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Deutsche Bank Markets Research

Asia

China

Industrials

Manufacturing

Industry

Shanghai Electric

Date

25 March 2017

Forecast Change

NDR takeaways – sailing through the power equipment downcycle

A resilient outlook painted during Hong Kong NDR (March 20-22)

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

Nick Zheng, CFA

Research Analyst

(+852 ) 2203 6198

[email protected]

Sky Hong, CFA

Research Analyst

(+852 ) 2203 6131

[email protected]

Key Changes

Company Target Price Rating

2727.HK 3.50 to 3.60(HKD) -

601727.SS 3.00 to 3.20(CNY) -

Source: Deutsche Bank

Companies Featured

Shanghai Electric (2727.HK),HKD4.08 Hold

2016A 2017E 2018E

P/E (x) 19.4 23.4 21.7

EV/EBITDA (x) 2.1 2.6 2.9

Price/book (x) 0.9 1.0 1.0

Shanghai Electric (601727.SS),CNY8.42 Sell

2016A 2017E 2018E

P/E (x) 54.8 54.5 50.4

EV/EBITDA (x) 13.5 12.0 11.9

Price/book (x) 2.5 2.4 2.4

Source: Deutsche Bank

Sales breakdown by segment (2019E)

Coal10%

Gas4%

Wind13%

Nuclear5%

Modern service

25%

Elevators22%

Others21%

Source: Deutsche Bank estimates

Revenue breakdown (Rmb bn)

2016A 2019E 2017-19 CAGR

Total sales 79.1 87.2 3%

Coal 12.0 9.1 -9%

Gas 2.0 3.8 25%

Wind 8.7 11.4 9%

Nuclear 2.7 4.0 15%

Modern service 17.8 21.5 6%

Elevators 18.1 18.9 2%

Others 17.9 18.5 1%

Source: Company data, Deutsche Bank estimates

We hosted a post-results NDR with Shanghai Electric management in HK on March 20-22. The company expects its power equipment business to remain resilient, with rising offshore wind and nuclear equipment offsetting the coal-fired equipment downcycle. For non-power equipment, overseas EPC and basic parts business (through the upcoming asset injection) will likely be the two key drivers. We project an earnings CAGR of 6% over 2017-19. At current levels, valuation looks fair for H-shares (hence Hold) but rich for A-shares (hence Sell). In this note, we summarize managements responses to 20 FAQs.

Diminishing impact from coal-fired equipment downcycle The company sees manageable downside risk to its coal-fired equipment sales during 2017-18, as most of the projects to be delivered have already gone half way through their construction cycles, which means substantial losses for project owners if those projects get suspended. Management expects its coal-fired equipment sales to sustain at c.Rmb10bn toward 2020 (2016: Rmb12bn), which would account for only c.10% of its 2020 sales target of Rmb100bn. We are more cautious, expecting its coal-fired equipment revenue to drop by 8-10% in 2017-19 and account for 10% of its sales by 2019.

Key drivers for power equipment: wind (2017-18) and nuclear (2019-20) Despite disappointing 2020 development targets for wind power announced by the government, management believes its unique positioning in offshore wind power equipment (c.50% market share globally in 2016) should allow its wind turbine segment to sustain growth at least during 2017-18. Nuclear power projects should see concrete resumption this year, and more projects are expected to kick off construction ahead. This should drive accelerating nuclear revenue recognition starting in 2019. We project a CAGR of 9% and 15% for its wind and nuclear equipment sales, respectively, over 2017-19.

Key drivers for non-power equipment: overseas EPC and basic parts Elevator business should remain stable, with rising after-sales and escalator sales offsetting weakness in new sales for traditional elevators. Management expects the injection of SPM to bring immediate accretion (sales of Rmb7-8bn) and to strengthen its strategic positioning in the basic parts business, in light of the government’s strong push for localization of core components. For overseas EPC, it will mainly focus on the countries alongside the “One Belt One Road” and only undertakes projects that are on Sinosure’s list to manage risks. We project a 2017-19 CAGR of 3% for non-power equipment sales.

Tweaking estimates and target prices while retaining ratings; dividend; risks Incorporating the 2016 results and guidance, we lowered our earnings estimates by 7% for 2017/18 and introduced our 2019 forecasts. We raised our target prices for H-shares to HKD3.6 and for A-shares to Rmb3.2 as we slightly lift our target P/B to 0.90x (vs. 0.85x previously) to reflect the potential for ROE accretion from the announced asset injections. We expect Shanghai Electric to resume dividend payout this year after completing its A-share placement. This, along with the distribution of deferred dividends for 2015-16, should lead to a 2017 dividend yield of c.4% for H-shares. We maintain Hold for H-shares and reiterate Sell for A-shares. Key risks: faster-/slower-than-expected decline in coal-fired equipment sales and good/poor execution of asset injections.

Distributed on: 24/03/2017 21:57:26 GMT

25 March 2017

Manufacturing

Shanghai Electric


20 Frequently Asked Questions (FAQs)

Overall outlook – revenue and margins

FAQ#1: What is the growth outlook for Shanghai Electric during the 13th Five-

Year-Plan period?

In short, the company expects to increase its sales to Rmb100bn by 2020, with

wind power equipment being a key driver in 2017-18 and nuclear power

equipment emerging as a key driver in 2019-20.

Shanghai Electric is expecting to grow its revenue to Rmb100bn by 2020

(2016: Rmb79bn). To accomplish this goal, the company expects:

Wind turbine business to remain a key growth driver during 2017-18

Nuclear power business to take off during 2019-20

Coal-fired power equipment business to sustain a revenue size of

Rmb10bn from 2019 onwards

Elevator business to remain steady, with rising after-sales service sales and

escalator sales offsetting the weakness in its traditional elevator business

Basic parts business to emerge as a new growth driver following its

acquisition of Shanghai Prime Machinery

Overseas EPC business to accelerate in light of China’s “One Belt One

Road” policy initiative

The company also aims to achieve profit growth that is faster than top-line

growth.

