HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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

<ul>
<li>We see the recent sell-down of <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> unjustified. 1Q23 revenue grew a healthy 19.6%, and management indicated excellent margin expansion as well. </li>
<li>New orders signed accelerated in Mar to 21.6%, from just 10.7% in Jan-Feb. Its order backlog reached Rmb18.9bn (+22.3%). For hydrogen business, new orders even grew 61%. </li>
<li>Guidances are for double-digit revenue growth in FY23, and besides better gross margin, lower tax rates have benefited net margin. We estimate 1Q23 profit may have increased ~50%.</li>
</ul>


We see the recent sell-down of CIMC Enric Holdings (3899 HK) unjustified. 1Q23 revenue grew a healthy 19.6%, and management indicated excellent margin expansion as well. 
New orders signed accelerated in Mar to 21.6%, from just 10.7% in Jan-Feb. Its order backlog reached Rmb18.9bn (+22.3%). For hydrogen business, new orders even grew 61%. 
Guidances are for double-digit revenue growth in FY23, and besides better gross margin, lower tax rates have benefited net margin. We estimate 1Q23 profit may have increased ~50%.


CIMC Enric (3899 HK): It's Not My Fault, I'm Resilient

<ul>
<li>After posting a decent FY22 result, earnings momentum for <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> should sustain, underpinned by clean energy recovery and chemical and environmental equipment demand.  </li>
<li>2M23 new orders growth stayed healthy at 10.7%, evidencing positive demand outlook. Hydrogen Energy is a growing driver as revenue will reach Rmb700m in FY23 and Rmb3bn in FY25.</li>
<li>The stock's PERs of 11.7x and 9.5x for FY23 and FY24, respectively, appear inexpensive in view of 19% earnings CAGR. Net cash position also adds an appeal to us.</li>
</ul>


After posting a decent FY22 result, earnings momentum for CIMC Enric Holdings (3899 HK) should sustain, underpinned by clean energy recovery and chemical and environmental equipment demand.  
2M23 new orders growth stayed healthy at 10.7%, evidencing positive demand outlook. Hydrogen Energy is a growing driver as revenue will reach Rmb700m in FY23 and Rmb3bn in FY25.
The stock's PERs of 11.7x and 9.5x for FY23 and FY24, respectively, appear inexpensive in view of 19% earnings CAGR. Net cash position also adds an appeal to us.


CIMC Enric (3899 HK): Growth Outlook Secured by Encouraging Orderbook

Thematic (Sector/Industry)

<ul>
<li>The NPC and CPPCC will likely to cover more on the future of China's energy security and potential development of a national master plan for the hydrogen energy industry chain. </li>
<li>The latest announcement of the 14th 5-year hydrogen energy Plan in Inner Mongolia is another important mark for the industry, with the province's end-2025 industry value set at Rmb100bn.  </li>
<li>We expect more opportunities after the "Two Meetings" for key players including <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>, <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/weichai-power-co-ltd-h" target="_blank" data-smartkarma-citation="entities:12508:1" rel="noopener">Weichai Power H (2338 HK)</a> to benefit. </li>
</ul>


The NPC and CPPCC will likely to cover more on the future of China's energy security and potential development of a national master plan for the hydrogen energy industry chain. 
The latest announcement of the 14th 5-year hydrogen energy Plan in Inner Mongolia is another important mark for the industry, with the province's end-2025 industry value set at Rmb100bn.  
We expect more opportunities after the "Two Meetings" for key players including Cimc Enric (3899 HK), Dongfang Electric (1072 HK) and Weichai Power H (2338 HK) to benefit. 


China's Hydrogen Economy: NPC and CPPCC to Give a Boost?

<ul>
<li>
<a href="https://www.smartkarma.com/entities/lonking-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3944:1" rel="noopener">Lonking Holdings (3339 HK)</a>'s 2H24 earnings will benefit from accelerated special purpose bond issuance and a low base. Potentially higher dividend payout is another attraction.</li>
<li>
<a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> may realise a partial gain from South China Logistics Park transformation and lower interest expenses in 2H24. Rmb appreciation will help, too.</li>
<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> should witness stronger order momentum in 2H24 as demand from transmission and generation upgrades surges. Order backlog now covers 3.5x revenue.</li>
</ul>



Lonking Holdings (3339 HK)'s 2H24 earnings will benefit from accelerated special purpose bond issuance and a low base. Potentially higher dividend payout is another attraction.

Shenzhen International (152 HK) may realise a partial gain from South China Logistics Park transformation and lower interest expenses in 2H24. Rmb appreciation will help, too.

Dongfang Electric (1072 HK) should witness stronger order momentum in 2H24 as demand from transmission and generation upgrades surges. Order backlog now covers 3.5x revenue.


China Strategy: Top 3 Ideas for the Rest of This Year

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)