There is more and more news from listed companies to Science and Technology Innovation Board listing: before Sansheng Pharmaceutical (01530) proposed to spin off Sansheng Guojian Pharmaceutical Industry, Tianneng Power (00819) split Tianneng Battery Group, China Railway Construction (01186) spun off Railway Construction heavy Industry, recently, Shanghai Electric (02727) plans to spin off Electric Wind Power listed in Science and Technology Innovation Board finally landed.

Zhitong Financial APP learned that on January 6, Shanghai Electric announced that it planned to spin off its holding subsidiary, Shanghai Electric Wind Power Group Co., Ltd. (hereinafter referred to as Electric Wind Power) to the Shanghai Stock Exchange Kechuang Board for listing. The number of shares in this issue accounts for no more than 40 per cent of the total share capital after the issuance of electric wind power. After the completion of the spin-off, Shanghai Electric's shareholding structure will not change and will maintain its controlling stake in electric wind power.

According to the announcement, electric wind power will become an independent wind power core business listing platform under Shanghai Electric, and the funds raised in this issue will be used for wind power equipment technology research and development projects, wind power post-market projects, existing manufacturing capacity upgrading, replenishment of liquidity, and so on.

Electric and wind power accounts for a small proportion of revenue

The impact of the spin-off of electric and wind power on listed companies should also start from the business structure of the company. Shanghai Electric's main business is mainly related to four major sectors: new energy and environmental protection equipment plate, efficient clean energy equipment plate, industrial equipment plate and modern service sector. The electric wind power listed in this spin-off belongs to the new energy and environmental protection equipment sector, which is mainly engaged in wind power equipment design, research and development, manufacturing and sales, as well as post-market supporting services.

From the perspective of business sectors, the new energy and environmental protection equipment sector accounted for the lowest proportion of total revenue, accounting for only 15.4% in the first half of 2019, but it carried the "banner" of growth in the past two years and became the fastest growing business sector of the company. It is worth mentioning that the "credit" for the growth of the new energy and environmental protection equipment sector is not due to electric and wind power, but to the rapid expansion of the environmental protection business and the substantial increase in revenue.

(mid-2019 report)

The profit of electric and wind power fluctuates greatly in the historical period, with net profits of about 21 million yuan in 2017 and-52 million yuan in 2018, respectively. The announcement said that in 2019, with the continuous introduction of favorable policies in wind power industry planning and regulation, feed-in electricity price, competitive configuration and consumption protection, as well as the improvement of the maturity of electric wind power products and the strengthening of cost control, electric wind power achieved a net profit of about 101 million yuan in the first three quarters of 2019, an improvement from last year. But in fact, the offshore wind power "rush to install" stimulated by subsidies is not sustainable.

In the same period, Shanghai Electric has an income of 75.219 billion yuan and a net profit of 2.21 billion yuan. it can be seen that the revenue and net profit of electric wind power account for relatively low in Shanghai Electric. After the split, Shanghai Electric's interest in holding electric wind power has been diluted. From this point of view, even if electric wind power uses the listed financing income to expand its business scale, it will have a relatively small impact on Shanghai Electric in the short term.

The decline of wind power subsidies increases the uncertainty of the outlook.

The other side of the independent listing of electric wind power is the decline of wind power subsidies, and the demand for funds of wind power enterprises with poor profitability is even stronger. Recently, the Ministry of Finance has made it clear that the state subsidy for newly approved offshore wind power projects will be cancelled from 2022. Industry insiders say this will be a major blow to China's offshore wind power, which has just started and is under construction.

Wind power subsidy slope, the greatest impact is actually located in the middle of the industry equipment manufacturers, because the downstream developers of higher requirements for cost control, will transfer the pressure of the industrial chain to the middle and upper reaches. Fierce competition has begun in the past two years, and the whole machine enterprises have cut prices crazily in order to survive. The gross profit margin of Jinfeng Technology (02208), the largest wind power manufacturer in China, fell again and again, from 25.5% in 2016 to 18.7% in 2018 and further to 11.3% in the first half of 2019.

Shanghai Electric is China's largest offshore wind power manufacturer, with a cumulative share of more than 60% of the domestic offshore wind power market, and is expected to be "doomed" once the price cut repeats. However, offshore turbines are high-end products. In terms of global installed capacity in 2018, electric wind power ranks third in the field of offshore wind power, second only to Siemens and Vestas.

The problem for electric and wind power is that the number of new installations may decline. Some analysts pointed out that after getting online at a low price, developers' enthusiasm for offshore wind power development may be reduced due to the high cost of construction and operation and maintenance, but low on-grid electricity price and low rate of return on investment.

Bohai Securities had expected that there would be insufficient 40GW for wind power for a total of two and a half years from the second half of 2018 to the end of 2020. In addition, in terms of subsidies, by the end of 2017, the cumulative subsidy gap for renewable energy power generation reached 112.7 billion yuan, and showed a trend of expanding year by year, exceeding 120 billion yuan by September 2018. The probability of explosive growth of newly installed wind power in the past 3 years is relatively small.

According to data released by the National Energy Administration, as of October 2019, China's offshore wind power had been connected to the grid of 5.1 million kilowatts, meeting 77 per cent of the 13th five-year Plan target.

In view of this, it is difficult for Shanghai Electric to rely on electric wind power to achieve deterministic high growth. On the other hand, the company itself also faces some problems.

The gross profit margin of many businesses of Shanghai Electric has declined.

In recent years, Shanghai Electric's performance has been mediocre. From 2015 to 2018, income increased by 11.41%, 1.22%,-10.13% and 27.17% respectively over the same period last year, and net profit from home increased by-15.14%, 1.77%, 11.55% and 13.44% respectively over the same period last year. The net cash flow of operating activities changed greatly, which was 8.359 billion yuan, 10.706 billion yuan,-7.525 billion yuan and 949 million yuan respectively during the corresponding period.

In the first three quarters of 2019, Shanghai Electric had an operating income of 75.219 billion yuan, an increase of 7.6% over the same period last year; a net profit of 2.21 billion yuan, an increase of 1.97% over the same period last year; and the net cash flow of operating activities was-14.269 billion yuan.

Although the income of industrial equipment in the business sector with the largest contribution to revenue has continued to rise, its profitability has gradually declined, and gross profit margin has continued to decline since 2017, mainly due to rising material prices and fierce competition in the elevator market. The company has adopted a price reduction strategy in order to increase its market share. In addition, the gross profit margin of efficient clean energy equipment has also declined due to fierce competition in the market, and even the fastest-growing new energy and environmental protection equipment sectors have suffered a decline in profit margins due to rising prices of key components. The decline in profitability caused by competitiveness is expected to be difficult to reverse in the short term.

All in all, the spin-off of electric wind power to the listing of Science and Technology Innovation Board can improve the financing efficiency and is conducive to the business development of offshore wind power, but it may take a long time to verify the overall performance of Shanghai Electric.