中国电力设备行业：特高压投资将如何影 响电力设备行业

1、 cGlobalResearch27 February2019China Power Equipment SectorHowwillUHVinvestmentimpactthepower equipment sector?UHV investment restarted positive for power equipment sectorWe are turning positive on the power equipment sector due to the ultra-high-voltage (UHV)transmissionlineinvestmentrestart.TheNEA

2、announced12UHVlinesinSept 2018 to be approved in 2018/19. We estimate this will bring Rmb170bn in total investmentandRmb43bninmajorequipmentinvestment,drivingsectornetprofittoa large rebound from its 2018 trough. Despite a share price rally since Sept 2018, the sectors valuation is still below its h

3、istorical trough, as the market may be considering these 12 lines to be a one-off fixed-asset investment (FAI) driver. However, we think UHV investment is sustainable over the long term and expect equipment GPM to recover as of 2019, suggesting further re-ratingpotential.The UHV restart is not a one

4、-off eventWebelievetheUHVinvestmentwillbesustainableoverthelongtermbecauseUHV+ large wind/solar farms in the North could play an important role in Chinas future power supply because: 1) Grid parity of wind/solar power in the North (c2020) will make UHV lines an economical way to transmit power to th

5、e East. 2) Government policiesthatencouragerenewablepowerdispatchandcross-regionpowertransactions willhelpremovenon-technicalhurdlesforUHVlineutilization.Weestimatewind/solar power transmitted through known DC lines will be less than 2% of total power demand in China, suggesting large investmentpote

6、ntial.We think UHV power equipment GPM will recover from 2017/18 troughUHV equipment company GPM troughed in 2017/18, given low SGCC (State Grid CorporationofChina)pricesandsurgingcommoditycosts.WeexpectGPMtorecover asof2019,withSGCCcontractpricesrisingandcommoditycostsstabilizing.Asapart ofpowerind

7、ustryreform,thegridisnowregulatedonanROAbasis.ThatgivesSGCC incentivetoexpanditsassetbasebyusinghigh-qualityproductsandithaschangedits bidding rules to focus more on quality instead ofprices.We are turning bullish on the sector; top pick: Pinggao and NARI (both Buy)WeupgradePinggaoandChinaXDtoBuyand

8、Neutral,andraiseourPTforNARI.We preferPinggao,asitssharepriceisthemostsensitivetotheUHVinvestmentcycleand ithasthebiggestshort-termupside.WealsopreferNARIforlong-terminvestmentasit coulddeliverthemoststableearningsgrowthoverthenextfiveyears.Figure 1: Valuation summary and key changesEquitiesChinaInd

9、ustrialAbigailEquitiesChinaIndustrial HYPERLINK mailto:abigail.sun abigail.sun+86-213-8668637WenzhuoDu HYPERLINK mailto:wenzhuo.du wenzhuo.du+86-213-8668960Alex HYPERLINK mailto:alex-c.liu +86-213-8668857RatingShare Pricetarget Price EPS2018E EPS2019E EPS2020E NewOldprice New Old Chg Upside New Old

10、Chg New Old Chg New Old ChgPinggaoBuySellRmb9.39Rmb12.00Rmb4.81149%28%0.220.28-24%0.610.19219%0.730.18308%NariBuyBuyRmb19.51Rmb24.50Rmb23.116%26%0.870.826%0.940.922%1.091.053%ChinaNeutralSell ReuRmb4.18tersRmb4.40Mktcap Rmb2.73P61%E5%0.10 P/B0.05V102%0.190.05 ROE266%0.21 Dividen0.06dyield282%codeRmb

11、m 19E 20E 19E 20E 19E 20E 19E 20EPinggao600312.SS12,74115.3x12.9x1.3x1.2x9%10%2.0%2.3%Nari600406.SS89,42720.8x17.9x3.0 x2.7x15%16%2.5%2.8%ChinaXD601179.SS21,42622.1x19.5x1.1x1.0 x5%5%1.8%2.1%Note: Price data as of 26 Feb 2019. Source: Reuters, company data, UBS-S estimates. HYPERLINK / This report h

12、as been prepared by UBS Securities Co. Limited.ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ONPAGE44. UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this

13、report. Investors should consider this report as only a single factor in making their investment decision.China Power Equipment SectorUBSResearchTHESISMAPMOSTFAVOREDLEASTFAVOREDPinggao,NARIChinaXDPIVOTALQUESTIONSQ: Is the Q418 UHV approval restart a one-offevent?Unlikely. We think UHV investment cou

14、ld be sustainable over the long term, as UHV + large wind/solarfarmsintheNorthwillbecomeaneconomicalwaytosupplypowerafterwind/solarreach grid parity. Government policies that encourage cross-region transactions and renewable power dispatch will help increase UHV line utilization. We estimate the tra

