9M16 net profit up 71% YoY, in line with Pinggao's estimate Pinggao Electric released its Q316 financial statement, reporting 9M16 revenue ofRmb4.2bn (up 34% YoY) and net profit of Rmb870m (up 71% YoY), in line withPinggao's preliminary estimate of 60-90% YoY growth in net profit in 9M16. Q316 netprofit was Rmb350m, up 61% YoY. We mainly attribute the rapid growth in net profitto an intensive delivery of high value-added products, mainly ultra-high-voltage (UHV)GIS products, in our view. Pinggao to be a major beneficiary of high UHV investment growth in 2016-18E We believe Pinggao will be a major beneficiary of high growth in UHV investment. Weestimate China's UHV investment to exceed Rmb300bn in 2016-18E, c2x of UHVinvestment in 2011-15. Pinggao's UHV GIS products, which have a c45% gross margin,occupy a leading share (45%+) in the market. We believe its leading position is likely tosustain in the next three years, therefore, it may obtain relatively sufficient high grossmargin UHV orders. New business & ongoing asset injection may partially offset some negatives We expect Pinggao's new businesses (Tianjin Pinggao, electrical vehicle chargingfacilities and grid maintenance) and ongoing asset injection (mainly mid-to-low-voltageproducts) will benefit from China's accelerating investment in power distributionnetworks in 2016-20 (Rmb1.7trn, a 50%+ growth vs. 2011-15 investment) and theNDRC's aggressive target on the development of charging piles (the NDRC targets tobuild an additional 4.8m+ charging piles and 12,000 charging stations, compared to31,000 charging piles and 780 charging stations at end-2014). We believe these couldpartially offset the potential UHV decline after 2018. Valuation: maintain Buy rating, price target of Rmb20.54 We derive our price target of Rmb20.54 with the DCF methodology (WACC 7%).Pinggao may face a fierce competitive environment in the UHV market by 2020, andthis situation may be more severe by 2030 and after. This is reflected in our mid- andlong-term DCF ROIC assumptions (10%/7.6%, respectively, below assumptions of 13-15% for international leading electric equipment manufacturers). However, we believethe market is too focused on the company's long-term UHV decline and not focusedenough on projected momentum in UHV returns in the next three years.

Awarded tender to provide 1,000-kV GIS for Shandong UHV loop. Pinggao Electric announced on 29 August it was among the winning bidders to providegas-insulated switchgears (GIS) for the 1,000kV Shandong UHV AC loop project. Theorder size is Rmb1.3bn (vs. full-year 2015 revenue of Rmb5.8bn), with deliveryexpected to take place in June 2017. Pinggao won 82% of the total tender value. Leading share remains intact in UHV AC GIS market. Based on historical bidding results, the company has a 45%+ market share in the UHVAC GIS market (Pinggao won 100% of the Ximen-Shengli 1,000-kV tender announcedin July 2016, and 82% of the current 1,000-kV Shandong loop tender). We expect tosee a UHV tendering boom in 2015-17, which could result in sufficient order flow todrive solid earnings in 2016-18 (AC GIS products have 40%+ gross margins). Asset injection still in progress. The CSRC approved a proposed asset injection from its parent in July 2016, which weexpect to be completed in Q316. The assets to be injected are mainly mid-/low-voltageproducts for power distribution networks and are likely to benefit from acceleratedpower distribution investment in China during 2016-20 (Rmb1.7trn, >50% more thantotal investment in 2011-15). The injected assets could boost EPS and partially offset apotential UHV decline after 2018. We believe EPS accretion of 3-22% is possible in2016-20 after the asset injection. Valuation: Maintain Buy rating, Rmb20.54 price target. Our Rmb20.54 price target is based on DCF and assumes a 5.7% WACC. Pinggao islikely to see a fierce competitive environment for UHV in 2020 and even fiercer in 2030and beyond due to a decline in the UHV business, which is reflected in our mediumandlong-term DCF ROIC assumptions (10%/7.6% vs. 13-15% for global leadingpower equipment manufacturers). However, we think the market is too focused on thelong-term UHV outlook and not focused enough on the sound returns expected to becontributed by UHV over the next 3 years.

Well positioned for the short term; initiating with Buy rating. We are initiating on Pinggao Electric with a Buy rating and a price target of Rmb20.54. We think the company is well positioned to benefit from a major program to expandChina's network of ultra-high-voltage (UHV) transmission lines. We think sufficientorder flow could provide sound returns and earnings over the next 3 years. UHVrevenue and margins are expected to begin declining in 2019 due to a harsher marketbut new business could help partially offset those negatives. We believe the market istoo focused on the long-term UHV decline and not focused enough on momentum inreturns and earnings in 2016-18, as well as new business. New businesses to partly offset UHV revenue decline after build-out peak. We forecast new businesses – grid maintenance, Tianjin Pinggao and electrical vehicle(EV) charging facilities – to deliver a revenue CAGR of 33% to Rmb3.5bn in 2020 fromRmb1.5bn in 2017, driven by accelerating investment in power distribution networks,partially offsetting the potential UHV decline after 2018. We forecast Pinggao'searnings to decline 10%/22.5% in 2019/20 but with limited further downside risksfrom UHV, as our forecasts indicate only 2/1 UHV DC/AC lines in 2020, while SGCCtargets to build an additional 24 UHV DC lines in 2020-30. Asset injection will lead to EPS accretion. A proposed asset injection from its parent has obtained CSRC approval and we expectit to close in 3Q16. We forecast a total earnings 2015-20 CAGR of 12% for fourpotentially-injected mid-/low-voltage manufacturers, driven by >50% more powerdistribution investment in 2016-20 in China. Meanwhile, for International Engineering,an earnings CAGR of 32% will be supported by a strong backlog as of February 2016. The injected assets could boost EPS and partially offset a potential UHV decline after2018. We believe EPS accretion of 3-22% is possible in 2016-20 after the assetinjection, which is not factored into our model. Valuation: Price target of Rmb20.54 and Buy rating. We derive via DCF (WACC 5.7%) a Rmb20.54 PT. Pinggao is likely to see a harsh UHVcompetitive environment by 2020 and even harsher by 2030 & beyond due to decliningUHV business, which is reflected in our medium- and long-term DCF ROIC assumptions(10%/7.6% vs. 13-15% for global leading power equipment manufacturers). However,we think the market is too focused on the long-term UHV outlook and not focusedenough on the sound returns expected to be contributed by UHV over the next 3 years.