Event:
NARI Technology Development released its Q3 2008 report today; in the first three quarters, the company gained prime operating revenue of Rmb675mn (+12.13% yoy) and net profit attributable to parent of Rmb66.83mn (+21.34% yoy). EPS stood at Rmb0.32 with ROE of 8.53%.
Our analysis and estimation:
Q1-Q3 performance is basically in line with our expectation.
As a typical electric power secondary equipment supplier, the company’s core business is settled in Q4; from quarterly profit distribution in recent 2 years, Q4 2008 earnings make up over 50% of the annual performance. At present, steady growth of the first three quarters has fully reflected a well-performed momentum, thus we forecast annual performance will basically reach our expectation.
Gross profit margin boosts notably than that of 2007.
As far as we are concerned, gross profit margin increases mainly owing to fast growth of high-gross-margin power grid automation products, and its proportion has greatly enhanced. In view of statistics from the interim repot, power grid dispatching automation realizes 40% of turnover (30% in 2007), and its gross margin increases sharply as well for emerging scale effects.
Driven by investment in domestic power grids and subways as well as overseas business, the company is expected to see explicit growth.
Benefiting from the booming industrial environment, steady management and dominant position in power grid dispatching automation sector, the company enjoyed sustained rapid growth since its going public in 2003, and maintained revenue CAGR of up to 21%, and net profit CAGR of 27% from 2003 to 2007. We predict the company will keep fast growth for several factors as below:
1) Power Grids investment greatly drives growth. According to national power grid development plan, power grid investment will maintain fast growth by 2012 and meantime drive demand in electric power equipment including electric power secondary equipment.
2) Subway monitoring automation is to see fast growth. Urbanization brings increasing demand in subways and its construction will speed up in the coming few years.
3) Overseas business is expanded in order. Under fierce competition of domestic transformer station automation, the company has shifted the focus to international market and obtained series of orders in transformer station and power plant automation in North Africa, SE Asia and Middle East.
Maintain former earnings forecast and “Recommended” rating
We forecast 2008-2010E EPS to be Rmb0.80, Rmb1.02 and Rmb1.19 respectively. Consulting average P/E ratio of its peers and the development and position of the company within the industry, we set its 2009 P/E ratio at 25x, and fair estimation at RMb25, with absolute estimation DCF (WACC＝11.42%, g=3%) at Rmb22.04 and fair estimation range at Rmb20.54-23.93 in sensitivity analysis. Current share price is fairly low in both absolute estimation and relative estimation, maintain “Recommended” rating.