1H18 results beat expectation

1H18 revenue +24% YoY to Rmb51.3bn; NP +13% YoY to Rmb1.8bn.Results beat thanks to asset injected in 2H17, better-than-expectedenvironmental protection equipment （EPP） growth and thermalequipment segment recovery.

Trends to watch

EPP and thermal drove the revenue growth, gross margin in downtrend. Revenue from EPP, coal-fire unit, gas-fire unit +153%, +22%and +285% respectively in 1H18. Revenue from new product line+24% YoY in 1H18, better than our single digit growth expectation.But under pressure of raw material cost, gross margin of EPP, coal-fireunit and elevators -1.4, -5.2 and -0.6ppt respectively as we expected.

As orders for emerging business increase and thermal backlog arebeing executed faster, we lift 2018e revenue assumption on EPP andthermal. 1H18 new orders +32% to Rmb66.5bn, among which EPP,industrial equipment and power plant construction +229%, +58% and+79% respectively. As some previously suspended projects resumeconstruction amid power consumption growth in some regions,thermal backlog are being executed faster. We lift 2018e EPP andthermal revenue growth to 200%/21%, implying a 20% growth inoverall revenue.

Emerging business on the go. Though acquisition of Zhongneng failedin August, SHE remains positive on alternative energy andautomation business. We believe the segments will supportsustainable growth of SHE.

Earnings forecast

As 1H18 results beat, we raise our 2018/19 EPS forecasts by 36% and38% from Rmb0.12/0.14 per share to Rmb0.16/0.19.

Valuation and recommendation

Shanghai Electric Group （SHE）-A is trading at 30.0x 2018e and 26.4x2019e P/E. SHE-H is trading at 12.0x 2018e and 10.6x 2019e P/E. ForSHE-A, maintain HOLD and TP of Rmb8.13 （65% upside, 49.5x 2018eand 43.6x 2019e P/E）。 For SHE-H, maintain BUY and TP of HK$4.49（86% upside, 22.4x 2018e and 19.7x 2019e P/E. Risks: New ordersweaker than expected; financial cost further increases.