Earnings missed but not a weak set of results

Shanghai Electric’s 2016 results (NP: -4% yoy), albeit below expectations, arerather resilient against industry headwinds. Key positives: 1) power equipmentbusinesses held up well as thermal weakness was largely offset by new energystrength; 2) Op-CF remained robust (+19% yoy to c.Rmb10bn); 3) GPMremained steady. Key negatives: 1) asset impairment charges stayed at highlevels; 2) ROE fell below 5%; 3) business outlook appears lukewarm.

Both headline and core earnings below expectations…

2016 reported NP of Rmb2.02bn (down 4% yoy) was 6%/8% shy of ourestimates (Rmb2.14bn) and the Street consensus (Rmb2.19bn). Core profit was8% below our estimates after excluding the non-operating gains of Rmb882mn(vs. DBe: Rmb650mn) while adding back the net impact from one-off itemsassociated with AEN (-Rmb237mn = +Rmb203mn gain from negativegoodwill – Rmb440mn provision for asset impairment).

…as asset impairment charges remained at high levels

Gross profit (+2% yoy) was 5% ahead of our estimates as GPM is moreresilient than our expectation (+40bps) while revenue came in 3% higher thanour estimates. We had previously expected its asset impairment charges tonormalize in 2016 after a big jump in 2015 (+140% yoy or 3.0% of sales vs.1.3% in 2014). Our expectation, however, turned out to be too optimistic ashigh asset impairment charges persisted in 2016, accounting for 3% of sales.The ratio was also high at 2.5% even after stripping out the impact from AEN.

Results review by segment

New energy & environmental protection: Revenue was up 11% yoy mainlydriven by wind turbines (+14% yoy). GPM expanded by 5.7ppt thanks toGPM normalization and rising contribution from higher-priced offshorewind turbines. New orders for wind turbines rose 18% yoy in 2016.

High efficiency & clean energy equipment: Revenue was down 5% yoymainly driven by coal-fired power equipment. We noted sales volumedropped by 10%/15%/16% yoy for generators/boilers/turbines in 2016. GPmargin, however, held up rather well (down 30bps yoy in 2016).

Industrial equipment: Revenue fell 4% yoy mainly driven by the disposal ofprinting machinery business as SMEIC’s elevator sales managed to growc.2% yoy despite macro headwinds. After-sales revenue for elevators rose12% yoy, reaching 25% of total elevator revenue last year (17% in 2015).

Modern services: Revenue was flattish yoy in 2016. GPM decreased by40bps yoy driven falling overseas engineering business. On the other hand,new orders surged by 70%+ yoy in 2016.