In 2018, the installed capacity of new power generation across the country is expected to drop to 110 gigawatts, and clean energy from non-thermal power plants is expected to account for 68% of the new installed capacity. According to data from the China Federation of Power and Power, the cumulative new installed capacity of the country in the first 11 months was 98.8 gigawatts, down 12.5% from the same period last year or 14.1 gigawatts less than the same period last year. During the period, the installed capacity of thermal power increased by 30.2 gigawatts, while that of hydropower, nuclear power, wind power and solar energy increased by 7.1 gigawatts, 6.0 gigawatts, 17.2 gigawatts and 38.2 gigawatts respectively. During the period, with the exception of thermal power and hydropower, the new installed capacity of all other types of power sources recorded varying degrees of year-on-year installed growth. National investment in power infrastructure reached 677.3 billion yuan in the first 11 months of 2018, down 3.1 per cent from the same period last year. Of the total investment during the period, investment in various types of power sources was 226.2 billion yuan, down 2.9 per cent from a year earlier, while investment in the power grid was 451.1 billion yuan, down 3.2 per cent from a year earlier. The country's total installed power generation capacity is expected to reach 110 gigawatts in 2018, while non-fossil energy generation will contribute 68% of the new generation capacity during the period. By the end of November 2018, the country's total installed power generation capacity had reached 1775 gigawatts, of which non-thermal power installed capacity was about 650 gigawatts (the rest was thermal power installed), accounting for 37% of the total installed capacity. In view of the fact that the 13th five-year Plan period is the key five years for optimizing the energy structure, non-thermal clean energy will continue to achieve rapid development during the period, while thermal power will develop steadily with higher environmental protection standards and power generation efficiency (thermal power is expected to stabilize at about 30 gigawatts per year), and old thermal power units that fail to meet the standards will be forced to be eliminated and shut down.

Harbin Electric's profit plunged 75.3% year-on-year to 31 million yuan in the first half of 2018. The company's revenue and net profit fell 24.1% and 75.3% respectively in the first half of 2018 compared with the same period a year earlier. The decline in revenue during the period was mainly due to the continued contraction in revenue from the thermal power equipment and power engineering services sector during the period. The company's total power generation equipment output capacity was only 7.6 gigawatts in the first half of 2018, down 18.3% from the same period last year, mainly due to a further decline in demand in the domestic market. During the period, new orders reached 8.65 billion yuan, a decrease of 27.8% compared with the same period last year.

The sharp decline in overseas new orders was the main reason for the decline in new orders during the period. Affected by the domestic policy of optimizing the current energy structure (that is, restraining thermal power and vigorously developing renewable energy), the slowdown in demand for traditional power generation equipment in the local market has had a greater negative impact on the company and is expected to continue to weaken the company's profitability and fundamentals in the future. For Harbin Electric, which is mainly engaged in the production of thermal power and hydropower equipment, the change of domestic energy strategy is fatal to the company. As thermal power is expected to continue the current downward trend, and the period of great development of hydropower has passed, we believe that the current predicament of the company is irreversible in the short term. There is great uncertainty in overseas markets (as can be seen from the history of new orders), and it will not be able to fill the gap in the domestic market in the short term.

Harbin Group made a bid for Harbin Electric at HK $4.56 per share. On December 24, 2018, the parent company Hardy Group announced that it would acquire all the current H shares of Harbin Electric with HK $4.56 per share in cash through its financial advisers. The offer price represents an 82.4% premium to the company's closing price of HK $2.50 on December 17 (the closing price before suspension) or an 84.96% premium to the company's average price of HK $2.47 over the past 180 trading days (up to December 17). The offer will involve about HK $3.08 billion and will be paid in cash. After the completion of the tender offer, Harbin Electric will delist from the Hong Kong stock market and merge with Harbin Group. The acquisition still needs to complete a series of prerequisites before it can be finally implemented. As of the date of announcement, the company has obtained the approval of SASAC, NDRC and safe. We expect this offer to be successfully completed in the first half of 2019. In the past two years, we have been expecting the company to integrate with its peers, but the integration with its parent company is a perfect exit for Harbin Electric. Our current rating on the company is "collection", with a target price of HK $4.56 (there is still 14.3% room to rise from the closing price on December 31).