3Q17 results in line with expectation

Shanghai Electric Group announced its 9M17 results: revenue wasRmb58.7bn, down 5% YoY; net profit was Rmb1.9bn, down 8% YoY,which accounted for 88% of our 2017 full-year estimates （9M16:

86%）。 On a quarterly basis, revenue was Rmb17.4bn （-17% YoY） in3Q17, and net profit was Rmb0.3bn, down 56% YoY and 64% QoQ.

Trends to watch

Rmb750mn of impairment losses recognized for coal-fired units in3Q; more to come in 4Q. The NEA issued detailed lists of coal-firedunits to be delayed or stopped from construction, which would affectthe company’s topline for 2017–2018. About Rmb750mn ofprovisions were made in 3Q17, including Rmb40mn for inventoriesand Rmb700mn for power plants. We expect more impairment lossesin 4Q as delays and cancellations are confirmed.

Power plants service and offshore wind segments to be the keyearnings drivers in 2018. Shanghai Electric now has a ~60% share ofthe offshore wind market and 3.6/4.0MW of WTGs in commercialoperation, 6MW under R&D and 7MW for future development.

Moreover, the power plants service segment may see toplineimprovement next year as new orders come in.

New nuclear projects in discussion, only a matter time. Nuclearproject approval is taking longer than the market expected. However,we expect no change in government’s 13th FYP target for nucleardevelopment and reiterate Shanghai Electric’s leadership in nuclearequipment production, especially in nuclear islands.

Earnings forecast

To factor in lower 4Q profit assumptions, we cut our 2017e net profitforecast by 8% to Rmb2,139 and introduce 2018e of Rmb2,386.

Valuation and recommendation

The stock is trading at 16.6x 2018 P/E and 0.8x P/B. We maintain BUYand HK$4.49 target price for the H-share and maintain HOLD andRmb8.13 price target for the A-share.

Risks

Severe margin pressure for coal-fired units.