CSCI-Utilities-CGN Power (1816 HK)：Utilisation continued to improve - 20171019

Utilisation continued to improve

• We have positive takeaways from CGN’s conference call following release of its Jan-Sep17 operational data, pointing to steady growth in 2H17.
• Utilisation rate improved further to 80% in 3Q17, from 66% in 1Q17 and 72% in 2Q17. 
• Without changing forecasts, we reiterate our Buy rating on CGN, and expect to see a medium-term re-rating on the back of solid growth and FCF turning positive from FY17E.

CNG’s on-grid power volume rose 21.8% YoY to 101,328 GWh during 1Q-3Q17 (+18.9% YoY and 11.2% QoQ in 3Q17). Although the YoY growth rate in 3Q17 has slowed down from the 35.4% YoY increase in 2Q17, we think this is well-expected by the market, given that the new capacity addition in June/July-16 had driven up the comparable base of 3Q17. We reiterate our forecast that the company’s on-grid volume growth rate will slow down to 3% YoY in 2H17, on the back of the high base in 2H16, with the full-year volume growth rate to reach 15% YoY. (For more details, please refer to our report “Solid earnings growth in 2017”, published on 1 September 2017.)

After two consecutive quarterly improvements, utilisation is likely to decline in 4Q17 on a low season. Based on our calculation, 9M17 utilisation rate has reached 73%, a further improvement from 70% in 1H17. CGN’s capacity utilisation rate posted a third consecutive quarterly increase to 80% in 3Q17, up significantly from 66% and 72% recorded in the 1Q and 2Q, respectively. This was attributable to the high power consumption in the summer time as well as a lack of new capacity addition during this period. We expect the utilisation rate of 4Q17 will drop to the level of 1Q17 at c.66%, due to the seasonable power consumption decline as well as the heat-power cogeneration’s priority of connecting power grid before nuclear power in Northeast China in the winter time.

Taishan’s contribution to profit will be trivial even if it commences production in 4Q17. Based on our calculation per our estimation, contribution from the Taishan project in terms of revenue or on-grid volume will be trivial at only c.1% in FY17E even if it commences commercial operation in 4Q17, given the low utilisation rate of the new capacity.

Re-rating on the back of FCF turning positive. We believe CGN has entered a steady phase in its capacity ramp-up process, with capacity addition estimated to be maintained at 1-2GW on an annual basis in the medium term. Thus, annual capital expenditure is estimated to remain at a steady level with operating cash inflow likely to grow further along with utilisation rate improvement going forward. As such, we expect to see a market re-rating of the company’s valuation in the medium-term on anticipation of positive FCF starting from FY17E, based on our forecast.  We reiterate our BUY rating on CGN and maintain our price target at HK$2.90, implying 1.8/1.7x FY17E/18E PBR, versus market’s 1.3/1.2x respectively.