Macquarie has initiated coverage of Harbin Power Equipment, which recently raised $417.5 million from its first placement since listing in 1994, with an 'outperform' rating and a target price of $6.80 per share, suggesting an upside potential of 33 per cent from its price at the time of $5.10.
Harbin Power says it will use the proceeds of the placement to fund the expansion of its nuclear power equipment plant at Qinhuangdao in Hebei province.
Compared to its peers, Harbin Power is the purest play in the sector and has the thinnest margins, making it the most sensitive to a decline in steel prices.
At the end of June, Harbin Power had an outstanding order book of 70 billion yuan of power-generating equipment to be completed in the next four years. Revenue growth should be strongest from 2005 to 2007 when much of these orders will be delivered. The company has factored in higher steel prices for this equipment. However, steel prices, which account for more than 60 per cent of costs, are not expected to go up yet and so net margin could improve.
The broker forecasts net earnings to increase by 259 per cent in 2005, 68 per cent in 2006 and 16 per cent in 2007. Although the orders indicate earnings will decline in 2008, if it signs more deals and wins the contract to develop nuclear power equipment in China, it could prolong its earnings cycle. The counter closed on Friday at $4.825.
