[买入评级]DEVOTION THERMAL TECHNOLOGY(300335)：LEADING CLEAN ENERGY PLAYER AND BENEFICIARY OF COAL-TO-G.
We initiate coverage of Devotion with a BUY rating and atarget price of Rmb23.00, implying 40x/29x 2017/18e P/E.
Why a BUY rating？
Wall-mounted gas boilers under the Squirrel brandto benefit from rural coal-to-gas reforms. In 2017,replacement demand for rural wall-mounted gas boilers inBeijing-Tianjin-Hebei was Rmb4bn~7bn. In 1H, thecompany sold 116,000 units of wall-mounted gas boilers,84% of 2016’s full year total.
Elimination of small coal-fired boilers may increasegas boiler demand by 4x. According to the 13th FYP forEnergy, coal-to-gas reform in major cities will lead to a 45bncbm increase in gas use and replace 189,000t/h （tonnes ofsteam per hour） of coal-fired boilers. In 2017, the gas boilerrenovation demand in Beijing-Tianjin-Hebei isRmb4bn~8bn.
How do we differ from the market？ The market isconcerned about the sustainability of demand arising fromcoal-to-gas reform in Beijing-Tianjin-Hebei. We’ve made anin-depth analysis on the replacement demand of ruralwall-mounted gas boilers and substitution demand for coal-firedboilers （growth room in 2017 and in medium/long term）。 Thishas validated our optimistic view on sustained demand.
Potential catalysts: as winter nears, clean heating in the northwill be the focus of investment. In particular, strongerenvironmental inspection and heavy pollution inBeijing-Tianjin-Hebei may be a catalyst for coal-to-gas reform.
Financials and valuation
Our 2017/18 EPS forecasts are Rmb0.58/0.79, a CAGR of 39%.
Sustainability of coal-to-gas policy in Beijing-Tianjin-Hebei; slowprogress in distributed natural gas business.
□ .W.e.n. .L.U.O./.Z.h.e.n.g.t.a.o. .Q.I .中.国.国.际.金.融.股.份.有.限.公.司