CSCI-Utilities-China Power (2380 HK)：Increasingly a renewable energy producer - 20180308

Increasingly a renewable energy producer  

• In our view, China Power is poised to transform into a renewable energy producer, on the back of the concrete progress in its acquisition of c.3.9GW renewable power capacity in October 2017 and disposal of 1.2GW coal-fired power capacity in February 2018.  
• We have revised down our FY17E/18E EPS forecasts by 61.1%/58.6% to RMB0.07/0.12 from RMB0.18/0.29 respectively, to reflect the company’s increased number of issued shares after its 1-for-3 rights issue and after factoring in our revised coal price forecast for 2018.
• We upgrade our rating on China Power to BUY from Hold, but have trimmed the DCF-based price target by 17.9% to HKD2.30 (from HKD2.80) on equity dilution subsequent to the 1-for-3 rights issue. Our price target implies 0.61x/0.60x FY17/FY18E PBR, versus the market consensus of 0.49x/0.46x FY17/FY18E PBR respectively.

Increasing share of energy from renewable sources. In October 2017, China Power acquired a total of c.3.9GW hydro/wind/PV power capacity, of which c.2.0GW are currently in operation. Meanwhile, the company has disposed Shanxi Shentou, which owns 1.2GW of coal-fired power capacity, to facilitate the formation of a joint venture by the six state-owned energy companies in Shanxi province. Based on our estimate, the share of renewable energy in the company’s total capacity is likely to increase from c.20% by 2017 to c.23% by 2018, and c.27% by 2020. 

Well positioned for renewable energy transformation. In terms of absolute capacity of renewable energy, China Power ranks only above Huaneng Power (902.HK, BUY, TP: HKD6.00) among the five HK-listed coal-fired IPPs. Despite so, we think the company is better positioned to transform into a renewable energy producer, given its lowest coal-fired power capacity (a total of c.26GW) as compared to the other four peers, with the lowest level reported at c.34GW. Thus, we think it will be easier for the company to dispose its coal-fired power assets in future. 

More immune to buoyed coal price. With the lowest coal-fired power capacity among the five HK-listed coal-fired IPPs, China Power’s earnings are not as sensitive to fluctuations in the coal price as its peers. For every 1% increase in the coal price, the company’s 2018 EPS will drop by c.5.3%, thanks to its high exposure to hydro power. This makes the company very defensive when the coal price stays at high levels, because, in our view, the coal price is likely to see marginal increase in 2018, and the QHD5,500 coal price is estimated to be RMB619/t on average for the year, only about 1.0% higher than RMB613/t for 2017.

Attractive valuation. We estimate the company’s EPS will increase by c.60% YoY in FY18E, versus c.70% YoY decrease in FY17E. (It is worth noting that, our current forecast is based on the assumption that the NDRC will not raise the on-grid tariff of coal-fired power in 2018 according to the “Coal-Electricity Price Linkage” mechanism) The company currently trades at 0.49x/0.46x FY17/FY18E PBR, lower than the industry average of 0.87x/0.82x FY17/FY18E PBR respectively.