15、nsmission volume of announced UHV lines will be less than 2% of total power consumption in China, suggesting large investment potential. HYPERLINK l _bookmark1 moreQ: Will major UHV power equipment GPM recover from its 2017/18 trough?Likely. We believe the GPM of major UHV power equipment companies

16、bottomed in 2017/18,given risingpowerequipmentbiddingpricesandstabilizingcommodityprices. HYPERLINK l _bookmark10 moreWHATSPRICEDIN?DespiteasharepricerallysinceSept2018,thesectorsvaluationremainsbelowitshistoricaltrough. We think the market has priced in the potential benefit of the announced 12 lin

17、es but not potential longer-termsectorgrowth. HYPERLINK l _bookmark11 moreUBSVIEWWe are turning positive on the power equipment sector due to the UHV transmission line investment restart.TheNEAannounced12UHVlinesinSept2018tobeapprovedin2018/19.Weestimatethis willbringRmb170bnintotalinvestmentandRmb4

18、3bninmajorequipmentinvestment,drivingsector net profit to a large rebound from its 2018 trough. In addition, we think UHV investment will be sustainableoverthelongtermandUHVequipmentGPMwillrecoverasof2019.EVIDENCEOur economic analysis and explanation of the policy suggest UHV investment could become

19、 a long- term trend in China. Our analysis of recent bid prices, the SGCC pricing system and the commodity price trend indicate UHV equipment margin will bottom out from 2019Eonwards.Power grid investment in ChinaRmb bn80020%70015%60010%5005%4000%300-5%200-10%100-15%-2010 2011 2012 2013 2014 2015 20

20、16 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E-20%UHVBackbone& othersPowerdistributionSource: CEC, UBS-Sestimates.China PowerEquipmentSectorUBSResearchPIVOTALQUESTIONS HYPERLINK l _bookmark0 return Q: Is the Q418 UHV approval restart a one-off event?UBS VIEWUnlikely.WethinkUHVinvestmentcoul

21、dbesustainableoverthelongterm,as UHV + large wind/solar farms in the North will become an economical way to supply power after wind/solar reach grid parity. Government policies that encourage cross-region transactions and renewable power dispatch willhelp increase UHV line utilization. We estimate t

22、he transmission volume of announced UHV lines will be less than 2% of total power consumption in China, suggesting large investmentpotential.EVIDENCEOur calculations suggest these 12 UHV lines could bring Rmb170bn total investment and Rmb43bn major power equipment investment.Oureconomicanalysisshows

23、UHVwillbecomeaneconomicalwaytotransmit renewable power (wind/solar) after grid parity.Several government policies have helped remove hurdles in cross-region power transactions.WHATS PRICED IN?We think the market has fully priced in the impact of the 12 UHV lines being approved in September 2018 but

24、may just view them as a one-off event.UHV investment restartThe NEA announced a plan to build 12 UHV lines (7 AC + 5 DC) in September 2018, signalling the restart of UHV construction in China after almost two years. According to the plan, these will be approved in Q418 and 2019 and most of them will

25、 be used to transmit renewable energy, including hydro, wind and solar power.After the share price rally for the past five months, we think most of the impact of these12lineshasbeenpricedin.Thecriticalquestionnowiswhetherthecurrent UHV construction is a one-off investment to drive FAI growth or a su

26、stainable investment to support Chinas future power supply.We think the UHV investment will be sustainable over the long term, as UHV + large wind/solar farms in the North could play an important role for Chinas future power supply because: 1) Grid parity of wind/solar in the North will make UHV an

27、economical way to transmit power to the East. 2) Government policies thatencouragerenewablepowerdispatchandcross-regiontransactionswillhelp remove non-technical hurdles in UHV lineutilization.Impact of the 12 UHV lines announced in 2018How much total investment can the 12 UHV lines bring?Weestimatet

28、hetotalinvestmentforthe12UHVlinesisRmb170bn HYPERLINK l _bookmark2 (Figure2)and the total investment for all major power equipment is Rmb43bn HYPERLINK l _bookmark5 (Figure 5). The NEA suggested these lines will be approved and start construction in Q418 and 2019,respectively,indicatingthatmostpower

29、equipmentorderswillbedelivered in 2019/20.TheearningsofmajorUHVequipmentcompaniesdroppedsignificantlyin2017-18 due to a slowdown in UHV construction, and we expect the restart that began in Q418 to drive their earnings turnaround in2019-20E.Figure 2: Total investment size of 12 UHV lines announced i

