1Q17 results broadly in line; Hold H-shares and Sell A-shares

Shanghai Electric reported 1Q results on Friday （21 April） and held aconference call this morning. Overall, 1Q results were broadly in line with NPdown 4% yoy, which achieved 23% of our 2017E （vs. historical average of26%）。 Slower-than-expected sales （down 16% yoy） were largely offset by itsstronger-than-expected GP margin （+3.5ppt yoy）。 Full year outlook remainsresilient as management expects wind and nuclear equipment to drive powerequipment growth while overseas EPC projects will accelerate going forward.

Top-line revenue slower than expected…

1Q revenue of Rmb13bn was down 16% yoy and accounted for 16% of ourfull-year estimates. This tracks behind the historical average of 21% in 1Q（since 2011）。 The sluggish top-line growth was mainly driven by: 1） a delay inwind power projects （wind turbine sales: -46% yoy）； 2） slower-than-expectedprogress for EPC projects （EPC revenue: -7% yoy）； and 3） a drop in boiler sales（coal-fired equipment sales: -12% yoy）。

…but largely offset by better-than-expected GP margin

1Q GP margin came in at 23.5%, up 3.5ppt yoy. This tracks ahead of our fullyear estimate of 18.7%. The stronger-than-expected GP margin was mainlydriven by: 1） an 11.5ppt GPM expansion for wind turbines; 2） a 5.6ppt GPMexpansion for nuclear island equipment; 3） a 60bps GPM expansion forelevators; and 4） a 20bps GPM expansion for EPC. Such GPM improvement ledto a more resilient 1Q GP （only down 1% yoy） and NP （down 4% yoy）。

Key takeaways from the analyst briefing call

Wind power equipment: management noted that the sluggish 1Q windturbine sales were largely driven by the fact that sales of offshore windturbines （70% of total wind backlog as of end-2016） are normally veryback-end loaded. Sales should catch up in 2Q and onwards. For the fullyear, management is targeting growth for both revenue and new orders.

Thermal power equipment: New orders were down 63% yoy in 1Q whilebacklog remained at a high level. Amid intensifying competition, pricinghas already been falling over the past few years, to a level where furtherdownside should be limited. Shanghai Electric will mainly focus on highquality orders, fully leveraging on its competitiveness in technology.

Nuclear power equipment: The anticipated resumption of new nuclearprojects might have limited impact on its new orders and this year’snuclear revenue recognitions given the long project cycle. For 2017,management is still expecting growth for this segment off low base.

Maintaining Hold for H-shares and Sell for A-shares; risksWe have largely kept our earnings estimates unchanged post 1Q17 results. Webase our target prices （HKD3.6 for H-shares and Rmb3.2 for A-shares） on 0.90x2017E BVPS, against an estimated ROE of c.5% – with an eye on sectorcomparables. We maintain our Hold rating for H-shares and reiterate Sell for Ashares:

Key risks include: faster-/slower-than-expected decline in coal-firedequipment sales and good/poor execution of asset injections.