HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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<li>
<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>'s 1Q25 express report suggested earnings may increase 15-25% YoY, reversing the YoY decline in 4Q24 and FY24. This is encouraging. </li>
<li>Its signs record new orders in FY24, fuelling its order backlog to Rmb152.6bn, which equals 2x the FY25F revenue. 2H24 new order momentum is better than 1H24.</li>
<li>The pending A-share placement, while diluting EPS, will enhance book value for the H-share holders. Its 6.4x PER and 7.3% dividend yield are inexpensive.</li>
</ul>



Dongfang Electric (1072 HK)'s 1Q25 express report suggested earnings may increase 15-25% YoY, reversing the YoY decline in 4Q24 and FY24. This is encouraging. 
Its signs record new orders in FY24, fuelling its order backlog to Rmb152.6bn, which equals 2x the FY25F revenue. 2H24 new order momentum is better than 1H24.
The pending A-share placement, while diluting EPS, will enhance book value for the H-share holders. Its 6.4x PER and 7.3% dividend yield are inexpensive.


Dongfang Electric (1072 HK): Returning to Growth in 1Q25 Despite Weak FY24

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<li>
<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> showed encouraging QoQ improvements in profit trend, margins, new orders, and operating cash flow in 3Q24, though reported profit was still down in 9M24.</li>
<li>Cost control has contributed to 4.6pp QoQ gross margin expansion. Meanwhile, new order growth has accelerated to 63.8% YoY, from just a teens level in 1Q24 and 2Q24.</li>
<li>Our estimate suggests that backlog is enough to cover 1.9x its annual revenue, enhancing visibility. Its PER, dividend yield and P/B are all standing on attractive levels.</li>
</ul>



Dongfang Electric (1072 HK) showed encouraging QoQ improvements in profit trend, margins, new orders, and operating cash flow in 3Q24, though reported profit was still down in 9M24.
Cost control has contributed to 4.6pp QoQ gross margin expansion. Meanwhile, new order growth has accelerated to 63.8% YoY, from just a teens level in 1Q24 and 2Q24.
Our estimate suggests that backlog is enough to cover 1.9x its annual revenue, enhancing visibility. Its PER, dividend yield and P/B are all standing on attractive levels.


Dongfang Electric (1072 HK): Good Sequential Improvement Masked

<ul>
<li>The collapse in share price 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> is too excessive. The concerns on margin and orders are overplayed and its latest financial result is solid.</li>
<li>Recurring profit surged 24.8% in 3Q23 and gross margin expanded both YoY and QoQ. For 9M23, new orders rose 19.2% to reach 98% of full-year FY22 level.</li>
<li>We estimate backlog at Rmb197bn, or 3x consensus FY23F revenue, and this provides excellent protection to forward earnings. Its 5.8x and 4.4x PERs are just too undervalued.</li>
</ul>


The collapse in share price of Dongfang Electric (1072 HK) is too excessive. The concerns on margin and orders are overplayed and its latest financial result is solid.
Recurring profit surged 24.8% in 3Q23 and gross margin expanded both YoY and QoQ. For 9M23, new orders rose 19.2% to reach 98% of full-year FY22 level.
We estimate backlog at Rmb197bn, or 3x consensus FY23F revenue, and this provides excellent protection to forward earnings. Its 5.8x and 4.4x PERs are just too undervalued.


Dongfang Electric (1072 HK): We See an Opportunity

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<li>The market should be happy with the 43.9% YoY growth in recurring earnings at <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> in 1Q23. Gross margin of 18.7% is the highest since 2Q21.</li>
<li>New orders surged 26.1% YoY and 92.4% QoQ to a record Rmb22.6bn in 1Q23. We estimate backlog equals to 1.42x FY23F consensus revenue, meaning a very secured pipeline.</li>
<li>While EPS dilution is a concern, this has already been reflected in share price. The acquisitions of subsidiaries will enhance FY23 earnings. Its 8x PER and 0.8x P/B are inexpensive.</li>
</ul>


The market should be happy with the 43.9% YoY growth in recurring earnings at Dongfang Electric (1072 HK) in 1Q23. Gross margin of 18.7% is the highest since 2Q21.
New orders surged 26.1% YoY and 92.4% QoQ to a record Rmb22.6bn in 1Q23. We estimate backlog equals to 1.42x FY23F consensus revenue, meaning a very secured pipeline.
While EPS dilution is a concern, this has already been reflected in share price. The acquisitions of subsidiaries will enhance FY23 earnings. Its 8x PER and 0.8x P/B are inexpensive.


Dongfang Electric (1072 HK): Profit Surged, Record New Orders Signed

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<li>
<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>'s management update suggested that its outlook remains encouraging. Order backlog of Rmb87.8bn well covers the FY22 revenue at 1.57x.  </li>
<li>It is positive towards pumped storage, alternative power storage and hydrogen energy. Although they may not have significant near-term contribution, DEC is well-positioned in the long term.</li>
<li>While new A-shares issue will dilute EPS, this should lower gearing (including contract liabilities) to 32.1%, from 49.2%, and is positive to H-share holders as book value will be enhanced.</li>
</ul>



Dongfang Electric (1072 HK)'s management update suggested that its outlook remains encouraging. Order backlog of Rmb87.8bn well covers the FY22 revenue at 1.57x.  
It is positive towards pumped storage, alternative power storage and hydrogen energy. Although they may not have significant near-term contribution, DEC is well-positioned in the long term.
While new A-shares issue will dilute EPS, this should lower gearing (including contract liabilities) to 32.1%, from 49.2%, and is positive to H-share holders as book value will be enhanced.


Dongfang Electric (1072 HK): Positive Takeaways from Post-Result Presentation

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)