国电南瑞(600406)

We see a broad weakness from China A-share power T&D equipment names’ 3Qearnings reporting: NARI Tech +5% (vs. 1H’s +25%, dragged by solar EPC), XJElectric +4% (vs. 1H’s +46%, lower margin) and Pinggao Electric down 69% (vs.1H’s down 35%, lower margin/UHVAC delay). However, when looking into theunderlying operations, we find NARI Tech’s 3Q profit weakness is relatively moretemporary than structural, with core grid business growth/margins and ordermomentum remaining on track. Its parentco asset injection has been approvedby SASAC, Ministry of Commerce and CSRC and is expected to be completedby end of this November. We continue to prefer NARI Tech in the sector onrelative better earnings defensiveness and growth sustainability against industryheadwinds (grid investment downturn, margin pressure, etc.), stronger parentcosupport, which should justify a valuation premium vs. peers.

Solar EPC, a near-term earnings dragger, expected to be removed next year

NARI Tech’s 3Q revenue/net profit growth weakened to +4%/5%, respectively,from +11%/25% in 1H. This was mainly dragged by the shrinking solar EPCbusiness (under power generation & renewable energy segment), which hasincurred a net loss of c.Rmb70m in 9M17 due to margin contraction amidintensified pressure passed through by customers and competition. Managementexpects it will remain an earnings dragger into 4Q this year, which may lead thecompany’s full-year earnings growth (before asset consolidation) to fall between10-20% (prior guidance: +20%). However, this impact should be temporary andwill be removed by next year, as management targets to speed up exiting thislow-margin business by next year.

Core business performance still on track

Putting solar EPC business aside, NARI Tech’s 3Q core power automationbusiness growth remains stable at close to 20%; rail automation profit tracks15-20% growth excluding PPP project contribution, according to management.GPM advanced by 1.6ppt on favorable product mix and resilient margins forsecondary grid automation business. Total order intake growth in 9M17 stayssimilar to 1H’s 18%. At consolidated level after asset injection, managementexpects it is largely on track to achieve close to 20% earnings growth target, withaccelerated UHV order delivery this year.