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CSCI-Utilities-CGN Power (1816 HK)：New projects pipeline back on track - 20180312

New projects pipeline back on track

• According to the 2018 Energy Work Guidance (the Guidance) released by the National Energy Administration (NEA), China will have five new nuclear power reactors with a total of c.6GW capacity to be brought online in 2018, and plans to approve construction of 6-8 nuclear power projects within the year.
• We have revised down our FY18E/FY19E EPS forecasts (excl. one-offs) by 16.7%/18.5% to RMB0.20/0.22 from RMB0.24/0.27 respectively, to reflect our view that CGN will enter a slow growth period in 2018, given that CGN’s two nuclear power units are expected to commence commercial operation in 2H18.
• We reiterate our BUY rating on CGN and price target of HKD2.60. We have kept our PT unchanged as we are more positive on it long-term growth. Our PT implies 1.5x/1.5x FY18E /FY19E PBR, which we think is undemanding as compared to its A-share peer China Nuclear (601985.CH, NR), which is currently trading at 2.6x/2.4x FY18E/FY19E PBR.

New pipeline projects back on normal growth track. The NEA appears to be more active in promoting construction of nuclear power projects this year than 2017, evident from the change of tone to ‘steadily carry forward’ from ‘safely develop’ nuclear power. According to the Guidance, five nuclear power units will commence operation in 2018, including two units owned by CGN, the Yangjiang Unit 5 (1,086MW) and Taishan Unit 1 (1,750MW), accounting for 44% of the total new capacity. Meanwhile, the company also expects to obtain construction approval for 1-2 of the 6-8 planned nuclear power projects from the NEA in 2018. On such basis, we see CGN’s pipeline projects to return on normal growth track as China resumes approval of new projects. In addition, we would like to highlight that the Taishan Unit 1 incorporates the European Pressurized Reactor (EPR) design, a type of Generation III+. The expected commencement of Taishan Unit 1 not only indicates that the Generation III+ reactor will kick off commercial operation in China and on a global basis, but also the commencement of Taishan Unit 2 will be highly-likely scheduled in 2019, as the second nuclear power unit normally commences in a year following the first one.

“V-shaped” growth in 2018. We estimate the company’s on-grid volume growth will drop to c.12% YoY in 2018 from +19% in 2017. (We have slightly raised our forecast from 10% that was set on 2 Jan 2018 before its 4Q17 volume data were released.) Impacted by the slowdown in on-grid volume growth, we forecast the company’s EPS (excl. one-offs) will record c.8% YoY growth in 2018. Given the lack of commencement of new capacity in 2H17, and that new capacity will only be added in 2H18, we expect the business growth of the company will likely slip into a trough level in 1H18, though profitability growth will likely start to recover in 2H18 after two new power units commence commercial operation.

Acquisition of 100% equity interest in Ocean Power and Hebei Thermal Power unveils development of small modular reactors. According to the announcement on 8 March 2018, CGN will carry forward the construction of marine small modular reactors (ACPR50S) and low-temperature nuclear heating reactors via Ocean Power and Hebei Thermal Power, respectively, after the acquisition. In our view, these two types of reactors are smaller, more adaptive and can operate more flexibly than conventional reactors, and thus adhere to the widespread commercial application, which puts CGN in the forefront of the energy industry in China.

Attractive valuation. We anticipate CGN’s A share offering will take place during 2H18-1H19. In view of the substantial premium valuations of its A-shared listed nuclear power peer China Nulcear (601985.CH, NR), which currently trades at 2.6x/2.4x FY18E/FY19E PBR, we see ample potential for rerating of its valuation going forward in 2H18-1H19. As such, we reiterate our BUY rating and price target of HKD2.60, which implies 1.5x/1.5x FY18E/FY19E PBR respectively.