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Morningstar | CRP’s Decent First-Half 2018 Earnings Boosted by Renewable Units. See Updated Analyst Note from 17 Aug 2018

China Resources Power’s, or CRP’s, decent first-half result was within our expectation, with net profit rising 60% to CNY 3 billion and tracking 47% of our full-year forecast. CRP benefits from a diversified business portfolio, with strong earnings growth from renewable generation units and coal mining segment offsetting the earnings decline at its coal-fired power plants. Operating profit from renewable units rose 47% year over year, surpassing the coal-fired segment to become the largest earnings contributor for the first time. While coal-fired power generation was still weak in the first half, we expect its profitability to improve in the second, amid weakening coal price outlook. We made little change to our key assumptions but fine-tuned our 2018 net profit forecast to HKD 6.3 billion from HKD 7.0 billion, to reflect the HKD 771 million noncash impairment charge, as well as the recent depreciation of the Chinese yuan against the Hong Kong dollar, which we think will have a slight negative impact on the company’s second-half earnings. Consequently, we lower our fair value estimate slightly to HKD 16.40 per share from HKD 16.60 per share. CRP is fairly valued at present, but we think the company’s well-managed, high-quality assets, along with its sound balance sheet and improving cash flow outlook, position the company well for long-term growth.

Performance at CRP’s coal-fired power segment lagged industry peers in the first half, with utilization improving merely 1.2% versus the 5.8% nationwide average. This should be attributable to the pressures coming from power trading, as the company sold 41% of its power output on power trading platforms at a large 13% price discount compared with on-grid tariffs. In addition, CRP’s unit coal cost was up by 5% in first-half 2018, which further squeezed operating margin at CRP’s coal-fired power plants to 9.6% from 11.2% a year ago.

However, the recent decline in the QHD 5500 kcal spot coal price to CNY 620/ton from over CNY 700/ton in early June reaffirms our bearish coal price outlook. We expect coal prices to continue weakening on increased coal supply in second-half 2018. In addition, China’s “Blue-sky Protection Campaign” should see continued expansion in coal-to-gas conversion dampening coal demand. We’re confident that the coal price will fall to the preferred “Green Zone” range of CNY 500-CNY 570/ton, and we maintain our midcycle BSIP assumption of CNY 565 per ton. This should drive a meaningful margin recovery for coal-fired power plants in the medium term.

CRP’s renewable generation is its bright spark. Operating profit from renewable segment rose to 43% of the group’s total, from 34% a year ago, with utilization rising 13% in the first half. The company continues to optimize its generation portfolio. In first-half 2018, it added 840 megawatts in wind and solar, and its clean and renewable capacity makes up 19.2% of the group’s total installed capacity (versus 17.4% at the end of 2017). This is well above the 10-12% for nationwide mix, and we think its efforts to increase its renewable capacity are paying off, with operating profit rising 47% to HKD 3 billion in first-half 2018, offsetting the weakness at its coal-fired power plants. In addition, the company plans to add 1.5 gigawatts in wind and solar power capacity per year and is targeting to increase its renewable capacity to 25% of the group’s total installed capacity by 2020. We think these proactive actions will help the company sustain growth and better align it with China’s long-term energy plan.