Morgan Stanley has released a research report raising its price target for Shanghai Electric Group Company Limited (SH ELECTRIC) (02727), increasing the H-share target from HK$1.93 to HK$2.32 and the A-share target from RMB4.63 to RMB5.33, representing increases of 20% and 15% respectively.

However, the bank maintained its Underweight rating, stating that the current valuation reflects excessive optimism and that future growth potential is limited, leaving little room for share price upside.

The report noted that this adjustment is mainly based on a 57% to 71% upward revision to net profit forecasts for 2026 to 2027, with revenue forecasts also raised. The main reasons include: higher-than-expected revenue from the thermal equipment business, increased contributions from associates, and an improved EBITDA margin forecast for the 2026 to 2027 period.

Despite this, Morgan Stanley pointed out that its earnings forecasts remain 8% to 35% below the market consensus, reflecting that market expectations for the company's earnings improvement may be overly optimistic. This is because gross margins for thermal power equipment are already at a 10-year high, competition in the wind power and energy storage businesses is intense, and the gas turbine export and service businesses are not expected to significantly contribute to margin improvement until 2028 to 2029.

Morgan Stanley analyzed that Shanghai Electric's H-shares currently trade at approximately 25 times the 2027 forecast price-to-earnings ratio, with an enterprise value-to-EBITDA ratio of about 9 times. Relative to its three-year net profit compound annual growth rate of only 6.0% and EBITDA compound annual growth rate of 3.9%, the valuation is elevated, also exceeding that of domestic and global peers.

The report concluded that the market is overly optimistic about the company's gross margin improvement prospects, but given the intense competition in its existing wind power and energy storage businesses, significant improvement is unlikely in the short term.