FAQ#2: What is the GP margin outlook in the coming years?

In short, Shanghai Electric expects a stable GP margin in the coming years.

Management expects its GP margin:

For the new energy and environment protection segment to expand, with

volume ramping up for both wind and nuclear island equipment

For the high-efficiency and clean energy equipment segment to see a

slight decline driven by coal-fired power equipment

For the industrial equipment segment to remain steady

For the modern service segment to remain stable

Strength in new energy

business should cushion

thermal downcycle

Basic parts and overseas EPC

will likely be the two growth

drivers for the non-power-

equipment segment

25 March 2017

Manufacturing

Shanghai Electric


High-efficiency and clean energy equipment segment

FAQ#3: What are the implications for the company’s coal-fired power

equipment business from the government’s tightening control on thermal

power supply? Does the company see any near-term impact from the

suspension of 50GW coal power projects announced earlier this year?

In short, the impact to 2017-18 revenue should be limited, but it may negatively

affect the revenue outlook for 2019 and onwards.

Based on the company’s on-the-ground checks, the announced 50GW thermal

project suspension did not come with details – i.e. it has not yet been finalized

as to which project would be affected.

According to the company’s production plan, Shanghai Electric is still

expecting mild volume growth for 2017-18. In terms of revenue, the company

does not expect big drop in sales for the coming two years (2017-18), and the

sales decline is expected to be milder than what was seen in 2016 (i.e. down

14% yoy).

The typical construction cycle for a coal power plant is three to four years.

Most of the projects to be delivered in 2017-18 have already gone half way

through the cycle (one to two years), which means substantial losses for

project owners if those projects are suspended. This is unlikely, in

management’s view.

For 2019, the impact could be bigger, but the company expects its revenue for

coal-fired power equipment to sustain at c.Rmb10bn (vs. Rmb12bn in 2016)

from 2019 onwards. This, along with the company’s sales target of Rmb100bn

by 2020, means that coal-fired equipment will likely account for only c.10% of

its revenue by 2020 (Figure 1).

As of end-2016, total order backlog for coal-fired power equipment amounted

to Rmb97.2bn, of which Rmb47.3bn (Figure 2) has already come into effect

(covering 3.4x 2016 coal-fired equipment sales).

FAQ#4: What is the pricing trend in recent years for coal-fired power

equipment? How does the company plan to mitigate the margin pressure from

rising raw material costs?

In short, management sees mild pricing declines for its focused coal-fired

equipment (i.e. generators and turbines).

Rising raw materials may adversely affect its margin from 2019, but Shanghai

Electric is striving to mitigate the impact by 1) undertaking more high-margin

overseas projects; and 2) implementing more stringent cost-control measures.

Management noted that pricing competition is much fiercer for boilers

because of the pricing war initiated by Dongfang Electric and Harbin Electric.

As a result, most of Shanghai Electric’s boiler orders were in fact loss-making

in recent years. To avoid this, the company has been more disciplined in taking

boiler orders, and the percentage of boiler orders has been declining.

In the meantime, Shanghai Electric has been focusing more on generators and

turbines, in which the company believes that it has visible competitive

Figure 1: Management expects coal-

fired equipment sales to account for

only c.10% of sales by 2020

49

67

90

23

12

10

-

20

40

60

80

100

120

2011 2016 2020 (Target)

Sale

s (

Rm

b b

n)

Others Coal-fired power equipment

Source: Company data, Deutsche Bank

Figure 2: Order backlog breakdown

for coal-fired power equipment (end-

2016)

Orders not yet coming into effect; 49.9; 51%

Orders coming into effect; 47.3;

49%

Source: Company data, Deutsche Bank. Note: In Rmb billion.

Shanghai Electric’s boiler

factory generated a net loss of

Rmb233m in 2016

25 March 2017

Manufacturing

Shanghai Electric


advantages over its local peers. Pricing decline for these two products has

been around 5% in recent years.

The recent hike in raw material pricing should only affect its GP margin from

2019, as the orders to be delivered in coming years were signed two to three

years ago and the pricing was locked in. In addition, the price hike for specialty

steel should be much milder than that for conventional steel.

To mitigate the cost pressure:

The company plans to undertake more overseas power EPC projects

(alongside “One Belt One Road”), as these projects typically generate

higher GPM (vs. domestic projects) for the equipment part.

Shanghai Electric will continue to strengthen its cost controls by raising

local contents.

In the mid-term to long term, the company believes that the sustainable GP

margin level for coal-fired power equipment should be slightly below 20%.

FAQ#5: How does the company see its gas turbine business evolving in the

longer term?

In short, its gas turbine sales will continue to grow off a low base in the near

term. Profitability should keep improving with volume ramping up. In the longer

term, its strategic partnership with Ansaldo (AEN) should bear fruit.

Shanghai Electric’s sales of gas turbines jumped by 84% yoy (to Rmb2bn) in

2016. Its GP margin also improved significantly to 8.6% (vs. -3.5% in 2015),

with volume ramping up rapidly. Its order intake also stayed at a high level in

2016 (Rmb3.6bn).

Partnering with AEN and Posteitaliane, Shanghai Electric is currently

developing H-class gas turbine technology, which is considered the highest

technology standard for gas turbines.

In addition, AEN’s competitive position has been further strengthened after it

acquired Alstom’s heavy-duty gas turbine assets, as required by European

regulators (avoiding monopoly following GE’s acquisition of Alstom’s energy

business).

New energy and environment protection segment

FAQ#6: The Chinese government’s 2020 capacity target for wind power looks a

bit disappointing; why is the company still upbeat on its wind power business?

