Investment Highlights
The Company, a firm leader in the Chinese cable material market,reported steady growth in turnover but slight decline in net profitduring 1H16. During the reporting period, the Company realizedturnover of Rmb897mn (+27.5% YoY), net profit attributable toshareholders of Rmb29mn (-9.49% YOY), and recurring net profitattributable to shareholders of Rmb30mn (-2.78% YoY). Itsmanagement expense rose 45% YoY as a number of subsidiaries,including Suzhou Gongxun, SharpReport Info Tech and DeweiCommercial Factoring, came into operation in succession. Although thedownstream electric wire and cable market remained in the doldrumsdue to weak macroeconomic conditions, the Company managed torealize steady revenue growth, underscoring its leading market position.Additionally, the Company announced to utilize the capital reserve toissue 5 bonus shares for every 10 existing shares.
The Company set up a hydrogen energy subsidiary, signalling itsentry into the hydrogen fuel cell market. During the reporting period,the Company invested Rmb100mn to set up a wholly-owned subsidiary,i.e. “Shanghai Dewei Huxing Hydrogen Energy Technology Co., Ltd.”,which will be engaged in R&D, production and sale of hydrogen fuelcells, fuel cell power systems, hydrogen storage systems etc. TheCompany started investment in the hydrogen fuel vehicles in 2015.Establishment of the wholly-owned subsidiary reflects its bullishforecast and strong determination to tap long-term potential in thehydrogen fuel cell and hydrogen fuel vehicle markets. In addition, theCompany also set up a joint-venture investment fund in Cayman tojointly invest in the overseas new energy cell technologies.
Cooperation with Sunrise Power further underscores theCompany’s firm determination to explore in the hydrogen fuel cellmarket. On Aug 18, the Company announced it has reached a strategiccooperation agreement with Sunrise Power. Sunrise Power maintainssolid cutting edges in fuel cell and voltaic pile R&D, and has previouslyobtained Rmb125mn subsidy from the government for “R&D of newenergy vehicles”. It owns the full intellectual property right of hydrogenfuel cells, and has attracted investment from listed companies includingSAIC Group, Zhejiang Narada Power Source, Lanzhou GreatwallElectrical etc. According to the cooperation agreement, the Companywill increase the use of Sunrise Power’s products in its hydrogen fuelpower systems and energy storage systems and in exchange, it willgain technology support from Sunrise Power. This shows theCompany’s determination to explore the hydrogen fuel cell market and itmay help the Company secure an earlier-mover advantage before thehydrogen fuel – one of the cleanest materials – gains rapiddevelopment.
The Company continues to enrich its product offerings in the traditional business field to tap thevast potential of import substitution. During the reporting period, the Company’s new products,including the 125℃ low-smoke, halogen-free compounds for cables of charging piles and the 110kVsuper-smooth semi-conductive shielding material for cables, passed certification of local and nationalgovernments in succession. It maintained heavy investment in the cable insulation materials market.Thanks to steady growth of the UHV and charging pile markets as well as the economies of scale, theCompany’s core business is expected to sustain stable growth going ahead.
Potential risks: Sluggishness in the traditional market, and dim short-term prospect in the hydrogen fuelcell market.
Earnings forecast, valuation and investment rating: We believe the Company will gradually sharpenits leading advantage in traditional core business market, and expect it to make net profit ofRmb93mn/155mn/222mn, implying EPS of Rmb0.23/0.38/0.55, during 2016/17/18E, respectively. Underthe sum-of-the-parts valuation method, we believe (a) the Company’s traditional core business willsustain an earnings CAGR of 52% during 2015~18, and it deserves 1x PEG, translating to acapitalization of Rmb~5bn, in light of the valuation and earnings growth momentum of the downstreamcable companies; (b) due to lack of comparable assets in the hydrogen fuel cell market, we refer tovaluation of Beijing SinoHytec (834613), a NEEQ-listed company, during its latest two fundraisingactivities (listed price/follow-on offering price at Rmb19.29/58.46, or capitalization of Rmb3.3bn/9.9bn,respectively) and value the Company’s fuel cell business at Rmb4bn. These add up to a combinedcapitalization of Rmb9bn, or Rmb21/share, for the Company. Initiate coverage with an OVERWEIGHTrating.
