EUR 850.00 For Business Accounts Only

Morningstar | SEG's 2018 Result Preview: Expect Top-Line Growth in Second Half to Slow; FVE Raised

No-moat Shanghai Electric Group is expected to report full-year 2018 results on March 29. We expect the firm to deliver full-year net income of CNY 3.4 billion, a 29.5% increase from 2017. This is mainly driven by our forecast of 19.7% sales growth. We expect revenue growth in the second half of 2018 to decelerate to 1.1% year over year following a robust 42% increase in the first half, which was primarily due to revenue recognition of completed environment protection engineering projects and peak season for production and delivery for coal-fired power generation projects. We don’t think that SEG’s strong growth in the first half of the year is sustainable, as it remains challenged by secular headwinds. In the near term, we see limited catalysts for the share price to move higher, given the economic slowdown in the latter half of 2018 and the potential spillover effect from the U.S.-China trade war. We have increased our fair value estimate to HKD 2.88 per share, primarily due to the time value of money.

In the longer term, we expect demand for thermal and nuclear power equipment to be relatively muted, given China’s focus on renewable energy as well as environmental and safety concerns regarding nuclear projects. We forecast demand for industrial equipment, within which elevator products make up approximately 40% of segment sales, to decelerate to a 1.4% compound annual growth rate between 2017 and 2022 from a 7.3% CAGR over 2012-17 as we expect property construction activity, a key demand driver for elevators, to slow over the longer term. We think that SEG’s transition toward the faster-growing wind power segment should help to mitigate the slowdown from its declining core thermal power business.