In short, Shanghai Electric will continue to focus on the offshore wind power

equipment business and maintain its dominance. It will remain a key growth

driver in 2017-18.

Indeed, the 2020 wind capacity target of 210GW appears a bit disappointing,

as it suggests a visible decline in annual capacity addition in the coming years.

However, of the 210GW target, 5GW will be for offshore wind power capacity,

compared with 1.63GW as of end-2016 (Figure 3). This translates into an

annual capacity addition of 842.5MW in the coming four years (vs. capacity

25 March 2017

Manufacturing

Shanghai Electric


addition of 592.2MW in 2016). Investment density for offshore wind power

capacity is higher at >Rmb7,000/KW compared to onshore capacity.

Figure 3: Offshore wind power capacity in China (2010-16)

0.14 0.11 0.130.06

0.23

0.36

0.59

0.15

0.26

0.390.45

0.68

1.04

1.63

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2010 2011 2012 2013 2014 2015 2016

GW

Capacity addition(GW) Year-end capacity (GW)

Source: CWEA, Deutsche Bank

Moreover, according to CWEA, Shanghai Electric dominated the domestic

offshore wind turbine market, with >80% share in 2016’s capacity addition

(Figure 5) and c.60% share in China’s total installed offshore wind capacity as

of end-2016 (Figure 4). The company also ranked number one globally in 2016,

with 48% market share.

Figure 4: Installed offshore wind power capacity by

manufacturer (end-2016)

Figure 5: Offshore wind power capacity addition by

manufacturer (2016)

Shanghai Electric

58%

Envision11%

Sinovel Wind11%

Gold Wind10%

XEMC Wind Power

4%

United Power

2%

HZ Wind Power

2%

Others2%

Shanghai Electric

83%

Envision8%

Gold Wind8%

HZ wind power

1%



Overall, management expects its wind turbine sales to exceed Rmb10bn in

2017 (or c.15% yoy growth vs. 2015’s Rmb87bn). The company also aims to

grow its new order for wind turbines by Rmb1bn to Rmb14bn in 2017 (or +8%

yoy).

25 March 2017

Manufacturing

Shanghai Electric


Figure 6: Wind turbine sales

breakdown – onshore vs. offshore

(2015-16)

Figure 7: Wind turbine new order


(2015-2016)

Figure 8: Wind turbine order backlog


(2015-16)

20%

38%

81%

62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016

As %

of w

ind turb

ine s

ale

s

Offshore Onshore

33%

61%

67%

39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016

As %

of w

ind turb

ine n

ew

ord

er

Offshore Onshore

43%

70%

57%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016

As %

of w

ind turb

ine b

acklo

g

Offshore Onshore




FAQ#7: What are the company’s views on the economics of offshore wind

power projects?

In short, management believes that the economics of offshore wind power

projects should improve with volume gradually ramping up.

The economics for offshore power projects are not optimal at the moment, but

management believes that key competitive advantages include 1) proximity to

coastal regions where the economy is typically more developed; 2) higher

power generation capacity (mainstream type of onshore wind turbine is ≤2MV

vs. 4MV for offshore wind turbine); 3) a more stable source of wind power; 4)

easy connection to the grid; and 5) less land occupation. Upfront investment is

typically substantial, but management expects the economics to improve with

volume gradually ramping up.

FAQ#8: What is the outlook for nuclear power business?

In short, management believes that nuclear power equipment will emerge as a

meaningful growth driver from 2019 as project approvals accelerate. Scope for

market share gains exists with its likely certification of CAP1000 technology.

2017 is the year that will likely see concrete resumption of nuclear power

projects. Management expects a total of eight nuclear projects to receive

green lights from the government and kick start construction in 2017.

The company aims to grow its new orders for nuclear island to >Rmb3bn in

2017 (vs. 2016’s Rmb2.15bn). In terms of revenue, the company guides for

10% growth in 2017. GP margin contraction in 2016 was mainly driven by

product mix and higher R&D expenses for fourth-generation nuclear

technology. Scope for margin expansion exists with volume ramping up.

Going forward, to meet the government’s development targets for nuclear

power by 2020, management expects six to eight nuclear projects to obtain

approvals every year.

Given Shanghai Electric adopts a percentage of completion method for nuclear

revenue recognition and the construction cycle is typically three to six years,

sales should see significant acceleration from 2019.

The company estimates that 1GW of nuclear power investment will translate

into Rmb2bn in orders for nuclear island equipment and Rmb1bn in orders for

25 March 2017

Manufacturing

Shanghai Electric


nuclear conventional island equipment. Historically, Shanghai Electric has 40%

market share in nuclear island equipment and 30% market share in

conventional island equipment.

Shanghai Electric expects successful certification of its CAP1000 technology to

facilitate its market share gain in nuclear pumps, in which it currently only has

single-digit market share.

Industrial equipment segment

FAQ#9: What is the growth outlook for elevator business?

In short, management expects revenue for the segment to remain steady, with

strength in escalators and after-sale services offsetting weakness in new sales

for traditional elevators.

Management expects a stable outlook for the elevator segment.

Sales volume is expected to sustain positive growth, but revenue may

remain steady, as pricing will likely keep trending down amid intensifying

pricing competition.

Escalator sales should see higher growth driven by infrastructure projects.

That said, revenue size is relatively small at the moment, only around 1/11-

1/10 of its sales for traditional elevators.

After-sales services will be the key growth driver. Revenue was up 12%

yoy in 2016, with its contribution rising to 25% vs. 23% one year ago

(Figure 9).

Out of the total installed base of 600k units sold by Shanghai Mitsubishi,

only 250k units currently receive after-sales services from the OEM. The

company expects to grow its after-sales service base to 300k units in 2017.