30、n September 2018UHV linesTypeCapacity (GW)Length (km)Investment (Rmb bn)Approval timeNoteZhangbeiXionganAC66405.92018.11Send renewable from Zhangbei (Hebei) to Xiongan (Hebei)Qinghai-HenanDC81,58722.62018.10Send renewable from Qinghai to HenanZhumadianNanyangAC3805.12018.12Supporting project for Qin

31、ghai-Henan DC lineZhumadianWuhanAC5525.12019ESupporting project for Qinghai-Henan DC lineShaanbei-WuhanDC101,13617.82019.01Send coal power from Shaanxi to HubeiJingmenWuhanAC4706.02019ESupporting project for Shaanbei-Wuhan DC lineYazhong-JiangxiDC81,70031.72019ESend hydro power from Sichuan to Jiang

32、xiNanchangWuhanAC7608.02019ESupporting project for Yazhong-Jiangxi DC lineNanchangChangshaAC8126.32019ESupporting project for Yazhong-Jiangxi DC lineBaihetan-JiangsuDC82,17224.42019ESend hydro power from Sichuan to JiangsuBaihetan-ZhejiangDC82,50026.32019ESend hydro power from Sichuan-ZhejiangNanyan

33、gJingmenChangshaAC61,20011.82019EStrengthen the stability of power grid in Central ChinaTotal52171Note: Numbers in red are UBS-S estimates. Source: NEA, UBS-S estimatesAtypicalUHVDClineusuallyconsistsoftwoconvertersandatransmissionlineof about 1,500-2,500 km. Major power equipment in the two convert

34、ers usually includes56convertertransformers,8convertervalves,2DCcontrol&protection systems and 60 750kv GIS (gas insulated switchgear), together accounting for c27% of the total costs for a DC line HYPERLINK l _bookmark3 (Figure 3).Figure 3: Cost of typical UHV DC lineASP(Rmb m per unit/km)Unit or k

35、mInvestment (Rmb m)% of total2 Converter:5,666211,33249%Converter transformer62563,47215%Converter valve23081,8408%DCcontrol&protectionsystem15023001%750kv GIS12607203%Other costs5,00021%Transmission lines and others6.02,00012,00051%Total InvestmentAvg Rmb12m/km23,332Source: UBS-S estimatesThe cost

36、of an AC line depends on the number of substations and whether they are new construction or expansion of old ones. A typical new substation usually costs cRmb2bn and major equipment includes 12 GIS, 7 transformers and 10 reactors HYPERLINK l _bookmark4 (Figure 4). The length of UHV AC lines is usual

37、ly about 500-1,500 km.Expansionofanoldsubstationusuallyneedslessequipmentandtotalcostscanbe around Rmb500-800m.Figure 4: Cost of typical new AC substationASP(Rmb m/unit)UnitInvestment (Rmb m)% of total1000kv GIS821298447%Transformer45731515%Reactor18101809%Other costs60029%One substation (new)2,0791

38、00%Source: UBS-S estimatesWe estimate total costs for major equipment of the 12 lines at cRmb43bn HYPERLINK l _bookmark5 (Figure HYPERLINK l _bookmark5 5). We calculate the cost for UHV DC based on the number of lines and the cost for UHV AC based on the number ofsubstations.Figure 5: Total cost of

39、major equipment for the 12 UHV linesRmb million5 DC linesTotalConverter transformer17,360Converter valve9,200DC control & protection system1,500750kv GIS3,600Total equipment costs for DC31,6607 AC lines5 new substation9 old substationTotal1000kv GIS4,9202,9527,872Transformer1,575-1,575Reactor9009721

40、,872Total equipment costs for AC7,3953,92411,319Total equipment costs for 12 UHV lines42,979Source: UBS-S estimatesIs UHV investment sustainable over the long term?Some investors view the UHV restart in Q418 as a one-off event for the government to boost FAI growth. However, we think UHV could becom

41、e a sustainablegridinvestmentoverthelongterm,consideringtheenvironmentaland economic benefits, as well as increasing policysupport.In 2014/15, China approved UHV lines for the purpose of environmental protection (9 lines, Rmb200bn investment). However, approval almost stopped after that, leading inv

42、estors to think China will no longer build new UHV lines. ManyinvestorsconsidertheapprovalrestartinQ418aone-offeventtoboostFAI.The arguments against UHV lines mainly include the following: 1) it is not economicaltotransmitpoweroverlongdistancestotheEast;and2)UHVlinesare notefficientinrenewablepowerd

43、ispatch,giventhelowutilizationrateofexisting lines.However, we think the situation has changed: 1) wind/solar power in the North could reach grid parity in 2020/21, making it economical to transmit power through UHV lines to the East; and 2) several government policies and power industry reform are

