China is the world’s largest market for power generation equipment,
with an 80% share of the world’s total power capacity additions.
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With a 6% CAGR, we expect China’s total installed capacity to double
by 2020, despite a short-term slowdown. EIA forecasts that China’s
installed capacity will show the fastest growth in the world until 2030.
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By virtue of being in the largest and fastest growing market, the three
major power equipment manufacturers in China (“the big three”), i.e.,
Dongfang Electric (DEC), Harbin Power Equipment (HPE) and Shanghai
Electric (SEG), are better positioned than their global peers.
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While the thermal power segment will continue to dominate China’s
power equipment market, alternative segments, mainly nuclear and
wind power, are expected to grow much faster.
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DEC is better positioned than HPE, in our view, not only due to its
stronger nuclear and wind power exposure, but also to its better margin
improvement prospects compared with HPE.
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Our DCF-based target prices of HK$35.0 for DEC and HK$6.3 for HPE
imply 17% upside and 25% downside, respectively. DEC and HPE are
trading at 12x and 14x 2010E P/E, respectively, but we believe DEC
deserves to trade at a premium to Harbin, given DEC’s higher margin
and RoE and better earnings growth perspective.