Globally, after-sales services typically generate higher margin (vs. new

sales), but this is not the case in China due to fierce competition with

independent contractors.

However, this (low profitability for after-sales services) is set to improve

with the enforcement of safety regulations for special equipment, which

should give OEMs more competitive advantages. Volume ramp-up should

also facilitate margin expansions.

Figure 9: Elevator revenue

contribution by after-sales services

80% 77% 75%

20% 23% 25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016A

s %

of ele

vato

r sale

s

New sales After-sales service


25 March 2017

Manufacturing

Shanghai Electric


FAQ#10: What does the company expect the acquisition of Shanghai Prime

Machinery (SPM) to bring to this segment?

In short, immediate profit accretion and the import substitution potential for key

components in the future.

In addition to immediate revenue accretion of Rmb7-8bn, management

expects the acquisition of SPM to strengthen its strategic positioning in basic

parts business. Localization of core components is one of the Chinese

government’s priorities under the “Made in China 2025” initiative.

SPM has four business segments (Figure 10):

Turbine blade: Profitability has been improving, driven by the internal

restructuring and rising export sales. The segment is a high-end

manufacturing business and is asset heavy in nature. Management,

however, does not expect high growth and expects sales revenue to be

largely capped at Rmb1bn going forward.

Cutting tool: SPM is the technology leader in the domestic market, but its

technology gap compared to global leaders is still substantial. Of its

revenue, 70% is derived from low-end products, as the high-end market is

currently dominated by foreign players. Revenue size is expected to be

around Rmb600-800m. Future growth will likely be driven by business

model innovation and consolidation of distribution channels, which are the

two priorities for Shanghai Electric following the acquisition.

Bearing: SPM has three production plants for this business: 1) large-scale

bearing (for wind power and rolling stocks); 2) automotive bearing; and 3)

precision bearing (for aviation and aerospace). These businesses, however,

are largely niche-market focused.

Fastener: This is by far the biggest segment for SPM. SPM recently

acquired Nedschroef, which supplies fasteners to big auto makers like

BMW and Mercedes-Benz. In the domestic market, auto fastener is

dominated by foreign makers. This should present huge opportunities for

SPM if the synergy is achieved as expected.

FAQ#11: What is the company’s strategy for industrial automation business?

In short, acquisitions will be the key driver, and automation system integrators

with a niche vertical focus will be Shanghai Electric’s key targets.

The expansion of its industrial automation business will be driven by

acquisitions, which will focus on automation system integrators for niche

verticals. This is in line with what the company has been doing lately

(acquisition of Manz, a leading new energy automation solution provider, and

Broetje Group, a leading automation solution provider for the aerospace

industry).

After these acquisitions, the company intends to further consolidate these

companies and help them penetrate into domestic markets. At the moment,

Shanghai Electric does not have plans to make big acquisitions in the industrial

robotics area.

Figure 10: SPM – revenue

breakdown (2016)

Bearing; 762 ; 10%

Blade; 958 ; 13%

Tool; 498 ; 6%

Fastener; 5,429 ; 71%

Source: Company data, Deutsche Bank. Note: in Rmb millions.

25 March 2017

Manufacturing

Shanghai Electric


Modern service segment

FAQ#12: Why did the segment’s operating profit margin drop in 2016?

The OPM contraction was mainly because of: 1) higher investment gains for

financial services in 2015; and 2) higher contribution of low-margin

photovoltaic EPC projects.

FAQ#13: What are the key opportunities for overseas EPC business, and how

does the company manage risks?

In short, Shanghai Electric will focus on the countries alongside the “One Belt

One Road,” and it only undertakes those projects that are on Sinosure’s list to

manage risks.

EPC is a more popular form of contract for power projects in the overseas

markets compared to the domestic market. For Shanghai Electric, overseas

EPC projects typically generate higher equipment margin (these projects

typically procure Shanghai Electric’s equipment) compared with domestic

projects. In light of the thermal downturn in the domestic market, the company

intends to undertake more overseas power EPC projects to mitigate the

negative impact.

Of the Rmb22.17bn new EPC orders signed in 2016, 85% are overseas EPC

projects.

Of the Rmb59.7bn EPC order backlog as of end-2016, 75% is overseas EPC

projects. Rmb45bn has not yet come into effect.

Currently, major overseas EPC projects signed or likely to be signed include:

The Pakistan project is expected to kick off contract signing this year after

signing the cooperative agreement in April 2016. Total size of this project

is expected to be USD1.8bn.

Shanghai Electric has been closely monitoring a number of EPC projects in

Iran and Iraq, which if secured could bring out billions of USD contracts.

The Egypt project (Rmb17.9bn) has not yet come into effect, as

prepayment has not yet received.

To manage risks, Shanghai Electric will mainly focus on the countries

alongside the “One Belt One Road,” and it only undertakes those projects that

are on Sinosure’s list.

FAQ#14: What are the key opportunities and challenges for revamping existing

coal-fired power plants?

In short, stricter emission requirements should drive power plant service

business, and the company targets to grow the business by 50% yoy per annum.

Shanghai Electric expects stricter regulation for environmental protection to

drive revamping opportunities for existing coal-fired power plants. This

business is included in its power plant service segment.

Currently, average coal consumption for coal-fired power plants is 310g/KW,

and the government intends to lower it to <300g/KW for >600MW power

plants in five years. Shanghai Electric’s 1000MW ultra-supercritical second

reheat technology can lower the coal consumption to only 254g/KW, which is

the leading level in China. In the coming years, the company aims to grow this

25 March 2017

Manufacturing

Shanghai Electric


business by 50% yoy per annum. The key challenge is the competition with

IPPs’ internal engineering arms.

SOE reform and industry consolidation

FAQ#15: What is the SOE reform potential for Shanghai Electric?