44、helping reduce non-technical costs for cross-region power transactions.Our discussion mainly focuses on UHV DC lines, which have high technology reliability; while the application of inter-regional UHV AC lines is still full of uncertainty. Compared with AC lines, DC lines are more cost effective ov

45、er long- distance applications, have lower electricity losses and can prevent cascading failures that propagate across the electric grid.UHV lines become more economical after gridparityThecostsofwindandsolararedroppingrapidlyandweexpectthemto HYPERLINK /shared/d26FTDWkDvM3 reachgrid HYPERLINK /shar

46、ed/d26FTDWkDvM3 parity(sellingatcoal-fireongridtariff)in2020/21.Thiscouldhappenearlierinthe North, given higher utilization hours and cheaper landcosts.Our economic analysis shows that after wind/solar power reach grid parity in 2020/21E, it will be economical to transmit power through UHV lines fro

47、m the North to the East, as the delivery costs could be lower than the local coal fire on- grid tariff in the East.In 2016, the average wind power tariff in the North was Rmb0.49/kwh (solar is more expensive). This, plus the Rmb0.063/kwh UHV transmission tariff and adjusting for 7% transmission loss

48、, gives a total delivery cost of cRmb0.6/kwh, much higher than the local coal fire on-grid tariff of Rmb0.4/kwh in the East HYPERLINK l _bookmark6 (Figure 6).After grid parity, the total delivery cost of sending wind/solar power to the East could drop to Rmb0.37/kwh, lower than the local coal fire o

49、n-grid tariff. This makes UHV + large wind/solar farms in the North an economical and environmental way to supply power. This economic benefit could increase with wind/solar power costs dropping. HYPERLINK l _bookmark7 Figure 8 shows the economic analysis for each UHV DC line that transmits wind/sol

50、ar power.Figure 6: Economics of UHV DC lines in 2016 (Rmb/Mwh) Figure 7: Economics of UHV DC lines in 2020E (Rmb/Mwh)-44597634904459763490403UHVtariffCostfromtranmission lossPowerfromUHVCoal tariff in end-285Tariff in province6326UHVtariffCostfromtranmission loss374Power from UHV403Coal tariff in en

51、dNote:Weusethelocalwindpoweron-gridtariffinstartprovince. Source: UBS-SestimatesNote:weusethelocalcoalfireon-gridtariffinstartprovince,assuming wind/solar has reached grid parity.Source: UBS-S estimatesFigure 8: Economic analysis for major UHV DC lines (assuming grid parity)StartEndTransmissionTarif

52、f(Rmb/Mwh)UHVDClinesprovinceprovinceLossStartprovince(a)*UHV(b)CostfromUHV(c)*Endprovince(d)c 6% above the MRA.49%26%NeutralFSR is between -6% and 6% of the MRA.38%23%SellFSR is 6% below the MRA.14%14%Short-Term RatingDefinitionCoverage3IB Services4BuyStockpriceexpectedtorisewithinthreemonthsfromthe

53、time theratingwasassignedbecauseofaspecificcatalystorevent.1%1%SellStockpriceexpectedtofallwithinthreemonthsfromthetime theratingwasassignedbecauseofaspecificcatalystorevent.1%1%Source: UBS. Rating allocations are as of 31 December 2018.1:Percentage of companies under coverage globally within the 12

54、-month rating category.2:Percentageofcompanieswithinthe12-monthratingcategoryforwhichinvestmentbanking(IB)serviceswereprovided within the past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:PercentageofcompanieswithintheShort-Termratingcategoryfor

55、whichinvestmentbanking(IB)serviceswereprovided within the past 12 months.KEYDEFINITIONS:ForecastStockReturn(FSR)isdefinedasexpectedpercentagepriceappreciationplusgrossdividend yieldoverthenext12months.Insomecases,thisyieldmaybebasedonaccrueddividends.MarketReturnAssumption (MRA) is defined as the on

56、e-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium).UnderReview(UR)StocksmaybeflaggedasURbytheanalyst,indicatingthatthestockspricetargetand/or ratingaresubjecttopossiblechangeinthenearterm,usuallyinresponsetoaneventthatmayaffecttheinvestmentcase or

57、valuation.Short-TermRatingsreflecttheexpectednear-term(uptothreemonths)performanceofthestockanddonot reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.EXCEPTIONS AND SPECIAL CASES:UK and European Investment Fund ratings and de

58、finitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management,performancerecord,discount;Sell:Negativeonfactorssuchasstructure,management,performancerecord, discount. Core Banding Exceptions (CBE): Excep

59、tions to the standard +/-6% bands may be granted by the Investment ReviewCommittee(IRC).FactorsconsideredbytheIRCincludethestocksvolatilityandthecreditspreadoftherespective companys debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to

60、 the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualifiedasresearchanalystswithFINRA.Suchan