CSCI-Utilities-CGN Power (1816 HK)：A share offering could be potential catalyst-20180423

A share offering could be potential catalyst

• CGN will hold an extraordinary general meeting (EGM) on 25 April 2018 to consider the plan for the A share offering. We believe the proposal will be approved by the shareholders as well as receive the greenlight from the CSRC over the coming 6-12 month period, given its state-owned enterprise nature.
• We reiterate our view that CGN will experience a “V-shaped” growth in 2018, in which case earnings growth will likely slip to a trough level in 1H18 given a higher comparable base and no new capacity addition in 1H18. Nonetheless, we foresee earnings to resume on a steady growth track in 2H18 after Yangjiang 5 and Taishan 1 commence commercial operation. 
• Meanwhile, we see CGN’s A share offering to remain a re-rating catalyst over a 12-month horizon, given the substantial premium valuation of its A-shared listed nuclear power peer China Nulcear (601985.CH, NR), which currently trades at 2.0x/1.8x FY18E/FY19E PBR, versus 1.1x/1.0x FY18E/FY19E PBR for CGN. We reiterate our BUY rating on CGN and price target of HKD2.60, which implies 1.5x/1.5x FY18E/FY19E PBR.   

A solid 15.5% YoY on-grid volume growth in 1Q18. We estimate CGN has achieved a 73.3% utilisation rate in 1Q18, lower than 76.8% in 4Q17, due to the seasonal and holiday effects, but still higher than 66.8% in 1Q17, thanks to the increase in direct power supply (DPS). Also, based on our calculation, the on-grid volumes of Fangchenggang and Hongyanhe, in particularly, have increased significantly by 83% YoY and 41.3% YoY, with the utilisation rates having improved to 85.9% and 54.1% (vs. 1Q17: 47% and 38.3%), respectively. For Fangchenggang, DPS accounted for 100% of the total on-grid volume in 1Q18. Looking forward, we estimate on-grid volume growth would likely slow down to around 10% in 1H18, on the back of a higher comparable base with Yangjiang 4 having commenced commercial operation in late March 2017.

DPS tariff discounts: the culprit for slower gross profit growth in 1Q18. CGN’s revenue grew by 9% YoY in 1Q18, lower than the volume growth rate, which we believe was attributable to the DPS tariff discount. Based on our calculation, the implied tariff of 1Q18 was RMB379/MWh, which is 2.3% lower than 1Q17, due to the expanding share of DPS. On the other hand, operating costs have surged 17% YoY, whilst implied unit costs have increased 4.9% YoY to RMB200/MWh in 1Q18, subsequent to rising Guangdong provincial government-related charges. All-in-all, gross profits improved slightly by 0.9% YoY in 1Q18 though gross profit margins have slipped to 45.8% from 49.5% in 1Q17.

Profit outlook: a tough 1H but likely a rebound in 2H. As no new capacity will be added in 1H18 and given the increase in DPS, we expect the company’s earnings growth rate to trough in 1H18. Nonetheless, as Taishan 1 and Yangjiang 5 are scheduled to commerce commercial operation in 2H18 (likely October), we believe the company will resume on a steady growth track thereafter.   

We reiterate our BUY rating on CGN and price target of HKD2.60. Even though the company’s earnings growth rate has slowed down in 1H18, we see its A share offering to remain a key re-rating catalyst over a 12-month horizon. The stock currently trades at 1.1x/1.0x FY18E/FY19E PBR, versus our PT implied valuation of 1.5x/1.5x FY18E/FY19E PBR respectively.