XJ Electric:Leading UHV DC and smart grid player;initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Industrials Manufacturing Company XJ Electric Date 16 September 2015 Initiation of Coverage Leading UHV DC and smart grid player; initiating with Buy Reuters Bloomberg Exchange Ticker 000400.SZ 000400 CS SHZ 000400 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 8,774.1 8,359.2 6,884.0 8,584.1 10,330.9 EBITDA (CNYm) 1,199.6 1,474.9 655.3 1,299.9 1,795.1 Reported NPAT (CNYm) 728.8 1,062.3 393.3 854.8 1,210.0 Reported EPS FD(CNY) 0.77 1.06 0.39 0.85 1.20 DB EPS FD(CNY) 0.77 1.06 0.39 0.85 1.20 DB EPS growth (%) 14.4 36.8 -63.1 117.4 41.5 PER (x) 23.5 20.0 37.3 17.1 12.1 EV/EBITDA (x) 14.5 14.7 22.8 11.2 7.9 DPS (net) (CNY) 0.07 0.10 0.04 0.17 0.30 Yield (net) (%) 0.4 0.5 0.3 1.2 2.1 Source: 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 Strong growth to resume from 2016; Buy ________________________________________________________________________________________________________________ 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) 124/04/2015. Price at 15 Sep 2015 (CNY) 14.53 Price target - 12mth (CNY) 22.50 52-week range (CNY) 35.54 - 14.53 Shenzhen Index 1,739 Michael Tong Research Analyst (+852) 2203 6167 michael.tong@db.com Luka Zhu Research Associate (+852) 2203 6173 luka.zhu@db.com Price/price relative 015304560759/133/149/143/15XJ ElectricShenzhen Index (Rebased) Performance (%) 1m 3m 12m Absolute -40.3 -58.9 -31.7 Shenzhen Index -28.1 -45.9 27.7 Source: Deutsche Bank XJ Electric is one of China’s leading UHV DC and smart grid system providers. Due to delay in grid investment and lack of high-margin UHV delivery, 1H15 earnings registered a 76% decline. However, we expect the company to deliver 117/42% earnings growth in 2016-17E, thanks to accelerated UHV DC investment and catch-up investment in China's distribution network upgrade (budgeted as Rmb2tr in 2015-20). It is also well positioned in the fledging electric vehicle charging market. Initiating with Buy and Rmb22.5 target price. Twin growth drivers: UHV DC and Distribution Grid Thanks to its full set of UHV DC products including converter valves, control & protection systems and field equipment, XJ stands as a key beneficiary of a visible acceleration of the approval and construction of UHV transmission lines, with an expected revenue growth of 65%/60% in 2016-17E for its DC power transmission segment. Moreover, the government’s ambitious distribution investment target of Rmb2tr in 2015-20 will benefit its smart sub-station and distribution business (contributing 50% gross profit in 2014). Earnings to grow 117%/42% in 2016/17E; potential from overseas and EV We expect the strong net profit growth to be driven by: 1) recovery in non-DC segments after a decline in 2015; 2) strong sales growth in the DC segment; and 3) margin expansion on a rising contribution from higher margin UHV products. Potential overseas orders provide additional upside as most of the planned overseas UHV lines adopt DC technology. Leveraging on its strong R&D capability and sound track record, we believe XJ Electric will stand out as a competitive player once the electric vehicle charging market takes off. Valuation and risks We value XJ Electric based on DCF through 2025E (WACC: 7.7%, tgr: 2%). Key risks include grid investment below expectation or delayed versus forecast; margin pressure or market share loss from intensifying competition; growth in new business below expectation. 16 September 2015 Manufacturing XJ Electric Page 2 Deutsche Bank AG/Hong Kong Model updated:10 September 2015 Running the numbers Asia China Manufacturing XJ Electric Reuters: 000400.SZ Bloomberg: 000400 CS Buy Price (15 Sep 15) CNY 14.53 Target Price CNY 22.50 52 Week range CNY 14.53 - 35.54 Market Cap (m) CNYm 14,651 USDm 2,300 Company Profile Headquartered in Xuchang, Henan province, XJ Electric is a leading state-owned manufacturer of electrical machinery and equipment. The Company's main products comprise smart power distribution system, smart substation automation system, direct current (DC) transmission system, energy-saving primary equipment, industrial and t