Leading UHV GIS player; Initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Industrials Manufacturing Company Pinggao Electric Date 16 September 2015 Initiation of Coverage Leading UHV GIS player; Initiating with Buy Reuters Bloomberg Exchange Ticker 600312.SS 600312 CH SHH 600312 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 3,818.4 4,605.8 6,002.1 7,841.5 9,269.2 EBITDA (CNYm) 613.4 1,102.0 1,466.4 1,944.6 2,343.4 Reported NPAT (CNYm) 398.6 693.2 972.3 1,342.5 1,666.6 Reported EPS FD(CNY) 0.49 0.66 0.85 1.18 1.47 DB EPS FD(CNY) 0.49 0.66 0.85 1.18 1.47 DB EPS growth (%) 194.4 34.6 30.4 38.1 24.1 PER (x) 19.5 20.4 26.4 19.1 15.4 EV/EBITDA (x) 13.4 13.3 18.2 13.8 11.3 DPS (net) (CNY) 0.05 0.50 0.26 0.35 0.44 Yield (net) (%) 0.5 3.7 1.1 1.6 1.9 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 Key beneficiary of ultra-high-voltage (UHV) investment boom ________________________________________________________________________________________________________________ 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 19 Jun 2015 (CNY) 22.58 Price target - 12mth (CNY) 27.10 52-week range (CNY) 27.54 - 12.66 Shanghai Composite 3,115 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 812162024286/1312/136/1412/14Pinggao ElectricShanghai Composite (Rebased) Performance (%) 1m 3m 12m Absolute -1.6 12.8 72.7 Shanghai Composite 1.4 25.1 121.4 Source: Deutsche Bank Pinggao is a leading UHV GIS player with 40% market share. Thanks to accelerated UHV build-out in China, we expect the company to deliver 40%/38%/24% earnings growth in 2015-17E. Moreover, its newly established mid-voltage business is also poised well for the catch-up investment in China’s distribution network upgrade, which is budgeted as Rmb2tr in 2015-20 by the government. We initiate with a Buy rating and a target price of Rmb27.1. Most leveraged UHV play; new venture in mid-voltage products Thanks to its core UHV GIS products (”gas-insulated switchgear“, >70% revenue contribution), Pinggao stands as a key beneficiary of accelerated UHV investment, with revenue expected to double in 2014-17E. It is also the most leveraged UHV play (35% FY15E revenue) among peers. The planned huge investment in China’s distribution network will also benefit its new Tianjin venture focusing on low-mid voltage switchgear and component businesses. Earnings to grow by 40%/38%/24% in 2015/16/17E, or 31% CAGR Based on our proprietary UHV approval/tender forecast, we expect Pinggao to receive orders of c.Rmb4-5bn p.a. during the period. We expect net profit to grow by 40%/38%/24% in 2015/16/17E, or a 31% CAGR through 2015-17E, driven not only by revenue growth but also by margin expansion on rising contribution from higher margin UHV products and operating leverage. Valuation and risks We value Pinggao based on DCF through 2025E (WACC: 7.2%, tgr: 1%). The stock is currently suspended pending announcement of share placement and potential asset injection. Our current investment thesis is based on its existing business and we believe the planned corporate action is unlikely to be negative to the company as it is conditional on minority shareholder approval. Key downside risks include investment in UHV being below expectation or delayed versus forecast, margin and market share pressure from intensifying competition and growth in new mid-voltage business below expectation. 16 September 2015 Manufacturing Pinggao Electric Page 2 Deutsche Bank AG/Hong Kong Model updated:09 September 2015 Running the numbers Asia China Manufacturing Pinggao Electric Reuters: 600312.SS Bloomberg: 600312 CH Buy Price (19 Jun 15) CNY 22.58 Target Price CNY 27.10 52 Week range CNY 12.66 - 27.54 Market Cap (m) CNYm 25,684 USDm 4,033 Company Profile Headquartered in Pingdingshan, Henan province, Henan Pinggao Electric Co. Ltd. is a leading state-owned manufacturer of electric power transmission and distribution equipment. The Company's main products include Gas Insulated Switchgears (GIS), high-voltage isolating switches and earthing switche