OF STABLE GROWTH ERA

Source: CGIHK Research

COMPANY / INDUSTRY NEWS

Analyst: Wayne Fung, CFA

WIND POWER SECTOR – THIRD BATCH OF APPROVED PROJECTS BY NEA SUGGESTS FURTHER REGIONAL DIVERSIFICATION;

BIG PLAYERS MARKET SHARE DOWN

What’s new? The National Energy Administration (NEA) officially released the 3rd batch of approved wind power projects for the

12th Five-year plan yesterday. A total of 491 projects are approved, with project size reaching 28.7GW (versus 28.8GW in 1st batch

and 16.8GW in 2nd batch). We see a few implications:

Chinese government has a strong aspiration to boost wind power installation, given the increase in projects compared to

the 2nd batch. The total approved projects for all the three batches reached 74.3GW. We believe most of these projects will be

scheduled to construct and commerce operation between 2014 and 2015 (subject to further approval by NDRC).

Further regional diversification to help mitigate grid curtailment issue. Traditional regions like Inner Mongolia, Heilongjiang

and Jilin that are suffering from grid curtailment continue to see no project approvals in the 3rd batch (Figure 1). On the contrary,

with good wind resources, Yunnan has become the biggest province in term of project size (3GW; ~11% of total). Gansu, which

had no projects approved in 2nd batch, obtained 2GW project in the 3rd batch, which we believe is due to the improving power

transmission capacity there.

Market share of big players drops which suggests more potential competition. We have summarized the projects by com-

panies to check their market share (figure 1). China Longyuan [916 HK; HK$6.77] got ~2GW of projects approved and contin-

ues to see a well-diversified project pipeline. Guodian (parentco of Longyuan) obtained 3GW of projects (largest in 3rd batch).

While the two companies take up ~17% of market share, this is down from ~23% in the first two batches. On the other hand, Da-

tang Renewable [1798 HK; HK$1.36] and Huaneng Renewables [958 HK; HK$1.98] obtained ~877MW (~3% market share)

and ~1.2GW (~4%) projects in the third batch respectively, but with market share for both declining from the 2nd batch (each with

~7% in the first two batches). We will check with the companies for the finalized figures.

Suntien’s large project intakes a positive. Suntien [956 HK; HK2.00], together with Hebei Construction & Investment Group

Company (Parentco of Suntien), gained 800MW+ projects. Apart from Hebei where the two companies located, they successfully

expanded into Xinjiang, Shandong, Yunnan and Henan, which we believe will offer additional growth driver in future.

NEA also released a circular regarding the improvement of wind power connection and absorption for 2013. The power loss

from grid curtailment reached 20bn kWh and utilization hours declined to 1,890 in 2012 (figure 2). According to the document, NEA

will support giving priority to wind power grid connection, in order to raise the percentage of wind power consumption (2% in China

currently). The document highlights a few areas in order to improve the wind power connection: (1) More emphasis on wind power

absorption. This includes applying the utilization hours as major criteria to better allocate the future construction of wind power plants;

(2) Reduce grid curtailment through various measures, including the enhancement of power transmission lines and grid construction,

as well as combining wind power with other renewable and clean energies (solar, hydro and gas) in order to improve efficiency.

COMPANY / INDUSTRY NEWS

Analyst: Wayne Fung, CFA

WIND POWER SECTOR – THIRD BATCH OF APPROVED PROJECTS BY NEA SUGGESTS FURTHER REGIONAL DIVERSIFICATION;

