GWD’s 1H19 earnings missed on 1) WTG margin squeezed to 11.3%; 2) higher-than-expected costs from sales & distribution and administration expenses. We see structural opportunities, however, as GWD released clear signal that WTG GPM had bottomed out. We expect market sentiment on GWD will improve on increasing ASP as well as improving costs. We upgrade GWD to BUY with TP raised to HK$12.06.
- 1H19 WTG GPM squeezed to 11.3%. Revenue surged 43.2% YoY to RMB15,700mn, mainly driven by 1) strong WTG sales growth of 45.7%; and 2) WPS revenue increase of 131.8%. GPM declined 10.5ppt YoY to 20.7%, however, as WTG GPM was further squeezed by 10ppt to 11.3%, and increasing low margin EPC services provision also dragged WPS GPM down by 11ppt to 8.7% only. Sales & distribution expenses/administrative costs also exhibited significant growth by 106.3%/29.5% respectively. Net profit recorded RMB1,134mn, down 24.1% YoY.
- Margin squeeze came to an end. We estimate WTG ASP declined 4.4% during 1H19, indicating GWD also faced pressures from the costs end. According to mgmt., surging costs was driven by product type and component upgrade but not absolute increase in material costs. Mgmt. expects costs curve to improve in 2H19 and near future, as those upgraded components are in early product life cycles. As 1) low cost order gradually releases, and 2) new WTG tender price experienced increase, mgmt. expects WTG GPM to recover in 2H19 as well as 2020. GWD maintained FY19 WTG margin guidance of a 5ppt decline only. We believe WTG segment had bottomed out in 1H19.
- Get prepared for opportunities beyond 2020. took active measures to consolidate existing product line from 46 to 22 product types by year end. New products will be grouped under 2.0s/2.5s/3.0s/6.0s platform series. We believe product consolidation will help GWD gain better costs control. Mgmt emphasized that it had put efforts to enhance product capability to bridge through to the grid-parity opportunities beyond 2020.
- Upgrade to BUY on improving WTG outlook. We trim GWD’s FY19E EPS by 7.3% based on higher costs incurred, and raise FY20/21E EPS by 2.5%/2.1% to factor in improving WTG GPM. Our sensitivity analysis indicates each 1% improvement in WTG ASP/costs will bring along earnings growth of 5.4%/5.5% to FY20E earnings. Given improving GPM outlook, we expect market sentiment will turn positive towards GWD. Raise TP by 30.4% to HK$12.06 based on 11.8x FY20E PER. Upgrade to BUY rating.
