Damo: Shanghai Electric's (02727) target price was raised by 20% to HK$2.32 to maintain “reduced holdings” rating

The Zhitong Finance App learned that Damo released a research report stating that the target price of Shanghai Electric (02727) was raised from HK$1.93 to HK$2.32; A shares were raised from RMB 4.63 to RMB 5.33, by 20% and 15%, respectively. However, the bank kept the “holdings reduction” rating unchanged. It believes that the current valuation reflects too many optimistic expectations, that there is limited room for future growth, and that there is not much room for the stock price to rise.

The report mentioned that this adjustment is mainly based on the 57% to 71% increase in Shanghai Electric's net profit forecast for 2026 to 2027, and the revenue forecast also increased. The main reasons include higher than expected revenue from the thermal energy equipment business, increased contributions from associated companies, and an increase in the EBITDA rate forecast for the 2026-2027 period.

Despite this, Damo pointed out that its profit forecast is still 8% to 35% lower than the market average, reflecting that the market's expectations for the company's profit improvement may be too optimistic. Since the gross margin of thermal power equipment is already at a 10-year high level and competition in the wind power and energy storage business is fierce, the gas turbine export and service business is not expected to contribute significantly to profit margin improvement until 2028 to 29.

According to Damo's analysis, Shanghai Electric H shares are currently trading at a price-earnings ratio of about 25 times the predicted price-earnings ratio in 2027. Compared with a net profit compound annual growth rate of only 6.0% and EBITDA compound annual growth rate of 3.9% over the next three years, the valuation is too high, and it is also higher than that of domestic peers and global peers. According to the report, the market is overly optimistic about the prospects for improving its gross margin, but competition in the current wind power and energy storage business is fierce, and it is difficult to see significant improvements in the short term.