SAUDI ELECTRICITY:3Q17results and recent developments

Strong operating profitability and healthy liquidity

Mild profit growth with SG&A cost control offsetting weak margin

    Saudi Electricity Company (SECO) reported headline 3Q17financial
resultsearlier this week reflecting strong operating performance and
healthy liquidity.Top line earnings were weak as 3Q17revenues declined
slightly (-1.3% YoY)and 9M17revenues were flat YoY due to lower
electricity sales on account ofshift in sales mix. However, this was
more than compensated by strong costdiscipline and special measures
(cancellation of municipalities’ fees) whichdrove 3Q17and 9M17reported
EBITDA up by 8.5% and 42.5% YoYrespectively. EBITDA margin also boosted
resultantly, expanding 520bps YoYto 57.2% for 3Q17. Looking further into
cost dynamics, 9M17fuel costsdeclined by 6.5% YoY and operational and
maintenance cost was down 13.1%YoY. This was partially offset by
increase in power purchase cost due to higheroutput from IPPs
generations. 9M17EBITDA growth was also significantlyboosted by a
special measure including reversal of accrued historicalmunicipalities’
fees of SAR6.1bn following a royal decree to cancelmunicipalities’ fees
in Feb-2017. Excluding the aforementioned one-off item,3Q17and
9M17EBITDA growth would still have been solid at 7.2% and
8.9%respectively. 3Q17reported net profit grew 6.8% YoY (excl. one off
+4.4%YoY) to SAR5.3bn while 9M17net profit almost doubled YoY to
SAR12.4bn(excl. one-off +1%).

    Deutsche Bank view – auto safety and ADAS gaining momentum

    Cash flow update: 9M17Cash flow from operations (CFO) increased by
ahealthy 30% YoY to SAR26.8bn. This was mainly driven by improved
workingcapital management driven by lower inventory, accounts payable
and prepaidexpenses. Capex programme continued in line with SECO’s
commitmenttotaling SAR32.1bn in 9M17. Overall liquidity improved
significantly, withgross cash position more than doubling to SAR2.8bn as
of end 9M17.

    3Q17revenue grew 9.3% YoY to RMB6.3bn. However, gross profit
declined 20.5%YoY to RMB0.9bn in 3Q17with 5.6ppt YoY gross margin
deterioration due toincreasing revenue contribution from lower margin
segments such as BMS andADAS (auto safety and interconnection system).
Together with 1) 17.2% YoY dropin SG&A expenses (SG&A ratio declining to
11.1% of revenue in 3Q17vs. 14.6% in3Q16) and 2) one-off disposal gain
of the remaining stake in industrial automationbusiness, but partially
offset by 43.1% YoY increase in finance cost, 3Q17netprofit increased by
71.1% YoY to RMB271.1m. On a 9M17basis, Joyson’s netprofit of RMB886.7m
was up 1.2x YoY and accounted for 78% of our previousfull-year
FY17earnings forecasts and 75% of Bloomberg consensus. Therefore,we
consider the results slightly above our expectation.

    Joyson is on track to consolidate the KSS and PCC businesses
acquired last year.According to the company, the two segments further
recorded new contract winsfor active safety products and interconnection
system. We raise our FY17-19Erevenue by 2.7-3.0% and net profit by
2.8-4.0% to reflect stronger revenue growthfrom new businesses and lower
SG&A cost ratio, partly offset by lower grossmargin assumptions.
Maintain Buy on our optimistic view for the growth potentialof KSS in
active safety and ADAS market in China. Our TP is set at 30x FY18E
P/E(from 27x, given the sector re-rating over the past few months), ~15%
below itsmid-cycle P/E of 36x. This is justified, in our view, since we
expect the companyto deliver a 37.5% EPS CAGR in FY16-19E. Key downside
risks: 1) weaker-thanexpectedauto sales; 2) failure to consolidate
KSS/TS or improve profitability; 3)future capital raising to fund
potential acquisitions.