CSCI-Utilities-CGN Power (1816 HK)：A bargain, albeit slowing growth in 2018 - 20180102

A bargain, albeit slowing growth in 2018

• We have revised up our FY17E/18E EPS forecasts by 7%/10% to RMB0.26/0.24 from RMB0.24/0.22 respectively, to reflect the company’s better-than-expected on-grid volume growth for FY17E and our confidence in the company’s capability to maintain volume growth in FY18E.
• We estimate Direct Power Supply (DPS) to expand further c.20% in FY18E versus c.15% in FY17E and c.5% in FY16A in terms of the company’s total power on-grid volume, after its power stations in Guangdong province start to trade directly with power consumers in the coming year.
• We will maintain our BUY rating on CGN Power, but have trimmed the DCF-based price target by 10.3% to HKD2.60 from HKD2.90 to reflect our view that the company will enter into a decelerating growth phase in 2018. Our price target implies 1.5x/1.4x FY17/FY18E PBR, which we think is undemanding given an estimated FY17E/FY18E ROE of 16.0%/15.6% respectively.

CGN is estimated to add 1-3GW in 2018. As stated in our ‘Nuclear Power update’ report, we believe nuclear power generation will enter into a sustainably stable phase in 2018 on the back of the intensified efforts in supply-side structural reform and given that the commencement of commercial operation of Generation III+ reactors in China remains uncertain. In our view, it goes to explain the delay in operation commencement of Taishan Unit 1 in 2017, rather than owing to technical safety concerns as reported by the HK media. As to when the Taishan Unit 1 will commence commercial operation, 2H18 would be a good estimate as it is still in the commissioning phase. Against this backdrop, we think the company will be able to add at least Yangjiang Unit 5 with installed capacity of 1,086MW, which uses ACPR1000 technology, belonging to the Generation III reactors.

We estimate the company’s on-grid volume will grow by 10% YoY in FY18E, albeit at a slower pace as compared with c.20% YoY in FY17E due to the higher comparison base. In addition, we have also revised upwards our volume growth projection for FY17E to 20% YoY from 15% YoY to reflect the continuous utilisation rate improvement of the Hongyanhe and Ningde power stations. Meanwhile, we estimate that in 2018 the DPS’ share of the company’s total on-grid volume would expand to c.20% from c.15% in 2017E after its power stations in Guangdong province start to trade directly with power consumers.

DPS impact will be limited, in our view. According to the media news, the company’s discount on DPS to the benchmark on-grid tariff in Guangdong is around RMB0.07/kWh, and that for DPS volume in Guangdong is 9,270 GWh, which we estimate the discount on the weighted average tariff of the company will be c.2% at RMB0.43/kWh. Moreover, as we believe an increase in DPS will drive unplanned power volume growth and at the same time dilute fuel costs as well as reduce operational costs, the subsequent overall impact on the company’s revenue will be immaterial.

Revenue and EPS (excluding one-offs) estimated to grow 10% YoY and 10% YoY in FY18E respectively, in line with the slowdown in volume growth higher comparison base. Meanwhile, EPS is likely to grow more rapidly than revenue, as the company has set its sights on controlling operational costs.

Reiterate BUY on likely strong FY17E earnings and higher dividend payout ratio. We estimate the company’s EPS will increase by 61% YoY in FY17E. If excluding the one-offs, EPS will see a 37% YoY increase, much better than that of its peers, which will likely see substantial decrease due to rising fuel costs. Moreover, as the company is expected to return to positive free cash flow in 2018, it will be in a financially sound position to increase its dividend payout ratio going forward. The company currently trades at FY17E/FY18E PBR of 1.3x/1.2x versus FY17E/FY18E ROE of 16.0%/15.6% respectively, which we deem undervalued.