In short, asset restructuring is coming to an end. Employee stock ownership

may not be the best option for Shanghai Electric to incentivize its employees

given the variety of its business operations.

After the two rounds of asset injections in 2015-16, its parent company’s

group restructuring is coming to an end, with most of its high-end

manufacturing assets having been injected into the listco. The priority for

Shanghai Electric in the coming years will be to further consolidate these

businesses through internal restructuring.

Employee stock ownership is a big part of SOE reform, but management

believes at the moment that it may not be the best option for Shanghai

Electric, as the company has so many business operations that having a

centralized stock ownership platform may not be a best way to incentivize

employees at each business segment level.

FAQ#16: What’s the company’s view on the possible merger between

Dongfang Electric and Harbin Electric?

In short, Shanghai Electric welcomes the merger and sees scope for market

share gain if the deal were to take place.

Shanghai Electric welcomes industry consolidation. The company believes

that, if the merger between Dongfang and Harbin materializes, Shanghai

Electric could be the key beneficiary, as the company believes that it would be

easier for two parties to reach consensus than for three parties. Moreover, if

the merger were to take place, Shanghai Electric is confident that it can

increase its market share to 50% from the current level of one-third.

Miscellaneous

FAQ#17: Why did the company decide not to pay a dividend in the past two

years?

According to CSRC regulation, dividend payout is not allowed when the listed

company is planning for equity placement. This was the case for Shanghai

Electric, as the company did back-to-back asset injections through A-share

placement over the past two years.

That said, dividend payout could be resumed once asset injection and A-share

placement finalize. However, the payout ratio will depend on its further capex

needs. Shanghai Electric’s stipulated dividend payout ratio is 20-30%.

FAQ#18: How does the company plan to manage and deploy its cash given its

strong cash position?

The company now holds Rmb30bn cash on hand. However, given SEC’s

holding structure, part of cash was held by its non-wholly-owned subsidiaries,

which SEC cannot use at will. Moreover, the cash balance also includes

prepayment from customers, which totaled Rmb43.6bn, and is deployed for

working capital.

25 March 2017

Manufacturing

Shanghai Electric


FAQ#19: What exactly was the Rmb440m provision associated with AEN for?

Shanghai Electric had acquired AEN’s 40% equity stake in 2014. AEN

generated NP of EUR60m in 2016 (or share profits of EUR24m to Shanghai

Electric). However, stripping out the negative goodwill of EUR69.59m

generated from its acquisition of Alstom’s heavy-duty gas turbine business

(total consideration was less than net asset value), AEN was actually loss

making in 2016.

This has resulted in discrepancy between AEN’s actual financial results and

Shanghai Electric’s earnings estimates when it acquired AEN. To be

conservative, the company decided to book one-off provision for this, after

discussion with its auditors. Management noted that the disappointing

financial result for AEN was mainly driven by unexpected project delays in Iran.

FAQ#20: Why did the large forging business continue to generate losses after

the restructuring?

Following the restructuring of Shanghai Heavy Machinery, the company only

retained the large forging business while disposing the grinding equipment

businesses (back to its parent company). The transaction was completed in

August last year.

Those orders signed in the past were no longer on the new business entity’s

book, while new orders were relatively small last year. According to the

accounting standards, profit estimates for these new contracts for the new

business entity will be based on the pricing for historical orders, which has led

to the loss for almost all the new orders.

This, along with one-off restructuring costs, has led to a net loss of Rmb250m

in 2016 (vs. Rmb830m in 2015). However, with volume ramping up (especially

for nuclear power equipment), management expects profitability for this

business to recover gradually in the coming years.

25 March 2017

Manufacturing

Shanghai Electric


Valuation and risks

P/B-based target price of HKD3.6 for H-shares and Rmb3.2 for A-shares; reiterating Hold on H-shares, Sell on A-shares

Incorporating the latest results and guidance, we lowered our earnings

estimates by 7% for 2017/18 and introduced our 2019 forecasts. We raised our

target price for H-shares to HKD3.6 (HKD3.5 previously) and our target price

for A-shares to Rmb3.2 (Rmb3.0 previously) as we slightly lift our target P/B to

0.90x (vs. 0.85x previously) to reflect the potential for ROE accretion from the

announced asset injections. Lacking earnings growth and trading at 1x BV

against c.5% ROE, valuation looks fair for H-shares (hence Hold) and rich for

A-shares (hence Sell).

Figure 11: Shanghai Electric-H – 1-year forward P/E Figure 12: Shanghai Electric-H – 1-year forward P/B vs.

ROE

16.4x

21.2x

11.6x

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

P/E

(x)

1yr fwd P/E (x) Avg P/E

+1 STDEV -1 STDEV

1.6x

2.3x

0.9x

0.0

5.0

10.0

15.0

20.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

RO

E (

%)

P/B

(x)

1yr fwd P/B (x) Avg P/B

+1 STDEV -1 STDEV

1yr fwd ROE (RHS, %)

Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates


Figure 13: Shanghai Electric-A – 1-year forward P/E Figure 14: Shanghai Electric-A – 1-year forward P/B vs.

ROE

38.9x

56.8x

20.9x

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

P/E

(x)

1yr fwd P/E (x) Avg P/E

+1 STDEV -1 STDEV

2.7x

3.9x

1.6x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

2.0

4.0

6.0

8.0R

OE

(%

)

P/B

(x)

1yr fwd P/B (x) Avg P/B

+1 STDEV -1 STDEV

1yr fwd ROE (RHS, %)



25 March 2017

Manufacturing

Shanghai Electric


Risks

Shanghai Electric-H

Key risks: 1) better-/worse-than-expected delays/cancellations in thermal

power projects; 2) slower-/faster-than-expected progress in nuclear power

projects; 3) higher-/lower-than-expected provisions on receivables and onerous

contracts; and 4) good/poor execution of M&As and/or asset injections.

