20160101-大和证券-中广核新能源-01811.HK-More_difficulties_likely_on_planned_asset_injection_16页_1mb

CGN New Energy (CGNNE) Summary

Core Content

CGN New Energy (CGNNE), formerly CGN Meiya, is a diversified Asia IPP investor focused on clean and renewable power generation. The company has been actively acquiring assets from its parent, CGNPC, with a goal of acquiring 3-5GW of clean energy assets over the next four years. The first asset injection of 1.4GW (wind and solar) was completed in November 2015, while the second injection of 1.5GW is scheduled for end-2016.

Main Points

• Share Price Performance: CGNNE's share price has fallen by over 50% since the first asset injection in June 2015 due to concerns over the profitability of the wind assets, deterioration in wind curtailment, and potential tariff cuts.

• Valuation: The company is currently trading at 6.5x 2016E PER, which is at a historical low (1.8SD below average). The PBR has dropped to 0.9x, and weak valuations raise uncertainty over the second injection. The next batch should be priced above 1x PBR to avoid undervaluation concerns.

• Earnings Forecast: Our revised 2015-17E EPS forecasts are lower than the Bloomberg consensus, primarily due to lower utilisation hour estimates for the wind assets and the impact of currency depreciation. We forecast a 18% net profit CAGR over 2015-17E, supported by the first and second asset injections.

• Asset Quality Concerns: The first injection included 69% wind capacity in Gansu, which has high wind curtailment. The utilisation hours of the injected assets were higher than the provincial average, which management attributes to careful site selection.

• Financial Impact: The first injection increased CGNNE's net debt-to-equity ratio to 360%, which is above its target. The second injection could push this ratio to 521.5% by end-2016.

• Strategic Considerations: Management is considering a direct swap of Korea power assets for CGNPC's clean energy assets to avoid further equity dilution and maintain the net debt-to-equity ratio. This would also help CGNNE avoid the need for additional equity placements, which could dilute earnings.

• Management and Shareholder Alignment: CGNNE granted 34.45 million share options to its employees in December 2015, with an exercise price higher than the current share price, to align management and shareholder interests. These options are subject to performance targets.

• Funding for Second Injection: CGNNE is seeking alternative funding methods to avoid increasing debt or diluting earnings, such as a complementary equity placement or asset swap.

Key Information

• Asset Injection Details:

  • First Injection: 1,221MW wind + 180.8MW solar, completed in November 2015.
  • Second Injection: 1.5GW (mainly wind), expected by end-2016.
  • Total Capacity Target: 3-5GW by 2015-18.

• Valuation Metrics:

  • 2015E PBR: 1.0x
  • 2016E PBR: 0.9x
  • 2017E PBR: 0.8x
  • 2016E PER: 6.5x
  • 2015E PER: 16.8x (for the injected assets)

• Earnings Revisions:

  • Our 2015E EPS is revised down by 2.3% compared to the consensus.
  • 2016E EPS is revised down by 5.1%.
  • 2017E EPS is revised down by 3.5%.

• Share Price Performance:

  • 12-month range: HKD1.34 - HKD3.49
  • Market Cap: USD0.77bn
  • Shares Outstanding: 4,291m

• Key Ratios:

  • Net Debt-to-Equity: 360% in 2015E, 521.5% in 2016E
  • ROE: 13.4% in 2015E, 14.0% in 2016E, 14.7% in 2017E
  • EBITDA: USD289m in 2015E, USD407m in 2016E, USD553m in 2017E
  • Free Cash Flow Yield: 67.6% in 2017E

Recommendations

• Rating: Downgraded from Outperform (2) to Hold (3).
• Target Price: Cut from HKD3.40 to HKD1.45, implying a 6.8x 2016E PER.
• Downside Risk: Asset injections not following the announced schedule.
• Upside Risk: Improvement in utilisation rates.

Financial Summary

Company Profile

• Established: 1995
• Focus: Clean and renewable energy in Asia
• Parent: CGNPC
• Current Capacity: Over 4,981MW by end-2015
• Share Options: 34.45m granted in December 2015, with an exercise price of HKD1.612

Outlook

• CGNNE is expected to maintain steady cash flow for future acquisitions, but its valuation remains a concern.
• The company may need to consider an asset swap to align its interests with CGNPC and maintain financial stability.
• The second injection is expected to be larger than the first, which could further increase its leverage.