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CSCI-Wind Power-Wind Power Monthly：Slowing growth of utilisation hours - 20171114

Slowing growth of utilisation hours

• Oct-17 saw divergent wind power output among major wind power plays, with 10.4% YoY increase for Longyuan Power (LYP) whilst 4.4% YoY decrease for Huaneng Renewables (HNR), which was mainly attributable to different seasonal wind speeds of their respective wind farms, in our view.
• Wind power curtailments continued to ease in Oct-17, with LYP and HNR respectively posting a 4.5 ppt and 4.0 ppt drop YoY in curtailment rate. However, impacted by the wind speed, the growth of their overall utilisation hours has slowed down compared to Sep-17.
• We reiterate our BUY rating on LYP and HNR, but would like to remind investors that the surge in account receivables (ARs) has hurt both’s operating cash flow and valuation.

Slowing output growth in Oct-17 and YTD. In October, the on-grid volume of LYP’s wind power in China recorded a 10.4% YoY increase (vs. +27.8% YoY in Sep-16). In contrast, HNR recorded a 4.4% YoY decrease (vs. +47.6% YoY in Sep-16). For the 10M17, the on-grid volume growth of wind power in China slowed down to 13.8% YoY (LYP) and 13.3% (HNR) from 14.3% YoY (LYP) and 15.7% (HNR) for the 9M17. We think this is mainly due to the seasonable decline in the wind speed in Northern China (e.g.: Hebei, Shanxi, Shandong) in October, which showed a large decrease in the on-grid volume.

LYP registered major growth in Eastern and Southern China, which accounted for c.28% and c.9% of its October wind power output, up 23.5% and 19.6% YoY, respectively. Growth in Eastern China was in particular substantial compared to a 13.0% YoY decrease in September. Meanwhile, the on-grid volume growth in Northwest and Central China recorded 26.0% YoY and 35.5% YoY growth, respectively, slowing down from September. And with Northern China recording a 10.5% YoY decrease following a sustaining increase in 3Q, increases in other regions were partially offset. According to LYP’s management, the overall curtailment rate has dropped by 4.5 ppt YoY to 5.9% (vs. 10.3% in Oct-16).

HNR saw solid growth in six provinces (namely, Inner Mongolia, Guangxi, Guangdong, Zhejiang, Jilin and Xinjiang). Inner Mongolia, accounting for c.23% of its total on-grid volume in October, recorded a 6.8% YoY increase. However, Yuannan, accounting for c.8% of its monthly volume, recorded a 28.4% YoY decrease. In contract, LYP’s wind farms in Yunnan grew by 14.1% YoY in October. In our view, this is due to the different wind speeds in Eastern and Western Yunnan where the wind farms of LYP and HNR are respectively located. According to HNR’s management, the overall curtailment rate has dropped 4.0 ppt YoY to 6.0% (vs. 10.0% in Oct-16).

Surging AR days hurt valuation. Share prices of LYP and HNR have declined 9-10% since the last week of October when both of them reported their 3Q results. Against the backdrop of a continuous decline in monthly curtailment rate, we think that the weak performance is mainly due to rising market concern that the accelerating ARs of both companies have largely outpaced their underlying revenue growth in the wind power sector, which according to our channel check will hardly reverse till the end of this year. We maintain our BUY rating on LYP and HNR for the time being, and would like to see if the government will take further actions to mitigate a shortage of renewable energy fund that pays for the ARs of the wind farms.