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CSCI-Utilities-Longyuan Power (916 HK)：Pick-up in AR days dents valuation - 20171108

Pick-up in AR days dents valuation

 

• Price target cut to HKD6.30 (from HKD7.11) to reflect the company’s increased account receivable (AR) days.
• In our view, the company’s AR days will likely be maintained at the current level for the remainder of 2017, in light of the continuously increasing on-grid generation.
• Without changing forecasts, we will maintain our Buy rating on Longyuan as we are waiting for the government to announce feasible measures (e.g.: details of Green Certification) for resolving renewable energy subsidy payments.

Growth in ARs has outpaced that of revenue year-to-date in 2017. Based on the company’s disclosures, ARs have increased 60.5% YoY (78.8% HoH) in 1H17. In contrast, the total revenue from wind power has increased 10.2% YoY (17.3% HoH) over the same period. Admittedly, ARs would normally decline as the payment is settled at the year-end, but based on the historical data of 2014-2016, we do not expect a substantial decline in ARs by the end of 2017.All in all, we estimate that the increase in ARs has potentially dragged down the company’s operating cash flow by RMB3-4bn (c.20-30%) in 2017, from RMB13.5bn in 2016.

Along with the development of wind power, wind farms have seen their AR days slow down to a period of flat/negative growth from 2011-2015 after posting rapid growth between 2008 and 2010. Given that investors tend to focus on curtailment rate improvements and on-grid wind power generation, the mild growth in wind farms’ ARs had not drawn enough market attention to trigger for a potential re-rating of the company’s valuation, in our view.

ARs of wind power brought to the forefront as the growth of ARs has picked up rapidly in 2017 compared to 2016. At the same time, the total revenue from wind power has increased at a steady pace. Details are shown in the table below:

	HoH growth (%)				YoY Growth (%)
	1H16	2H16	1H17	2H17E	2016	2017E
AR	54.9%	-10.2%	78.8%	-10.2%	39.1%	60.5%
Revenue	28.0%	-6.1%	17.3%	-0.5%	12.8%	13.3%

 

We do NOT want to make an early conclusion that the company’s ARs has entered an accelerating period whereby it will keep growing faster than its underlying revenue during the period of 2016-2020 (13FY), because we see the government is actively looking for solutions to make up for the shortage of renewable energy fund. However, we DO think the surge in ARs has hurt the company’s operating cash flow and enterprise valuation. Thus, we have cut our DCF-based price target to HKD6.30 (from HKD7.11) but will maintain our BUY rating on the back of 11.1% upside potential. Our new PT implies 1.05/0.96x FY17/18E PBR, versus consensus of 0.90/0.82x FY17/18E PBR.