HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>China's ambition to build into a strong manufacturing country as revealed in 20th Party Congress should place <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a> and <a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">CIMC Enric Holdings (3899 HK)</a> in excellent positions.</li>
<li>The leadership in power and new energy equipment industry, improving gross margin outlook, well-covered order book and undemanding multiples are the key merits of <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a>. </li>
<li>
<a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">CIMC Enric Holdings (3899 HK)</a>'s good presence in clean energy, chemical/environmental and liquid food segments, global product competitiveness, secured order backlog and net cash position are its major edges. </li>
</ul>


China's ambition to build into a strong manufacturing country as revealed in 20th Party Congress should place Dongfang Electric (1072 HK) and CIMC Enric Holdings (3899 HK) in excellent positions.
The leadership in power and new energy equipment industry, improving gross margin outlook, well-covered order book and undemanding multiples are the key merits of Dongfang Electric (1072 HK). 

CIMC Enric Holdings (3899 HK)'s good presence in clean energy, chemical/environmental and liquid food segments, global product competitiveness, secured order backlog and net cash position are its major edges. 


Dongfang Electric (1072 HK) And CIMC Enric (3899 HK): Two Stocks for the Next Five Years

<ul>
<li>The 1Q22 result of <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a> kick-started FY22 with an encouraging new record high quarterly profit and a good recovery in YoY new order momentum.</li>
<li>We are excited to see DEC managed to control its selling, administrative and R&amp;D costs with a slight 2.7% YoY growth, compared with a solid 29.8% revenue increase.</li>
<li>Recurring pre-tax profit growth is estimated to be over 30% YoY, and its order backlog at around Rmb85.4bn, 1.8x its FY21 revenue. We consider its 7.7x FY22F PER very undemanding. </li>
</ul>


The 1Q22 result of Dongfang Electric (1072 HK) kick-started FY22 with an encouraging new record high quarterly profit and a good recovery in YoY new order momentum.
We are excited to see DEC managed to control its selling, administrative and R&amp;D costs with a slight 2.7% YoY growth, compared with a solid 29.8% revenue increase.
Recurring pre-tax profit growth is estimated to be over 30% YoY, and its order backlog at around Rmb85.4bn, 1.8x its FY21 revenue. We consider its 7.7x FY22F PER very undemanding. 


Dongfang Electric (1072 HK): From Strength to Strength

<p><a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric Corporation (1072 HK)</a> (DEC) has been rallying on the back of its hydrogen energy angle and the pumped storage story. Given the company's experience and leadership in hydro generating equipment, we think it is well positioned to capture the gigantic market opportunity from the government's push to increase pumped storage capacity in the country by potentially a CAGR of 16% between 2020 and 2035. </p><p>DEC's edges are its expertise and technical competence - it has completed complicated projects like the world's largest pumped storage (Fengning, Hebei), highest operating water heads in China (Changlongshan, Zhejiang) and largest single unit size of generation (Xianju, Zhejiang). Currently, it has pipeline in Fujian, Xinjiang, Chongqing and Henan among others. Despite the recent spike in share price, valuations are still not too demanding at 12.7x PER for FY21 and 11.4x for FY22. We even see likeliness for earnings upgrade after 1H21 result announcement set for 27-Aug.</p>

Dongfang Electric Corporation (1072 HK) (DEC) has been rallying on the back of its hydrogen energy angle and the pumped storage story. Given the company's experience and leadership in hydro generating equipment, we think it is well positioned to capture the gigantic market opportunity from the government's push to increase pumped storage capacity in the country by potentially a CAGR of 16% between 2020 and 2035. DEC's edges are its expertise and technical competence - it has completed complicated projects like the world's largest pumped storage (Fengning, Hebei), highest operating water heads in China (Changlongshan, Zhejiang) and largest single unit size of generation (Xianju, Zhejiang). Currently, it has pipeline in Fujian, Xinjiang, Chongqing and Henan among others. Despite the recent spike in share price, valuations are still not too demanding at 12.7x PER for FY21 and 11.4x for FY22. We even see likeliness for earnings upgrade after 1H21 result announcement set for 27-Aug.

Dongfang Electric (1072 HK): Pumped Additionally by Pumped Storage Story

<ul>
<li>The YTD underperformance of <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a> has put it on very attractive PER of 5.8x for FY23. More importantly, it has delivered both earnings and new order growth. </li>
<li>Financial position has improved with net cash of Rmb16.5bn and its recurring earnings soared 26.5% at 1H23. The adverse economic environment has not had an impact on its operations.</li>
<li>New orders amounted to Rmb48.9bn (+33.3% YoY), a record high, and we estimate backlog at Rmb166bn. This equals 2.5x FY23F revenue and suggests forward earnings are well covered.</li>
</ul>


The YTD underperformance of Dongfang Electric (1072 HK) has put it on very attractive PER of 5.8x for FY23. More importantly, it has delivered both earnings and new order growth. 
Financial position has improved with net cash of Rmb16.5bn and its recurring earnings soared 26.5% at 1H23. The adverse economic environment has not had an impact on its operations.
New orders amounted to Rmb48.9bn (+33.3% YoY), a record high, and we estimate backlog at Rmb166bn. This equals 2.5x FY23F revenue and suggests forward earnings are well covered.


Dongfang Electric (1072 HK): Don't Miss Out on This Undervalued Play

Thematic (Sector/Industry)

<ul>
<li>Supportive policies from central and local governments on the development of the hydrogen energy industry have boosted the share prices of the sector (up 12.3% YTD).</li>
<li>Inner Mongolia has eased regulations on electrolysis water hydrogen production projects while Shandong has waived hydrogen-powered vehicle tolls on highways. </li>
<li>
<a href="https://www.smartkarma.com/entities/beijing-sinohytec-co-ltd-57df3cd9-bd23-4f74-899b-d589f67fa85f" target="_blank" data-smartkarma-citation="entities:36866:1" rel="noopener">Beijing SinoHytec (2402 HK)</a>, <a href="https://www.smartkarma.com/entities/weichai-power-co-ltd-h" target="_blank" data-smartkarma-citation="entities:12508:1" rel="noopener">Weichai Power (2338 HK)</a>, <a href="https://www.smartkarma.com/entities/dongyue-group-ltd" target="_blank" data-smartkarma-citation="entities:20429:1" rel="noopener">Dongyue Group (189 HK)</a>, <a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">CIMC Enric (3899 HK)</a>, and <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a> have recorded good progress in hydrogen business.</li>
</ul>


Supportive policies from central and local governments on the development of the hydrogen energy industry have boosted the share prices of the sector (up 12.3% YTD).
Inner Mongolia has eased regulations on electrolysis water hydrogen production projects while Shandong has waived hydrogen-powered vehicle tolls on highways. 

Beijing SinoHytec (2402 HK), Weichai Power (2338 HK), Dongyue Group (189 HK), CIMC Enric (3899 HK), and Dongfang Electric (1072 HK) have recorded good progress in hydrogen business.


China's Hydrogen Economy: Re-Igniting Interests

China

Dongfang Electric Corporation Limited manufactures and sells hydro and steam power generators and AC/DC electric motors. The Company also provides repair, upgrade, maintenance, and other services for the products.

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Dongfang Electric (1072 HK)