Profit in the first half of 2020 fell 17.6% year-on-year to 1.522 billion yuan, in line with expectations. After experiencing a collapse in high double-digit profits affected by COVID-19 's epidemic in the first quarter, the company's revenue and net profit in the second quarter rose 18.8% and 29.9% respectively from a year earlier to 38.532 billion yuan and 1.408 billion yuan, respectively. Shanghai Electric's net profit surged 11.4 times quarter-on-quarter in the second quarter of 2020. The company's consolidated gross margin was flat at 19.8% in the first half of 2020, while net profit fell 0.6 percentage points year-on-year to 2.9%.

New orders signed in the first half of 2020 surged by 40.8% to 108.84 billion yuan compared with the same period last year. Orders on hand at the end of the period reached 294.37 billion yuan (including orders of 85.54 billion yuan not yet in force), up 20.5 percent from the end of 2019. Among them, energy equipment, industrial equipment and integrated services accounted for 49.3%, 5.5% and 45.2% of the orders, respectively. It is worth noting that the new orders for wind power equipment during the period were 33.96 billion yuan, up 505.8% from the same period last year, and the orders for hand wind power at the end of the period were 57.09 billion yuan, up 90.4% from the end of 2019.

We reaffirm our "buy" investment rating and raise our target price to HK $3.25. In view of the continuous transformation of the company and the strong rebound in performance in the second quarter of 2020, we are full of confidence in the future of Shanghai Electric. Our adjusted earnings per share forecast for 2020-2022 is 0.256 yuan, 0.294 yuan and 0.334 yuan. Our new target price of HK $3.25 is equivalent to 11.5 times / 10.0 times / 8.9 times 2020-2022 earnings or 0.7 times / 0.6 times 2020-2022 price-to-book ratio.

Profit in the first half of 2020 fell 17.6% year-on-year to 1.522 billion yuan, in line with expectations. Revenue rose 0.5 per cent year-on-year to 53.237 billion yuan, while net profit fell 17.6 per cent to 1.522 billion yuan. Shanghai Electric's net profit in the first half of 2020 was in line with our expectations and accounted for about 51.8 per cent of our previous 2020 full-year profit forecast. The increase in asset impairment losses (up 35.6% from a year earlier to 1.126 billion yuan) and a sharp decline in income from asset sales (6.7 million yuan in the first half of 2020, compared with 425 million yuan in the first half of 2019) were the main reasons for the decline in profits during the period. After experiencing a collapse in high double-digit profits affected by COVID-19 's epidemic in the first quarter, the company's revenue and net profit in the second quarter rose 18.8% and 29.9% respectively from a year earlier to 38.532 billion yuan and 1.408 billion yuan, respectively. Shanghai Electric's net profit surged 11.4 times quarter-on-quarter in the second quarter of 2020. The total income in the first half of 2020 was unchanged at 53.237 billion yuan. Of this total, energy equipment revenue rose 2.3 per cent year-on-year to 19.292 billion yuan, industrial equipment revenue fell 0.8 per cent year-on-year to 20.464 billion yuan, and integrated services revenue rose 9.7 per cent to 17.857 billion yuan. As the gross profit margin of energy equipment rebounded (up 2.1 percentage points year-on-year to 18.1%), the consolidated gross margin remained unchanged at 19.8% in the first half of 2020. Gross profit margins in the other two business sectors fell moderately in the first half of 2020. Shanghai Electric's operations basically returned to pre-epidemic levels in the second quarter of 2020, and we expect the company to record a strong performance in the second half of 2020, especially when its new orders exceeded RMB 100 billion for the first time in the first half of 2020 (this amount is equivalent to the amount of a whole year in a normal period). In order to promote economic growth, we believe that domestic investment in the power sector will record a strong year-on-year growth in 2020 and Shanghai Electric will benefit from the surge in investment.

New orders signed in the first half of 2020 surged by 40.8% to 108.84 billion yuan compared with the same period last year. Of these, energy equipment, industrial equipment and integrated services accounted for 48.3%, 25.1% and 26.6% of new orders, respectively. Orders on hand at the end of the period reached 294.37 billion yuan (including orders of 85.54 billion yuan not yet in force), up 20.5 percent from the end of 2019. Among them, energy equipment, industrial equipment and integrated services accounted for 49.3%, 5.5% and 45.2% of the orders, respectively. It is worth noting that the new orders for wind power equipment during the period were 33.96 billion yuan, up 505.8% from the same period last year, and the orders for hand wind power at the end of the period were 57.09 billion yuan, up 90.4% from the end of 2019. Among the orders for wind power equipment, new orders for offshore wind power equipment reached 24.91 billion yuan, up 707.3 percent from the same period last year, while orders-on-hand for offshore wind power equipment reached 38.94 billion yuan, an increase of 126.9 percent over the end of 2019. At the same time, new orders for nuclear power equipment reached 2.69 billion yuan, up 244.8 percent from the same period last year, while orders for nuclear power equipment in hand reached 19.1 billion yuan at the end of the period, up 5.7 percent from the end of 2019.

