Goldwind Sci & Techp：An industry leader at discount valuation; Initiate with Buy

Asia China Industrials 19 July 2010 Goldwind Sci & Tech Reuters: 002202.SZ Bloomberg: 002202 CS Exchange: SHZ Ticker: 002202 An industry leader at discount valuation; Initiate with BuyMichael Tong, CFA Research Analyst (+852) 2203 6167 michael.tong@db.com Eric Cheng, CFA Research Analyst (+852) 2203 6202 eric-ct.cheng@db.com Kai-Ting Wong Research Assistant (+852) 2203 6235 kai-ting.wong@db.com Share price weakness creates attractive buying opportunities Since late June, Goldwind’s share price has dropped 26%, relative to an 8% decline of the benchmark index, the SSECI. The withdrawal of its H-share placement and weak peer performance may be to blame. However, we believe this is unjustified, as its growth plan is unlikely to be slowed by the delay in issuing new shares, and it does not face the overhangs confronting its EU/US peers. We see an attractive entry point for a stock trading at 14x FY10E P/E, at a 50% and 20% discount to the historical average and sector peers average, respectively. Forecasts and ratios Year End Dec 31 2008A2009A2010E2011E2012ESales (CNYm) 6,457.810,738.4 18,095.321,460.224,580.8EBITDA (CNYm) 1,193.32,015.7 3,069.33,615.34,203.0Reported NPAT (CNYm) 914.51,745.6 2,495.82,889.73,349.0Reported EPS FD(CNY) 0.410.78 1.111.291.50DB EPS FD(CNY) 0.410.78 1.111.291.50DB EPS growth (%) 30.790.9 43.015.815.9PER (x) 45.022.9 14.212.310.6EV/EBITDA (x) 35.321.0 7.76.45.2DPS (net) (CNY) 0.280.10 0.170.190.22Yield (net) (%) 1.50.6 1.11.21.4Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Deutsche Bank AG/Hong Kong All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. 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. MICA(P) 007/05/2010 Coverage Change Buy Price at 16 Jul 2010 (CNY) 15.86Price target - 12mth (CNY) 19.0052-week range (CNY) 24.67 - 15.20HANG SENG INDEX 20,250 Price/price relative 4812162024287/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10Goldwind Sci & TechHANG SENG INDEX (Rebased ) Performance (%) 1m 3m12mAbsolute-25.0 -32.6-22.2HANG SENG INDEX 0.9 -7.410.3 Stock data Market cap (CNYm) 19,746Market cap (USDm) 2,914Shares outstanding (m) 2,240.0Major shareholders Xinjiang Wind Power Corp. (18.27%)Free float (%) 26 Key indicators (FY1) ROE (%) 39.1Net debt/equity (%) 48.7Book value/share (CNY) 3.37Price/book (x) 4.7Operating profit margin (%) 16.4 Company Global Markets Research An industry leader unafraid of overcapacity On top of our upbeat view on the wind power industry, we like Goldwind for its edge in both quality and technology, potential growth overseas, offering of total solutions, and higher order-book coverage. Turbine capacity oversupply is unlikely to threaten Goldwind, with its well-established strengths. The risk/reward profile becomes increasingly attractive after recent share price weakness. Positive catalysts ahead to trigger a re-rating We have identified a few near-term catalysts for the stock to re-rate, which include strong interim results, investment in key components and new order momentum from a pickup in exports and good tender results of offshore wind turbines. Sector-wise, the announcement of an official 2020 wind capacity target and a more concrete smart grid investment plan will likely boost sector sentiment. Target price based on DCF; risks We use DCF to value the stock by discounting FCF over 2010-2016E, with a 2% terminal growth rate. Our WACC of 9.1% is based on COE of 10.6%, a beta of 1.1 and COE of 10%, an after-tax cost of debt of 5.5% and a target debt-to-capital ratio of 30%. Key downside risks include a sharper ASP fall, lower order intake, disappointing overseas expansion and an unfavourable wind-power environment. 19 July 2010 Industrials Goldwind Sci & Tech Page 2 Deutsche Bank AG/Hong Kong Fiscal year end 31-Dec 200720082009 2010E2011E2012EFinancial Summary DB EPS (CNY) 0.310.410.78 1.111.291.50Reported EPS (CNY) 0.310.410.78 1.111.291.50DPS (CNY) 0.100.280.10 0.170.190.22BVPS (CNY) 1.31.72.3 3.44.55.8Weighted average shar