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CSCI-Utilities-China Nuclear Power Outlook 2018：Stable but more sustainable growth - 20180102

Nuclear Power Update
2018 Outlook: Stable but more sustainable growth

• In our view, China’s nuclear power sector will enter into a sustainably stable phase in 2018, with its share of China’s total power generation volume estimated to expand to 4.25% from 3.95% in 2017E whilst the volume growth is likely to slow down further to 12.5% YoY (vs. 18% YoY in 2017E) due to the higher comparison base. 
• Looking ahead into 2018, we foresee the domestic nuclear sector will face three major challenges: 1) against the backdrop of “capacity reduction”, commencement of commercial operation of new capacities will likely be further postponed; 2) the yet uncertain timeline of Chinese government’s greenlight of Generation III+ reactors; and 3) the discounts offered by direct power supply (DPS) will further dent the industry’s revenue as the share of DPS in the industry’s total on-grid volume rises.    
• We maintain our POSITIVE view on the sector and recommend CGN Power (1816.HK, BUY, TP: HKD2.60). As China’s largest nuclear power provider, CGN Power’s EPS (excluding one-offs) is estimated to grow by 37% and 10% YoY in FY17E and FY18E respectively. In addition, 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, in our view. 

 

“Capacity reduction” restricts nuclear power capacity from growing at an explosive rate. China’s nuclear power capacity addition eased substantially in 2017, with merely 2,175MW added for the year, accounting for only 30% of the 7,205MW of addition in 2016. In our view, the supply-side structural reform (the Reform) in 2017 was one of the key reasons for the slowdown, considering the existing oversupply situation in China’s power industry. In 2018, against the backdrop of the intensified efforts in the Reform, which was emphasised in the 19th Congress Party, we estimate nuclear power capacity will continue to grow by 2-4GW per annum in the foreseeable future.

The commencement of Generation III+ reactors’ commercial operation is uncertain. It is worthy to note that majority of CNG (1816.HK, BUY, TP: HKD2.60) and China Nuclear’s (601985.HK, NR) new nuclear reactors, which are currently experiencing construction delays, are of the so-called “Generation III+” that have not been put into commercial operation on a global basis. Moreover, based on our estimate, the Generation III+ reactors account for 62% of the new capacity to be added during 2018-2020, and once the greenlight is given, nuclear power capacity will resume rapid growth, which defeats the government’s purpose of capacity reduction.

Nuclear power is still the preferred clean and sustainable energy of the Chinese government. We estimate nuclear power’s share in China’s total power generation volume will expand to 4.25% in 2018 from 3.95% in 2017E, representing 8 years of consecutive growth, in line with the government’s target of raising the share of clean energy in total power consumption. Against this backdrop, nuclear power generation is estimated to increase by 12.4% YoY in 2018, albeit slower vs. +18.0% YoY in 2017E mainly due to the higher comparison base.

Competitiveness in on-grid tariff and fueling cost. In the clean energy space, the nuclear power’s on-grid tariff is c.30%, 40% and 50% cheaper than wind, gas and solar power respectively. Moreover, the sustainability of nuclear power as an energy source makes it more suitable for industrial consumers. In addition, nuclear power has an absolute advantage over other energy sources in terms of fuel cost, accounting for c.20% and 30% of the unit cost of gas and coal-fired power respectively, especially amid the current high gas and coal prices.

Stock pick. We recommend CGN Power (1816.HK, BUY, TP: HKD2.60) in the nuclear power sector, on expectation that the company’s EPS (excluding one-offs) will grow by 37% and 10% YoY in FY17E and FY18E respectively, on the back of the company’s steady on-grid power volume growth. In addition, as capital expenditure is likely to come down along with slowdown in new capacity addition, the company is expected to resume positive free cash flow in 2018, it will be in a financially sound position to increase its dividend payout ratio going forward. The company is currently trading at FY17E/FY18E PBR of 1.3x/1.2x versus FY17E/FY18E ROE of 16.0%/15.6% respectively, which we deem undervalued.