Yangtze Power reported 1H16results after market close on 30Aug 2016witha net profit of Rmb7.7bn. The reported earnings were up 8% yoy based onrestated 1H15numbers (merge accounting for parent asset injections), andrecurring profit was by 26% yoy to Rmb7.6bn, which is mainly driven byincrease in power output in Three Gorges/Gezhouba and lower financial cost.The net profit number accounts for 39% of our full year forecast ofRmb18.2bn, in line with the historical ratio which lies between 28-41%. Wethink Yangtze is on track to achieve our full year earnings forecast and we likeYangtze Power due to the defensive nature of hydro power and DPScommitment at Rmb0.65/sh for 2016-2020(4.8% yield). Maintain Buy. Power generation surged after asset injection Yangtze completed the Chuanyun Hydro asset injection at the end of March2016and its total installed capacity increased by c.80% to 45.5GW. In 1H16,total power generation reached 71.2bn kwh (incl. only 2Q16generationnumber of Chuanyun Hydro), up 64% yoy compared to the un-restated poweroutput in 1H15. Power output from Three Gorges/increased by 22%/13% yoyrespectively in 1H16thanks to better water flows in Yangtze River. Impressive financial cost savings with further room to improve By end-1H16, total debt increased by 8% to Rmb157bn from Rmb146bn atend-2015and net gearing was raised to 132% from 106%. Nevertheless,Yangtze’s financial expense decreased by 27% yoy in 1H16. Yangtze plans toreplace the old debt with medium notes and short-term debentures, and wenotice that the latest notes issued by Yangtze have a interest rate of 2.6-3.2%.therefore we believe there are still further room for financial cost savings withpotential debt pay down and lower effective interest rate. 10-year dividend commitment Yangtze has committed a stable DPS at Rmb0.65/sh for 2016-2020and no lessthan 70% cash dividends payout ratio in 2021-25e. The dividend visibility issupported by the stable hydro operations with an estimated operatingcashflow of Rmb28-30bn each year (Rmb14bn in 1H16). At current price level,Yangtze generate a dividend yield of 4.8%, much higher than its A-share peers.

Pinggao reported strong 1H16 results, with net profit +79% driven by moreUHV GIS shipment. It is in line with preliminary result announcement issuedearlier. Management revised up full-year UHV GIS delivery guidance to 30-33sets (from prior 27-30) based on current schedule, suggesting a strong 2H16growth momentum. We believe the proposed parentco asset injection(scheduled to be completed by end-16) is strategically positive for Pinggao,even though it should be EPS impact neutral after share placement (c.19%dilution). Maintain Buy. Strong 1H16 results; revising up full-year UHV GIS delivery guidance In 1H16, Pinggao delivered 14 sets of UHV GIS, vs. 6 in 1H15. As a result,revenue rose 35% yoy, gross margin expanded 7ppt yoy to 37% and net profitjumped 79% yoy to Rmb525m. Management revised up their full-year UHV GISdelivery guidance to 30-33 sets (from prior 27-30), implying 16-19 to bedelivered in 2H (vs. 14 in 2H15). Rmb1.7bn of UHV orders won year-to-date, likely more to come Pinggao has won Rmb1.7bn of UHV orders YTD, incl. Rmb1.1bn from Ximeng– Shengli AC project, c.Rmb270m from Zhundong – South Anhui DC projectand Zhalute-Qingzhou DC project, Rmb368m from two UHV-complementarypower plants in Shanxi/Shaanxi. Key equipment of the UHV orders are 16 setsof 1000kV GIS, ASP of which are slightly lowered to Rmb85-90m compared toc.Rmb90m for those in 2015. For rest of the year, we expect at least one moreUHV orders from Shandong AC project, which have already opened tender inlate July. Pinggao is likely to win around 10 UHV GIS out of a total 24 fromShandong AC project, based on its historical UHV GIS market share (>40%). Parentco asset injection and share placement target to be completed in 2H Pinggao plans to acquire five companies from parentco and set up a GIS plantin India, funded by share placement (max.219m shares). The deal was firstlyannounced in Nov 15 and then received approval from China SecuritiesRegulatory Commission in July 16 (valid until 22 Jan 2017). It targets tocomplete the deal by end of this year, while exact timing depends on stockmarket situation. The proceeds from share placement, if completed, would beprimarily utilized for asset acquisition from parentco (Rmb3bn) and capitalinjection in acquired assets and Tianjin Pinggao (Rmb1.2bn) with priority,followed by Indian plant investment (Rmb676m). We consider the deal strategically positive as it is a move to better positionitself for long-term growth by strengthening low-mid voltage GIS and switchproduct offering and export capability. The parentco asset injection, ifcompleted, could present c.20% upside to the company’s FY17E earnings(FY17 net profit of acquired assets guaranteed at >Rmb271m), while EPSimpact should be neutral after factoring in 19% share dilution. We currentlyhave not yet factored in the deal in our financial forecast.

