Goldman Sachs-China Machinery Engineering Corporation-1829.HK-First Take，In line；higher GM for power EPC，soft new effective order

August 29, 2014
COMMENT
China Machinery Engineering Corporation (1829.HK) HK$4.52

Equity Research
First Take: In line; higher GM for power EPC, soft new effective order
News
China Machinery Engineering Corporation (CMEC) released 1H14 results
on August 28 post market; revenue/net profit came in at Rmb11.1bn/
Rmb1.1bn with +6%/+9% yoy growth, achieving 50%/51% of FY14 GSe.
Analysis
Key highlights:
1) Resilient top-line growth in 1H: International EPC/trade/other revenue
recorded +5%/+12%/-2% yoy change; within the International EPC segment,
we see the highest growth from transportation/non-core sector (+66%/
+62% yoy) while power EPC was flattish (85% of total EPC revenue). We
highlight that revenues from Iraq contributed 32% of total in 1H14, mainly
from the Salah Al-din power plant; we think the project suspension due to
emergency evacuation may pressure CMEC’s revenue growth into 2H14.
2) Soft newly effective orders: Newly effective EPC contracts value
declined by 83% yoy to US$197mn in 1H14; CMEC commented that it was
mainly due to major domestic financiers’ more prudent loan policies in 1H.
CMEC’s full-year newly effective orders target was set at US$4bn at year-
beginning; and we think the key is whether the Argentina railway contract
(US$2.5bn) could become effective in 2H14. EPC backlog stood at
US$7.0bn as of June 30, representing 2.8X of our FY14E EPC revenue.
3) Power EPC gross margin increased to 24.7% from 23.9%/22.3% in
1H13/ 2H13, which was offset by transportation/telecommunication EPC’s
lower margin – blended EPC gross margin stood at 22.1% vs. 22.2%/18.6%
in 1H13/2H13. Trading gross margin also improved 0.4pp yoy to 6.0%.
4) Total forex loss impact narrowed yoy: CMEC reported a Rmb95mn net
forex gain, albeit with a Rmb192mn loss from derivatives; the net impact
was Rmb-97mn vs. Rmb-202mn in 1H13.
Implications
We put our estimates/target price under review pending more details from
the company’s results briefing (September 1).
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Coverage View: Neutral

Tian Lu, CFA
+852-2978-0748 tian.lu@http://wendang.chazidian.com Goldman Sachs (Asia) L.L.C.
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David Jin
+86(10)6627-3007 david.jin@http://wendang.chazidian.com Beijing Gao Hua Securities Company Limited






The Goldman Sachs Group, Inc. Global Investment Research