Shanghai Electric-A

Key upside risks: 1) better-than-expected delays/cancellations in thermal power

projects; 2) faster-than-expected progress in nuclear power projects; 3) lower-

than-expected provisions on receivables and onerous contracts; and 4) value-

accretive M&As and/or asset injections.

25 March 2017

Manufacturing

Shanghai Electric


Model updated:24 March 2017

Running the numbers

Asia

China

Manufacturing

Shanghai Electric Reuters: 2727.HK Bloomberg: 2727 HK

Hold Price (24 Mar 17) HKD 4.08

Target Price HKD 3.60

52 Week range HKD 3.12 - 4.21

Market Cap (m) HKDm 54,799

USDm 7,055

Company Profile

Shanghai Electric Group Company Limited designs, manufactures, sells, and services a wide range of products and services in the power equipment, electromechanical equipment and environmental system industries. The company (through its JV with Siemens) is one of the top three power equipment companies in China, together with Harbin Electric and Dongfang Electric.

Price Performance

2

3

5

6

8

9

Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16

Shanghai ElectricHANG SENG INDEX (Rebased)

Margin Trends

5.0

6.0

7.0

8.0

9.0

10.0

14 15 16 17E 18E 19E

EBITDA Margin EBIT Margin

Growth & Profitability

0

2

4

6

8

-4

-2

0

2

4

6

14 15 16 17E 18E 19E

Sales growth (LHS) ROE (RHS)

Solvency

0

100

200

300

400

500

600

-50

-40

-30

-20

-10

0

14 15 16 17E 18E 19E

Net debt/equity (LHS) Net interest cover (RHS)

Nick Zheng, CFA

+852 2203 6198 [email protected]

Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E

Financial Summary

DB EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18

Reported EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18

DPS (CNY) 0.06 0.00 0.00 0.14 0.05 0.05

BVPS (CNY) 2.7 3.0 3.4 3.5 3.5 3.7

Weighted average shares (m) 12,824 13,150 13,244 13,431 13,431 13,431

Average market cap (CNYm) 33,699 56,923 39,174 48,601 48,601 48,601

Enterprise value (CNYm) 20,188 41,959 13,044 17,568 20,434 16,955

Valuation Metrics P/E (DB) (x) 13.4 27.2 19.4 23.4 21.7 20.0

P/E (Reported) (x) 13.4 27.2 19.4 23.4 21.7 20.0

P/BV (x) 1.23 1.12 0.87 1.03 1.02 0.99

FCF Yield (%) 11.5 13.0 22.0 9.4 9.9 11.6

Dividend Yield (%) 2.2 0.0 0.0 3.8 1.4 1.5

EV/Sales (x) 0.3 0.5 0.2 0.2 0.2 0.2

EV/EBITDA (x) 3.0 5.7 2.1 2.6 2.9 2.2

EV/EBIT (x) 4.1 7.4 2.8 3.4 3.8 2.9

Income Statement (CNYm)

Sales revenue 76,785 79,461 79,078 81,026 83,783 87,174

Gross profit 14,366 14,436 14,755 15,164 15,656 16,264

EBITDA 6,779 7,353 6,239 6,859 7,156 7,546

Depreciation 1,706 1,434 1,302 1,353 1,409 1,465

Amortisation 167 268 225 327 327 328

EBIT 4,906 5,652 4,713 5,180 5,420 5,753

Net interest income(expense) 0 -202 -235 -373 -172 -12

Associates/affiliates 533 550 797 610 610 610

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0 0

Profit before tax 5,439 6,000 5,274 5,417 5,858 6,351

Income tax expense 895 1,298 1,113 1,138 1,230 1,334

Minorities 2,033 2,608 2,144 2,204 2,384 2,584

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 2,511 2,093 2,018 2,075 2,244 2,433

DB adjustments (including dilution) 0 0 0 0 0 0

DB Net profit 2,511 2,093 2,018 2,075 2,244 2,433

Cash Flow (CNYm)

Cash flow from operations 4,411 8,359 9,949 5,578 5,857 6,659

Net Capex -532 -969 -1,319 -1,021 -1,021 -1,021

Free cash flow 3,879 7,389 8,631 4,557 4,836 5,638

Equity raised/(bought back) 0 0 0 0 0 0

Dividends paid -2,373 0 0 0 -1,856 -673

Net inc/(dec) in borrowings 1,947 7,491 2,062 -2,411 -4,548 -498

Other investing/financing cash flows -612 -652 -14,493 -223 -22 138

Net cash flow 2,841 14,229 -3,800 1,923 -1,590 4,605

Change in working capital -2,147 5,972 7,299 6 81 597

Balance Sheet (CNYm)