XJ Electric reported a 32% yoy decline of FY15 NP at Rmb720m, which is stillsignificantly above our estimate of Rmb393m, due to strong 4Q15performance as a result of catch up in grid investment. In 1-3Q15, XJ’s NPdeclined 75% yoy. However, 4Q made a sharp U turn with earnings accountingfor 77% full year. As a result, we have aligned FY15 earnings based onreported numbers while keeping FY16/17E forecast largely unchanged. XJ is akey beneficiary of a visible acceleration of construction of UHV transmissionlines as well as planned growth in distribution network investment. Wemaintain Buy rating with target price of HK$22.5. Key reasons of FY15 earnings beat First, strong pickup in grid investment in 4Q15 after delay incurred in 9M15,especially for the high-margin DC products; Second, a Rmb220m decline inadministration expenses (mainly due to R&D expense decline from Rmb430mto Rmb233m); third, a higher-than-expected non-operating income from assetdisposal gain of Rmb74m and government subsidy of Rmb142m.Nevertheless, GPM retreated to 27.2% from 33.7% in FY14, mainly caused bymargin contraction in distribution automation products given completion of thehigh-margin Shandong project in 2014 and tender price decline. Segmental performance: DC Power transmission much better than expected Smart sub-station & distribution: revenue -13.4% yoy (DBe: -20%), gross profitRmb864m(DBe: Rmb945m), GPM 30.3% (DBe: 36%); Smart mid-voltage powersupply: revenue +14.4% (DBe: +10%), gross profit Rmb254m (DBe: Rmb242m)GPM15.2% (DBe: 15%); DC Power transmission: revenue -29% (DBe: -40%),gross profit Rmb612m (DBe: 242m), GPM 58.3% (DBe: Rmb40%); Smartpower meter: revenue -23% (DBe: -5%), gross profit Rmb140m(DBe:Rmb208m), GPM 15.7% (DBe: 19%). Earnings to grow 24%/35% in 2016/17E; potential from overseas We expect the strong net profit growth to be driven by: 1) recovery insubstation and distribution segment after a decline in 2015; 2) strong salesgrowth in the DC segment; and 3) modest margin expansion on a risingcontribution from higher margin UHV products. Potential overseas ordersprovide additional upside as most of the planned overseas UHV lines adopt DCtechnology.

We met SDIC Power at dbAccess China 2016, and below are the keytakeaways: Power reform and direct power supply Management believes the government will actively push the execution of thepower reform in the next few years, and market competition will become morefierce in the future. The total percentage of direct power supply of SDIC Powerin 2015was less than 10%. The average tariff discount for the direct powersupply is at Rmb3-4cents/kWh, and there is no hydro power involved in thedirect power supply yet. Utilization/coal price/tariff Hydro: Although SDIC has recorded a poor waterflow of Yalong River in Julyand August 2015, its waterlow level in the fourth quarter reached multi-yearaverage. There is no water abandon in Yalong River this year. Thermal: thecompany’s thermal utilization decreased by 10% yoy in 2015. Management advised an average standard coal cost of c.Rmb460/ton for 2015with a further 10% yoy decline in 2016. According to the management,whether the company’s cross-provincial hydro tariff will be adjustedaccordingly has yet to be decided, and the average thermal tariff impact on thecompany is less than Rmb3cent/kWh as some of the company’s thermal tariffsare already lower than the previous benchmark thermal tariff. Capacity addition plan Hydro: while Tongzilin unit 4is expected to start operation in 1Q15, thescheduled operational dates of the remaining hydro power plants are beyond2020. Thermal: there are 6GW thermal projects currently under construction with thescheduled commissioning time in 2016and 2017including: Beijing Phase II(2x1,000MW), Qinzhou Phase II (2x1,000MW), Meizhouwan Phase II(2x1,000mw). Financial cost/dividend/non-public share issuance Thanks to the interest cut, management expects the company could saveRmb450m financial cost in 2016. Management has also guided it will maintainits dividend payout ratio of 35% in 2016. Management suggests that the finaltiming of the non-public A-share issuance remains uncertain.