In addition, new orders for power grids and industrial intelligent power supply system solutions recorded 5.1 billion yuan, up 11.7 percent from the same period last year, while new orders for automation projects and services reached 2.43 billion yuan, up 473.7 percent from the same period last year. Looking ahead, we expect that the new orders will mainly come from equipment related to emerging industries promoted by the Chinese government, such as renewable energy, environmental protection, smart manufacturing, energy storage, advanced industrial equipment, etc. We believe that the volume of new orders in the second half of 2020 will be as substantial as in the first half of 2020.

China's total investment in the power sector will reach an all-time high in 2020 and is expected to break through the 1 trillion yuan mark, including 4, 0 yuan in power project investment and 6, 0 yuan in power grid investment. According to the China Federation of Electric Power Enterprises, the country's newly installed power generation capacity reached 54.09 gigawatts in the first seven months of 2020, an increase of 14.9 percent over the same period last year. Of these, thermal power, hydropower, nuclear power, wind power and solar power contributed 25.8 gigawatts, 6.57 gigawatts, 0.0 gigawatts, 8.56 gigawatts and 13.09 gigawatts of new installations in the first seven months of 2020, respectively. By the end of July 2020, the country's cumulative installed power generation capacity had reached 1, 951.7 gigawatts, an increase of 5.7% over the same period last year. In the first seven months of 2020, national investment in the power sector reached 4, 19.2 billion yuan, up 28.3% from the same period last year. Of this total, investment in power projects rose 71.7 per cent year-on-year to 2, 13.9 billion yuan, while grid investment rose 1.6 per cent year-on-year to 2, 5.3 billion yuan. During the period, investment in thermal power fell 10.6 per cent from a year earlier, while investment in hydropower, nuclear power and wind power rose 8.0 per cent, 6.7 per cent and 203.8 per cent respectively. Renewable energy investment accounted for about 90% of the total investment in power projects in the first seven months of 2020, and we expect future power investment to be more focused on renewable energy. In order to promote economic growth, domestic investment in the power sector is expected to rise sharply and remain high in the second half of 2020. The sharp increase in new orders from all major power equipment manufacturers and power engineering service providers in the first half of 2020 also supported and confirmed this forecast / estimate. We expect domestic investment in the power sector to reach more than 9, 0 yuan in 2020, up 12.6% from the same period last year. In terms of breakdown, we expect domestic investment in power supply projects to reach more than RMB 3, 50 billion (year-on-year increase of 11.5%) in 2020, while investment in power grid will reach more than RMB 5, 50 billion (year-on-year increase of 13.3%). Our best scenario forecasts show that China's total investment in the power sector may break through the RMB 1 trillion mark for the first time in 2020 (challenging the RMB 8, 84 billion recorded in 2016), including RMB 4., A power project investment of 0 yuan and a power grid investment of 6, 0 yuan. In view of Shanghai Electric's leading position in the domestic ultra-supercritical thermal power, hydropower, nuclear power and offshore wind power equipment market, we expect it to benefit from the surge in domestic investment in the power sector. Shanghai Electric ranks first in the offshore wind power market and in the top five in the domestic onshore wind power market. We believe that domestic investment in wind and solar power will surge in the next 6 to 12 months, driven mainly by government policies dedicated to driving such investments. and Shanghai Electric is expected to be a big winner in the domestic wind power investment frenzy.

We reaffirm our "buy" investment rating and raise our target price to HK $3.25. We expect Shanghai Electric to benefit from further SOE reform, a continued transformation aimed at infiltrating emerging industries and an expected surge in domestic investment in renewable energy and energy storage systems. In addition, the spin-off and listing of Shanghai Electric Wind Power Group on the Shanghai Stock Exchange of Science and Technology Innovation Board is expected to further accelerate the development of the company's wind power business and raise Shanghai Electric's valuation. The spin-off is expected to be completed in 2020. In view of the better-than-expected operating results in the first half of 2020, following disappointing results in the first quarter of 2020, we have adjusted our profit forecasts for the three-year period from 2020 to 2022. We expect the company's total revenue to increase by 4.7% / 6.6% / 6.8% respectively from 2020 to 2022. At the same time, we expect the company's consolidated gross profit margin to be 17.6% / 17.9% / 18.1% respectively from 2020 to 2022.

Our adjusted earnings per share forecasts for 2020-2022 are 0.256 yuan, 0.294 yuan and 0.334 yuan. In view of our optimism about the company's prospects, we reiterate our "Buy" investment rating and raise our target price to HK $3.25, which is equivalent to 11.5 times / 10.0 times / 8.9 times 2020-2022 earnings or 0.7 times / 0.6 times 2020-2022 price-to-book ratio.