Cash and other liquid assets 25,113 36,970 39,471 41,394 39,804 44,409

Tangible fixed assets 14,066 12,393 12,990 12,662 12,279 11,839

Goodwill/intangible assets 1,063 1,197 2,490 2,318 2,146 1,974

Associates/investments 11,613 15,750 18,875 19,485 20,095 20,705

Other assets 91,694 99,158 101,808 103,484 106,137 108,990

Total assets 143,551 165,468 175,634 179,343 180,461 187,917

Interest bearing debt 12,027 25,038 19,662 15,087 14,589 13,740

Other liabilities 86,099 88,442 98,325 102,330 101,174 105,135

Total liabilities 98,125 113,480 117,987 117,417 115,763 118,875

Shareholders' equity 34,236 39,269 45,093 47,168 47,556 49,316

Minorities 11,189 12,719 12,554 14,759 17,142 19,727

Total shareholders' equity 45,425 51,988 57,647 61,927 64,698 69,042

Net debt -13,087 -11,932 -19,809 -26,307 -25,215 -30,669

Key Company Metrics

Sales growth (%) -2.6 3.5 -0.5 2.5 3.4 4.0

DB EPS growth (%) 4.9 -18.7 -4.3 1.4 8.1 8.4

EBITDA Margin (%) 8.8 9.3 7.9 8.5 8.5 8.7

EBIT Margin (%) 6.4 7.1 6.0 6.4 6.5 6.6

Payout ratio (%) 30.0 0.0 0.0 89.4 30.0 30.0

ROE (%) 7.6 5.7 4.8 4.5 4.7 5.0

Capex/sales (%) 2.4 1.7 1.9 1.3 1.2 1.2

Capex/depreciation (x) 1.0 0.8 1.0 0.6 0.6 0.6

Net debt/equity (%) -28.8 -23.0 -34.4 -42.5 -39.0 -44.4

Net interest cover (x) nm 28.0 20.1 13.9 31.6 483.6


25 March 2017

Manufacturing

Shanghai Electric


Model updated:24 March 2017

Running the numbers

Asia

China

Manufacturing

Shanghai Electric Reuters: 601727.SS Bloomberg: 601727 CH

Sell Price (13 Oct 16) CNY 8.42

Target Price CNY 3.20

52 Week range CNY 7.28 - 13.59

Market Cap (m) CNYm 113,090

USDm 16,417

Company Profile

Shanghai Electric Group Company Limited designs, manufactures, sells, and services a wide range of products and services in the power equipment, electromechanical equipment and environmental system industries. The company (through its JV with Siemens) is one of the top three power equipment companies in China, together with Harbin Electric and Dongfang Electric.

Price Performance

4

8

12

16

20

24

28

Oct 14Jan 15Apr 15 Jul 15 Oct 15Jan 16Apr 16 Jul 16

Shanghai ElectricHANG SENG INDEX (Rebased)

Margin Trends

5.0

6.0

7.0

8.0

9.0

10.0

14 15 16 17E 18E 19E

EBITDA Margin EBIT Margin

Growth & Profitability

0

2

4

6

8

-4

-2

0

2

4

6

14 15 16 17E 18E 19E

Sales growth (LHS) ROE (RHS)

Solvency

0

100

200

300

400

500

600

-50

-40

-30

-20

-10

0

14 15 16 17E 18E 19E

Net debt/equity (LHS) Net interest cover (RHS)

Nick Zheng, CFA

+852 2203 6198 [email protected]

Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E

Financial Summary

DB EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18

Reported EPS (CNY) 0.20 0.16 0.15 0.15 0.17 0.18

DPS (CNY) 0.06 0.00 0.00 0.14 0.05 0.05

BVPS (CNY) 2.7 3.0 3.4 3.5 3.5 3.7

Weighted average shares (m) 12,824 13,150 13,244 13,431 13,431 13,431

Average market cap (CNYm) 57,262 174,654 110,660 113,090 113,090 113,090

Enterprise value (CNYm) 43,751 159,691 84,530 82,057 84,923 81,444

Valuation Metrics P/E (DB) (x) 22.8 83.4 54.8 54.5 50.4 46.5

P/E (Reported) (x) 22.8 83.4 54.8 54.5 50.4 46.5

P/BV (x) 3.08 3.86 2.47 2.40 2.38 2.29

FCF Yield (%) 6.8 4.2 7.8 4.0 4.3 5.0

Dividend Yield (%) 1.3 0.0 0.0 1.6 0.6 0.6

EV/Sales (x) 0.6 2.0 1.1 1.0 1.0 0.9

EV/EBITDA (x) 6.5 21.7 13.5 12.0 11.9 10.8

EV/EBIT (x) 8.9 28.3 17.9 15.8 15.7 14.2

Income Statement (CNYm)

Sales revenue 76,785 79,461 79,078 81,026 83,783 87,174

Gross profit 14,366 14,436 14,755 15,164 15,656 16,264

EBITDA 6,779 7,353 6,239 6,859 7,156 7,546

Depreciation 1,706 1,434 1,302 1,353 1,409 1,465

Amortisation 167 268 225 327 327 328

EBIT 4,906 5,652 4,713 5,180 5,420 5,753

Net interest income(expense) 0 -202 -235 -373 -172 -12

Associates/affiliates 533 550 797 610 610 610

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0 0

Profit before tax 5,439 6,000 5,274 5,417 5,858 6,351

Income tax expense 895 1,298 1,113 1,138 1,230 1,334

Minorities 2,033 2,608 2,144 2,204 2,384 2,584

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 2,511 2,093 2,018 2,075 2,244 2,433

DB adjustments (including dilution) 0 0 0 0 0 0

DB Net profit 2,511 2,093 2,018 2,075 2,244 2,433

Cash Flow (CNYm)

Cash flow from operations 4,411 8,359 9,949 5,578 5,857 6,659

Net Capex -532 -969 -1,319 -1,021 -1,021 -1,021

Free cash flow 3,879 7,389 8,631 4,557 4,836 5,638

Equity raised/(bought back) 0 0 0 0 0 0

Dividends paid -2,373 0 0 0 -1,856 -673

Net inc/(dec) in borrowings 1,947 7,491 2,062 -2,411 -4,548 -498

Other investing/financing cash flows -612 -652 -14,493 -223 -22 138

Net cash flow 2,841 14,229 -3,800 1,923 -1,590 4,605

Change in working capital -2,147 5,972 7,299 6 81 597

Balance Sheet (CNYm)

