Core view: The company is a leader in power supply equipment, with a market share of 33%, 40%, 40%, 74%, and 5-10% in thermal power, hydropower, nuclear power, combustion engines, and wind power, respectively. At present, we are focusing on recommending Dongfang Electric. The company has steady operation, high dividends, low valuation, and strong performance certainty. The expected difference in target is reflected in: 1. The market is concerned about the company's business cycle, yet the company's business structure has been diversified, the periodicity has weakened, and growth is prominent. The general direction of business development is not only related to electricity demand, but also to new energy consumption. Among them, savings, thermal power frequency modulation, and thermal power flexibility transformation all solve the problems of new energy development and consumption; 2. The market is concerned about the cyclical nature of thermal power investment. We estimate that only water and electricity will be pumped and saved in the future (including water and electricity)) One can basically make up for the decline in thermal power orders Part; 3. The market believes that the company's orders are high for 24 years, and the valuation is being suppressed. We believe that the company's order growth can be seen in 2025, and the visibility of performance growth can be seen in 2028.
At present, we focus on recommending Dongfang Electric: the company is a leading power supply equipment company, with a market share of 33%, 40%, 40%, 74%, and 5-10% in thermal power, hydropower, nuclear power, gas engines, and wind power respectively
Steady operation: A leading power equipment company. Compared with the other 2 power equipment companies, the company operates steadily. The other 2 companies have accrued a lot of impairment due to overseas business problems, and have lost or marginal performance in recent years. The market wants to choose the power equipment company Dongfang Electric Association as the first choice.
High dividends: Assuming a cash dividend ratio of 46.7% in 2024, the current position corresponds to a dividend rate of 3.5% for A-shares and 5.6% for Hong Kong stocks; in 2025 and 2026, along with the increase in dividend ratios and performance growth, the dividend rate growth rate is expected to be faster than the performance growth rate.
Low valuation: As of May 10, 2024, the company's A-share PE was 13.4, 11.5X, and Hong Kong PE was 8.1 and 7.0X respectively in 2024 and 2025, respectively. Currently, the valuation center for A-share power equipment companies is 23x. The certainty of the company's performance is not weaker than that of power equipment companies. The valuation is low, and it has sufficient margin of safety and upward flexibility.
Strong performance certainty: In 2019-2023, the company's orders grew at a high rate for 5 consecutive years, with an order growth rate of 31% in 23. The company's order growth is expected to be continuous in 2024 and 2025. Considering the company's long product delivery cycle, future performance is highly certain for 4-5 years.
Expectations gap 1: The market is concerned about the company's strong business cycle, yet the company's business structure has diversified, the periodicity has weakened, and growth is prominent. In the company's 2008 and 2009 order structure, thermal power accounted for a high share of nuclear power orders, 45% of thermal power orders, 25% of nuclear power orders, and the two businesses together accounted for 70%. In 2023, thermal power and nuclear power accounted for 25% and 6% respectively in the company's order structure. Business concentration has been drastically reduced compared to the past, and its resilience to risks has increased. The general direction of the company's business development is not only related to electricity demand, but also to new energy consumption. Among them, savings, thermal power peak modulation, thermal power flexibility transformation, and combustion engine peak frequency modulation are all used to solve the problems of new energy development and consumption.
Expected difference 2: The market is concerned about the cyclical nature of thermal power investment. We estimate that in the future, only hydropower (including savings) alone can basically make up for the downturn in thermal power orders. We believe that the company's order growth is sustainable. According to estimates, during the “15th Five-Year Plan” period, hydropower (including savings) alone can make up for the decline in thermal power orders. Furthermore, the company's nuclear power, emerging growth industries, power plant services (including thermal power flexibility transformation), and equipment exports all had good growth potential. The company's orders will increase steadily at a high level of 100 billion during the “15th Five-Year Plan” period.
Expected difference of 3: The market believes that the company's order growth is 24 years high, and the valuation has been suppressed. We believe that the company's order growth can be seen in 2025, and the visibility of performance growth can be seen in 2028 (long product delivery cycle, referring to the decline in orders after 2008, and the performance continues to grow at a high rate for 3 years), compounded by the increase in the company's dividend ratio. We believe that we can currently give a valuation that matches the growth rate of performance.
How do you value a company? Comparison with the market: The current valuation center of power equipment companies has reached 20X, and the company's order and performance certainty is not weaker than that of power equipment companies; compared with the company's historical PE: in the past 10 years, the company's PE valuation center was 22-23X; we expect the company's net profit to the mother will maintain a high growth rate of about 20% in 2024-2028, with high dividends, strong performance certainty, and the current valuation is low.
Profit forecast and valuation: It is estimated that in 2024, 2025, and 2026, the company will achieve operating income of 681.2, 728.9, and 77.47 billion yuan, with net profit attributable to mother of 42.0, 49.0, and 5.68 billion yuan respectively. Corresponding Hong Kong PE is 8.1, 7.0, and 6.0X, respectively, and A share PE is 13.4, 11.5, and 9.9X respectively, covering Dongfang Electric Hong Kong stocks for the first time, giving them a “buy” rating and maintaining Dongfang Electric's A share “buy” rating.
Risk warning
The amount of completed investment in power infrastructure falls short of expectations: the company's main power equipment, performance is highly correlated with investment in wind power, gas power, thermal power, hydropower, and nuclear power. If the completed amount of power supply investment falls short of expectations, it will affect the company's performance;
Prices of upstream raw materials fluctuate greatly: Fluctuations in prices such as upstream steel will affect the company's performance; downstream electricity demand falls short of expectations: power investment is related to electricity demand. If electricity demand is weak, it will affect investment in new power sources, which in turn will affect the company's performance; production expansion progress falls short of expectations: the company's current production capacity is still insufficient. If production expansion falls short of expectations, it will affect the company's external sales; risk of macroeconomic fluctuations; revenue recognition falls short of expectations: Among them, thermal power companies account for the largest share of gross profit, and thermal power revenue confirmation falls short of expectations. The movement had a big impact on the company's net profit. The basic assumption in the report is that the company's 2024 thermal power sales revenue is 18 billion yuan. If there is a discrepancy in thermal power sales revenue, it will have an impact on profit forecasts.