Nuclear:More catalysts for upstream casting/forging; CFH top pickNuclear

研究机构：高盛高华证券 分析师： Frankl ... 撰写日期：2011年01月18日

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    We believe the upstream nuclear casting and forging (C&F) segment has amore attractive industry landscape than the downstream assemblednuclear equipment segment, because of higher technical entry barriers andeven greater market share concentration. For example, we expect the2011E nuclear equipment gross margin of China First Heavy (CFH) (30%) toremain above that of Dongfang Electric (DFE) (19%). We believe thebottleneck of the nuclear power equipment supply chain lies in theupstream segment, and hence the growth of the downstream segment islimited by the former. We therefore expect CFH’s gross margin to expandfurther due to improving economies of scale and production capability butsee relatively smaller scope for Dongfang Electric’s margin to grow.
    Export potential varies greatly by segment。
    We believe upstream manufacturers should be able to realize their exportpotential sooner than downstream ones, though both may not beimminent. For example, we think downstream nuclear equipment makersmay not be able to export AP1000 products as Westinghouse owns thepatent. We also think exports of their other nuclear products derive mostlyfrom the overseas expansion of the Chinese nuclear power operators,which may take years to develop. Meanwhile, we think upstream nuclearC&F parts are less bound by these constraints. We think CFH can partnerwith overseas nuclear equipment assemblers due to its cost advantage.
    DFE has been the frontrunner but Shanghai Electric may outpace it。
    DFE enjoyed first mover advantage in nuclear power equipment marketshare thanks to its strength in CPR1000 (the 2nd+ generation technology).
    However, we expect Shanghai Electric (SEG) to catch up on the marketshare front as it begins to ramp up delivery of 3rd generation AP1000.
    Reiterate CFH as our top pick in nuclear power coverage。
    CFH remains our top pick in the China nuclear power equipment universefor its market leadership in the more attractive upstream nuclear C&Fsegment. Our 12-month P/E-based target price of Rmb7.5 suggests 23%potential upside. Of the Big 3 downstream nuclear equipment makers, webelieve SEG is comparatively more attractive for its strength in AP1000.
    Key risks: nuclear capacity growth; localization; ASP different from ourview; slower-than-expected metallurgical business recovery for CFH.