Cash and other liquid assets 25,113 36,970 39,471 41,394 39,804 44,409

Tangible fixed assets 14,066 12,393 12,990 12,662 12,279 11,839

Goodwill/intangible assets 1,063 1,197 2,490 2,318 2,146 1,974

Associates/investments 11,613 15,750 18,875 19,485 20,095 20,705

Other assets 91,694 99,158 101,808 103,484 106,137 108,990

Total assets 143,551 165,468 175,634 179,343 180,461 187,917

Interest bearing debt 12,027 25,038 19,662 15,087 14,589 13,740

Other liabilities 86,099 88,442 98,325 102,330 101,174 105,135

Total liabilities 98,125 113,480 117,987 117,417 115,763 118,875

Shareholders' equity 34,236 39,269 45,093 47,168 47,556 49,316

Minorities 11,189 12,719 12,554 14,759 17,142 19,727

Total shareholders' equity 45,425 51,988 57,647 61,927 64,698 69,042

Net debt -13,087 -11,932 -19,809 -26,307 -25,215 -30,669

Key Company Metrics

Sales growth (%) -2.6 3.5 -0.5 2.5 3.4 4.0

DB EPS growth (%) 4.9 -18.7 -4.3 1.4 8.1 8.4

EBITDA Margin (%) 8.8 9.3 7.9 8.5 8.5 8.7

EBIT Margin (%) 6.4 7.1 6.0 6.4 6.5 6.6

Payout ratio (%) 30.0 0.0 0.0 89.4 30.0 30.0

ROE (%) 7.6 5.7 4.8 4.5 4.7 5.0

Capex/sales (%) 2.4 1.7 1.9 1.3 1.2 1.2

Capex/depreciation (x) 1.0 0.8 1.0 0.6 0.6 0.6

Net debt/equity (%) -28.8 -23.0 -34.4 -42.5 -39.0 -44.4

Net interest cover (x) nm 28.0 20.1 13.9 31.6 483.6


25 March 2017

Manufacturing

Shanghai Electric


Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Shanghai Electric 2727.HK 4.08 (HKD) 24 Mar 17 14,15

Shanghai Electric 601727.SS 8.42 (CNY) 13 Oct 16 14,15 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Nick Zheng

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

25 March 2017

Manufacturing

Shanghai Electric


Historical recommendations and target price: Shanghai Electric (2727.HK) (as of 3/24/2017)

1 2

3

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche Bank

1. 02/08/2015: Sell, Target Price Change HKD3.90 Michael Tong, CFA 3. 21/09/2016: Hold, Target Price Change HKD3.50 Nick Zheng, CFA

2. 18/11/2015: Upgrade to Hold, Target Price Change HKD4.00 Michael Tong, CFA

Historical recommendations and target price: Shanghai Electric (601727.SS) (as of 10/13/2016)

1

2

3

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche Bank

1. 02/08/2015: Sell, Target Price Change CNY3.06 Michael Tong, CFA 3. 21/09/2016: Sell, Target Price Change CNY3.00 Nick Zheng, CFA

2. 18/11/2015: Sell, Target Price Change CNY3.50 Michael Tong, CFA

25 March 2017

Manufacturing

Shanghai Electric


Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

54 %

36 %

10 %17 % 17 % 21 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

25 March 2017

Manufacturing

Shanghai Electric


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25 March 2017

Manufacturing

Shanghai Electric


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review this information before investing.

United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and

SIPC. Analysts located outside of the United States are employed by non-US affiliates that are not subject to FINRA

regulations.

Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated

in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under

German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal

Financial Supervisory Authority.

United Kingdom: Approved and/or distributed by Deutsche Bank AG acting through its London Branch at Winchester

House, 1 Great Winchester Street, London EC2N 2DB. Deutsche Bank AG in the United Kingdom is authorised by the

Prudential Regulation Authority and is subject to limited regulation by the Prudential Regulation Authority and Financial

Conduct Authority. Details about the extent of our authorisation and regulation are available on request.

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http://www.optionsclearing.com/about/publications/character-risks.jsp

https://gm.db.com/equities

25 March 2017

Manufacturing

Shanghai Electric


India: Prepared by Deutsche Equities India Pvt Ltd, which is registered by the Securities and Exchange Board of India

(SEBI) as a stock broker. Research Analyst SEBI Registration Number is INH000001741. DEIPL may have received

administrative warnings from the SEBI for breaches of Indian regulations.

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instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA,

Type II Financial Instruments Firms Association and The Financial Futures Association of Japan. Commissions and risks

involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by

multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to

losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional

losses stemming from foreign exchange fluctuations. We may also charge commissions and fees for certain categories

of investment advice, products and services. Recommended investment strategies, products and services carry the risk

of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in

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relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in

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not disclosed according to the Financial Instruments and Exchange Law of Japan. Target prices set by Deutsche Bank's

equity analysts are based on a 12-month forecast period.

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South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register

Number in South Africa: 1998/003298/10).

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Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters

arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who

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is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited,

Taipei Branch may not execute transactions for clients in these securities/instruments.

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Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall

within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower,

West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related

financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre

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any appraisal or evaluation activity requiring a license in the Russian Federation.

Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the

Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall

within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya

District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.

United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated

25 March 2017

Manufacturing

Shanghai Electric


by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services

activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai

International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been

distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as

defined by the Dubai Financial Services Authority.

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Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian

Corporations Act and New Zealand Financial Advisors Act respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon

request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent.

Copyright © 2017 Deutsche Bank AG

https://australia.db.com/australia/content/research-information.html

David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Michael Spencer Head of APAC Research

Global Head of Economics

Steve Pollard Head of Americas Research

Global Head of Equity Research

Anthony Klarman Global Head of Debt Research

Paul Reynolds Head of EMEA

Equity Research

Dave Clark Head of APAC

Equity Research

Pam Finelli Global Head of

Equity Derivatives Research

Andreas Neubauer Head of Research - Germany

Stuart Kirk Head of Thematic Research

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Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

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United States of America

Tel: (1) 212 250 2500

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