BUT BIG PLAYERS MARKET SHARE DOWN

1st batch 2nd batch 3rd batch Share of 3rd batch projects

China

Total

China Total China Total China

Longyuan

Huaneng

Renewables

Datang

Renewable

China Suntien Jingneng Guodian Others

Province MW % MW % MW % MW MW MW MW MW MW MW

Innner Mongolia 5,630 19.5% - - - - - - - - - - -

Hebei 3,020 10.5% 1,240 7.4% 1,425 5.0% 50 98 98 298 - 248 635

Xinjiang 2,300 8.0% - - 1,982 6.9% 198 50 - 50 - 198 1,487

Heilongjiang 2,100 7.3% - - - - - - - - - - -

Jilin 2,080 7.2% - - - - - - - - - - -

Shandong 1,320 4.6% 1,470 8.8% 1,725 6.0% 50 50 99 98 - 298 1,132

Shanxi 1,300 4.5% 1,390 8.3% 2,520 8.8% 140 - 347 - - 597 1,437

Liaoning 860 3.0% 1,010 6.0% 491 1.7% 48 99 - - - 50 294

Guangdong 680 2.4% 790 4.7% 1,460 5.1% - 50 39 - - 198 1,174

Yunnan 640 2.2% 1,360 8.1% 3,042 10.6% 242 250 147 200 173 2,031

Jiangsu 610 2.1% 640 3.8% 1,427 5.0% 250 - 98 - - 50 1,031

Ningxia 600 2.1% - - 1,390 4.8% 30 - - - 50 99 1,211

Fujian 590 2.0% 540 3.2% 1,046 3.6% 136 - - - - 108 802

Gansu 550 1.9% - - 2,095 7.3% - - - - - 50 2,046

Guizhou 500 1.7% 690 4.1% 1,206 4.2% 191 246 - - - 50 721

Hunan 450 1.6% 740 4.4% 593 2.1% - - 50 - - 48 496

Shaanxi 350 1.2% 300 1.8% 1,450 5.0% 100 - - - 50 150 1,150

Henan 340 1.2% 760 4.5% 698 2.4% - - - 50 - 99 550

Qinghai 270 0.9% 500 3.0% 495 1.7% - - - - - 50 446

Zhejiang 220 0.8% 600 3.6% 548 1.9% 24 - - - - 131 394

Anhui 200 0.7% 620 3.7% 590 2.1% 147 - - - - - 443

Sichuan 200 0.7% 340 2.0% 786 2.7% - 296 - - - 50 441

Jiangxi 190 0.7% 500 3.0% 505 1.8% - - - - - 32 473

Guangxi 180 0.6% 490 2.9% 393 1.4% - - - - - 99 294

Hubei 150 0.5% 310 1.8% 764 2.7% - 50 - - - - 715

Chongqing 150 0.5% 250 1.5% 347 1.2% - - - - - 99 248

Shanghai 140 0.5% 100 0.6% 121 0.4% - 48 - - - - 73

Tianjin 110 0.4% 130 0.8% 246 0.9% 147 - - - - 99 0

Hainan 100 0.3% 0 0.0% - - - - - - - - -

Beijing - - 100 0.6% 247 0.9% - - - - 247 - 0

Tibet - - 50 0.3% 99 0.3% 50 - - - - - 50

Others 3,000 10.4% 1,837 11.0% 1,046 3.6% 200 - - 149 99 - 598

Total 28,830 16,757 28,734 100.0% 2,000 1,233 877 843 446 2,972 20,365

100% 100.0% 7% 4% 3% 3% 2% 10% 71%

Figure 1: Wind power projects approved by NEA (12th 5-year plan)

Note: The actual project size for individual companies will be subject to the upcoming announcement by the companies

The total figure is slightly different from the actual announcement due to rounding issue.

Sources: NEA (http://zfxxgk.nea.gov.cn/auto87/201303/t20130319_1586.htm), CGIHK Research

COMPANY / INDUSTRY NEWS

Analyst: Wayne Fung, CFA

WIND POWER SECTOR – THIRD BATCH OF APPROVED PROJECTS BY NEA SUGGESTS FURTHER REGIONAL DIVERSIFICATION;

BUT BIG PLAYERS MARKET SHARE DOWN

Figure 2: Regional Utilization Hours Breakdown in 2012

Source: NEA (http://zfxxgk.nea.gov.cn/auto87/201303/t20130319_1587.htm), CGIHK Research

2011 2012 Chg (YoY)

State Grid (average) 1928 1869 -3.1% Regional Utilization Hours in 2012

North China Grid 1982 2029 2.4%

West Inner Mongolia 1829 1922 5.1%

South Jizhou 1908 1883 -1.3%

Shandong 2028 1986 -2.1%

Shanxi 2113 2149 1.7%

Beijing, Tianjin, Tangshan 2214 2167 -2.1%

Northeast China Grid 1816 1490 -18.0%

Jilin 1610 1420 -11.8%

Liaoning 1802 1732 -3.9%

East Inner Mongolia 1863 1499 -19.5%

Heilongjiang 2008 1780 -11.4%

Central China Grid 2085 1844 -11.6%

Sichuan 1781 2476 39.0%

Hubei 1955 1621 -17.1%

Chongqing 2166 1773 -18.1%

Henan 2308 1907 -17.4%

Jiangxi 2340 2380 1.7%

Hunan - 1814 n/a

Regional Utilization Hours in 2011

East China Grid 2204 2292 4.0%

Anhui 1791 1682 -6.1%

Jiangsu 1849 1958 5.9%

Zhejiang 2014 2082 3.4%

Shanghai 2073 2363 14.0%

Fujian 3096 2803 -9.5%

China Southern Power Grid 1801 2265 25.8%

Guangdong 1638 1847 12.8%

Guangxi 1700 1655 -2.6%

Hainan 2135 1845 -13.6%

Guizhou 2230 2069 -7.2%

Yunnan 2440 2555 4.7%

China (average) 1920 1890 -1.6%

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John Mulcahy johnmul@chinastock.com.hk

Wong Chi Man, CFA cmwong@chinastock.com.hk

Eric Tomter, CFA erictomter@chinastock.com.hk

Janus Chan, CFA januschan@chinastock.com.hk

Wayne Fung, CFA waynefung@chinastock.com.hk

Angela Han Lee angelahanlee@chinastock.com.hk

Vicky Lai vickylai@chinastock.com.hk

Cecilia Chen ceciliachen@chinastock.com.hk

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