Summary of China Power Transmission

Summary of China Power Transmission report: (UBS,07,12,07)

Banquet for local industry leaders

China.s power transmission and distribution (T&D) equipment sector is likely to enjoy an unprecedented growth in the next five years, due to domestic above-GDP-growth demand increase, in our view. We also believe that industry profitability will be improved by upgrades in product mix and softening of raw material costs. Here we suggest focusing on local leaders of primary equipment production with aggressive capacity expansion, which should be the largest beneficiaries in this sector.

Robust demand . anticipated and unanticipated. China plans to invest

RMB1,200 bn in power T&D system during the 11th Five-Year Plan to make

up for the historically inadequate investment, upgrade the current power grid and build new transmission lines. However, we believe actual investment might reach at least RMB1,400 bn, based on our estimated total installed capacity of 944GW in 2010E (versus 852GW in the 11th Five-Year Plan), due to faster-than-expected power demand growth.

■ Focus on the high-end market. Local leaders in primary equipment

production, which control the high-end market (above-220 kV), should

become the largest beneficiaries. The reasons for this are: 1) primary

equipment has a much larger market size and faster demand growth, than

secondary equipment, 2) the high-end market (above-220kV) has undercapacity, less competition, faster demand growth and improving

payment modes, and 3) the government.s requirements for a high

localisation rate should enable local players to win the majority of orders.

Moreover, expected soft raw material costs should improve industry margins from 2008 onwards.

■ Stock picks. We believe China.s power T&D equipment sector should have a premium on valuation on account of its very strong growth and improving profitability. We adopt a two-stage DCF model as our major valuation method, as we consider it unreasonable to compare local leaders on P/E with domestic followers and global peers, whose growth rates are much lower. We initiate coverage of Pinggao Electric with a UTPERFORM rating, and of TBEA and Tianwei Baobian with NEUTRAL ratings.

etc... ... interesting this report send me email pls.