Pinggao Electric reported in-line 3Q15 results and announced to acquire assetsfrom parentco and invest in overseas plants along with a no-more-thanRmb4.9bn share placement. Without asset injection/share placement, weforecast a strong earnings growth in 2015-16 (+40/38%) backed by UHV ordersreceived YTD. The announced acquisition, fairly priced at 15x FY16E P/E, is tofurther strengthen its low-mid voltage and export capability, even EPS impactis likely to be neutral due to share placement. The stock has resumed tradingtoday after four-month suspension during which the market has corrected by27%. However, we think its strong fundamentals will prevent the stock fromfalling as much as the index. Reiterate Buy with a target price of Rmb27.1. 3Q15 results in line; growth to remain strong into next year Pinggao Electric’s 3Q15 revenue was up 39% yoy, driven by 1) more UHV GISdelivery (4 vs. 2 in 3Q14) and 2) consolidation of Pinggao Toshiba. On higherUHV product contribution, GPM jumped by 10ppt to 36.4% and thus GP/NPgrew by 89%/28%. 9M15 NP accounted for 52% of our full-year forecast, inline with avg. of 57% in 2013-14. We believe the company is on track toachieve our FY15 estimate, with full-year UHV GIS delivery schedule intact(total 20 units, 10 in 4Q15). Backed by a record UHV order intake (Rmb3.4bn)YTD, we also expect the earnings growth to remain strong into 2016 (+38%). Asset acquisition and share placement Pinggao Electric announced to acquire assets from parentco and set up a GISplant in India, funded by share issuance of >= Rmb4.9bn. Accordingly, itproposed to place <=219m shares (16.2% of total share capital) to 10 investorsat a price >= Rmb22.33/share. Among the total gross proceeds of Rmb4.9bn,Rmb3bn is planned for asset acquisition from parentco, Rmb799m for sharecapital increase in five companies while Rmb676m for Indian plant. Theparentco guaranteed the NP of acquired assets at >Rmb213m/>Rmb271m in2016E/17E (up from Rmb109m/Rmb145m in 2014/15E) with a specifiedpenalty scheme, implying a 15x FY16E P/E and a 16% FY16e earnings upside.After factoring in a max. share dilution of 16%, the EPS impact seems neutral. A move to strengthen low-mid voltage and export capability The planned acquired assets include five companies: 1) Shanghai Tianling(90% stake, low-mid voltage GIS cabinets, 2014 NP: Rmb35m), 2) PinggaoWeihai (100%, low-high voltage GIS, 2014 NP: Rmb17m), 3) PinggaoTongyong (100%, low-mid voltage switch cabinets, 2014 NP: Rmb43m), 4)International Engineering Co. (100%, export & EPC, 2014 loss: Rmb2m),Langfang Toshiba (50%, arrestors, 2014 NP: Rmb15m). We consider theinjection/investment, as a move to 1) strengthen its low-mid voltage productoffering to benefit from distribution grid investment tailwinds; and 2) to betterposition for L-T growth with enhanced export capability (InternationalEngineering Co.’s order intake in 2014 at Rmb2.6bn).

Key beneficiary of ultra-high-voltage (UHV) investment boom . Most leveraged UHV play; new venture in mid-voltage products Pinggao is a leading UHV GIS player with 40% market share. Thanks to accelerated UHV build-out in China, we expect the company to deliver 40%/38%/24% earnings growth in 2015-17E. Moreover, its newly established mid-voltage business is also poised well for the catch-up investment in China’s distribution network upgrade, which is budgeted as Rmb2tr in 2015-20 by the government. We initiate with a Buy rating and a target price of Rmb27.1. Most leveraged UHV play; new venture in mid-voltage products . Thanks to its core UHV GIS products (”gas-insulated switchgear“, >70% revenue contribution), Pinggao stands as a key beneficiary of accelerated UHV investment, with revenue expected to double in 2014-17E. It is also the most leveraged UHV play (35% FY15E revenue) among peers. The planned huge investment in China’s distribution network will also benefit its new Tianjin venture focusing on low-mid voltage switchgear and component businesses. Earnings to grow by 40%/38%/24% in 2015/16/17E, or 31% CAGR . Based on our proprietary UHV approval/tender forecast, we expect Pinggao to receive orders of c.Rmb4-5bn p.a. during the period. We expect net profit to grow by 40%/38%/24% in 2015/16/17E, or a 31% CAGR through 2015-17E, driven not only by revenue growth but also by margin expansion on rising contribution from higher margin UHV products and operating leverage. Valuation and risks . We value Pinggao based on DCF through 2025E (WACC: 7.2%, tgr: 1%). The stock is currently suspended pending announcement of share placement and potential asset injection. Our current investment thesis is based on its existing business and we believe the planned corporate action is unlikely to be negative to the company as it is conditional on minority shareholder approval. Key downside risks include investment in UHV being below expectation or delayed versus forecast, margin and market share pressure from intensifying competition and growth in new mid-voltage business below expectation.

