20160816-招商证券_香港_-华能新能源-00958.HK-Strongest_utilization_among_its_peers_in_FY16E_11页_1mb_1mb

Summary of Huaneng Renewables (958 HK) Report

Core Content

Huaneng Renewables (958 HK) is a leading wind power company in China, with strong performance and a promising outlook for the fiscal year 2016 (FY16E). The report highlights the company's improved utilization rates, earnings upgrades, and strategic initiatives to mitigate risks such as wind curtailment and potential tariff cuts.

Main Points

• Strong Utilization Performance:
  HN Renewables achieved wind utilization of 1,094 hours in 1H16, the highest among peers. This is expected to reach the full-year target of 1,900-2,000 hours, with the company on track to achieve ~1,900 hours.

  • Utilization hours in 1H16 increased by 2.3% YoY.
  • The 1H/2H utilization ratio is expected to be ~54:46.
  • Management expects utilization to reach 2,100 hours if all minimum utilization hours are fully executed.

• Earnings Upgrade:
  The company's FY16E/FY17E/FY18E net profit has been upgraded by 8.8%, 0.8%, and 0.7%, respectively.

  • The upgrade reflects better utilization and lower financing costs.
  • The revised net profit forecast represents a 2.4–13.2% premium to the market consensus.
  • EPS is expected to rise to 25.5 cents, 33.6 cents, and 38.5 cents for FY16E, FY17E, and FY18E, respectively.

• Tariff Cut in Yunnan:
  A proposed tariff cut in Yunnan is not considered a major concern for HN Renewables.

  • The policy would reduce the average on-grid tariff for wind power in the province by ~0.119 kWh.
  • The impact on revenue is estimated at ~400 million HKD, or ~4% of the full-year forecast.
  • The chance of implementation is low due to opposition from renewable companies and its deviation from central government goals.

• Capital Expenditure and Financing:

  • FY16E capex is estimated at ~RMB10 billion, with a target of adding 1.4 GW of new capacity.
  • The company expects at least 60% of capex to be funded by operating cash flow, which is improving due to rising earnings.
  • It has multiple financing options, including green bonds, short-term notes, and corporate bonds.
  • The debt-to-asset ratio is at 71.2% (or 232% under internal calculation), which is at an average industry level.

• Strategic Positioning:

  • HN Renewables is the only HK-listed wind farm operator that can achieve profit growth through both capacity expansion and improved utilization.
  • The company has ~64% of its wind capacity located in zone IV areas, which are less affected by curtailment, making it more defensive against market risks.
  • It is the top pick in the China wind power sector due to its high earnings visibility and resilience against curtailment.

• Valuation and Investment Recommendation:

  • The target price (TP) has been raised to HK$3.2/share from HK$3.0/share, reflecting higher earnings expectations.
  • The TP is equivalent to a 10.7x FY16E P/E and 1.3x FY16E P/B.
  • The current valuation of ~9.0x FY16E P/E is considered attractive, with a potential return of 18% to the current market price.
  • The company maintains a BUY rating.

Key Financial Forecast (RMB mn)

Key Assumptions for Valuation

• Discount Rate (WACC): 6.8%
• Growth Rate (FY21E-FY25E): 5.0%
• Terminal Growth Rate (beyond FY25E): 3.0%
• Debt Cost: 4.5%
• Cost of Equity: 15.5%
• Beta: 1.5
• Tax Shield: 95.5%
• Equity Value (HKD mn): 31,551
• DCF/share (HKD): 3.2

Highlights from Annual Results

• 1H16 Net Profit: Increased by 59% YoY to RMB1,807 million, slightly above the estimate.
• Electricity Sales: Rose by 25% YoY to RMB3,922 million, driven by a 31% increase in wind generation and direct sales.
• Wind Utilization: Increased to 1,094 hours, with 64% of the company's wind capacity in zone IV areas.
• Solar Utilization: Improved by 7% YoY, contributing to a 26% increase in solar generation.
• Debt Cost: Decreased from 5.18% to 4.58%, with management expecting further reduction in 2H16E.

Conclusion

HN Renewables is well-positioned to achieve its utilization and earnings targets for FY16E, supported by strategic project placements and improved operational efficiency. The company's financial strength and diverse financing options allow it to manage its capex effectively. Despite potential risks such as the Yunnan tariff cut, the impact is considered limited and unlikely to be executed. The report recommends maintaining a BUY rating with an updated target price of HK$3.2/share, highlighting the company's strong performance and defensive positioning in the wind power sector.