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SH Electric has entered into an agreement to buy a 51% share inJiangsu Zhongneng, a subsidiary of GCL. The proposed deal valuesthe target company at no more than Rmb25bn; the consideration willbe paid 50% in cash and 50% in A share consideration issuance.

Comments

Expansion into solar manufacturing is suitable for the company’sreform. Investment in thermal power is under continuous restrictionsand the delay/cancellation of new units causes serious provisions tobe made to inventory and account receivables. The company’sexpansion into the solar sector is suitable for its reform and matcheswith China’s renewable energy development plan. The target assetcontains polysilicon and wafer production bases in Jiangsu, Xinjiangand Yunnan, as well as IPRs with advanced technology, such as CCZand FBR.

Market might be disappointed due to the improper timing andexpensive valuation of the deal. After the May 31 policy release, themarket is concerned about the profitability of solar manufacturersafter drops in new solar installation, polysilicon and wafer prices. Thevaluation implies 13.3x P/E & 1.5x P/B, much higher than GCL’scurrent valuation （7.5x P/E & 0.5x P/B）； the market might bedisappointed with this premium. The transaction is still pending theapproval of both companies’ shareholders and the Shanghai SASAC.

Valuation and recommendation

We maintain our earnings forecasts ahead of the company’s June 7conference call, and might adjust them after that.

SH Electric-H: maintain BUY rating and target price of HK$4.49,implying 29.4x/26.3x 2018/19e P/E, a 49% upside from its currentprice, which implies 19.8x/17.7x 2018/19e P/E.

SH Electric-A: maintain HOLD rating and target price of Rmb8.13,implying 67.8x/58.1x 2018/19e P/E, a 28% upside from its currentprice which implies 52.5x/46.9x 2018/19e P/E.

Risks

Transaction fails; target asset does not work well.