Strong growth to resume from 2016; Buy XJ Electric is one of China’s leading UHV DC and smart grid system providers.Due to delay in grid investment and lack of high-margin UHV delivery, 1H15earnings registered a 76% decline. However, we expect the company to deliver117/42% earnings growth in 2016-17E, thanks to accelerated UHV DCinvestment and catch-up investment in China's distribution network upgrade(budgeted as Rmb2tr in 2015-20). It is also well positioned in the fledgingelectric vehicle charging market. Initiating with Buy and Rmb22.5 target price. Twin growth drivers: UHV DC and Distribution Grid Thanks to its full set of UHV DC products including converter valves, control &protection systems and field equipment, XJ stands as a key beneficiary of avisible acceleration of the approval and construction of UHV transmissionlines, with an expected revenue growth of 65%/60% in 2016-17E for its DCpower transmission segment. Moreover, the government’s ambitiousdistribution investment target of Rmb2tr in 2015-20 will benefit its smart substationand distribution business (contributing 50% gross profit in 2014). Earnings to grow 117%/42% in 2016/17E; potential from overseas and EV We expect the strong net profit growth to be driven by: 1) recovery in non-DCsegments after a decline in 2015; 2) strong sales growth in the DC segment;and 3) margin expansion on a rising contribution from higher margin UHVproducts. Potential overseas orders provide additional upside as most of theplanned overseas UHV lines adopt DC technology. Leveraging on its strongR&D capability and sound track record, we believe XJ Electric will stand out asa competitive player once the electric vehicle charging market takes off. Valuation and risks We value XJ Electric based on DCF through 2025E (WACC: 7.7%, tgr: 2%). Keyrisks include grid investment below expectation or delayed versus forecast;margin pressure or market share loss from intensifying competition; growth innew business below expectation.

Strong recovery in 2016 after a hiccup in 2015; Buy . Market leader in grid dispatching, automation and relay protection NARI is a leading grid automation systems provider. Despite an earnings slide in 1H15 caused by a delay in delivery, we project 102%/33% earnings growth in 2016-17E on the back of resumed delivery and China’s aggressive investment plan for its distribution network in 2016-20. NARI is also best positioned among peers on the asset injection front. We initiate with Buy and a target price of Rmb18.1. Market leader in grid dispatching, automation and relay protection . NARI is a leading player in power grid automation (69% of revenue in 2014). We forecast a >35% CAGR in the rural electrification and power distribution automation sub-segment in 2015-17, driven by China’s smart grid and distribution investment boom in 2016-20. China aims to boost the penetration of distribution automation from 20% in 2014 to 90% by 2020; NARI should be a key beneficiary, leveraging on its established competitiveness. Earnings to grow by 102%/33% in 2016/17E; substantial asset injection upside . We expect strong net profit growth, driven by the recovery in power automation after delayed delivery in 2015. We are upbeat on the recovery in 2016 based on the trend in order backlog/revenue in 2013-15E. Moreover, the company has a strong track record in asset injection. The injection of NARI Electric by November 2016 should substantially enlarge the company’s earnings base and increase its exposure to the booming UHV investment. Valuation and risks . We value NARI based on 1) DCF through 2025E (WACC: 7.1%, tgr: 2%), and 2) an Rmb3.6/share potential value enhancement from asset injection. Our target price translates into 36x/27x 2016/17E EPS. Key downside risks include: 1) lower-than-expected investment in secondary automation equipment; 2) market share loss or margin pressure in secondary equipment tenders; 3) risks associated with new PPP projects; and 4) uncertainty over asset injection.