20130819-美银美林-Material_improvement_in_RoIC___gearing__maintain_Buy_14页_451kb

Summary of Material Improvement in RoIC & Gearing for China Power International (CPID)

Core Content

China Power International (CPID) has reported significant improvements in its financial performance and operational metrics during the first half of 2013 (1H13). The report highlights a material increase in net income, a reduction in debt-capital ratio, and an improved return on capital employed (RoIC), which supports the maintenance of the Buy rating.

Key Financial Highlights

• Net Income: CPID's 1H13 net income increased by 156% YoY to RMB1,401mn, 58% above consensus and 16% ahead of our estimate.
• Effective Tax Rate: The effective tax rate in 1H13 was 15.5%, down from 24% in 1H12. The report projects a 20% effective tax rate for 2013 and 22% for 2014.
• Debt Capital Ratio: The debt-capital ratio dropped significantly from 72.1% in 1H12 to 67.6% in 1H13.
• Free Cash Flow: Assuming a 0.5% thermal tariff cut in 2H13, CPID is expected to turn free cash flow positive in 2H13. A further 1% thermal tariff cut in 2014 is also anticipated, which will be less than that for coastal thermal plants.
• EPS Adjustments: The report lifts its 2013-14 EPS estimates by 4.0% after factoring in lower 2H hydro output, lower operating costs, and the write-back of Heimifeng operating costs.

Key Operating Metrics

• Unit Fuel Cost: CPID's 1H13 unit fuel cost dropped by 12.8% YoY to RMB232 per MWh, lower than HNP's 16.7% drop. The company guides a 12% YoY drop in 2013, slightly below our 14% expectation.
• Hydro Output: CPID's 1H13 hydro output rose by 47% to 8.8bn kWh, attributed to abundant water flow and high reservoir levels. However, due to low rainfall in July, hydro output dropped to 0.5-0.6bn kWh, compared to 2bn kWh in June. The forecast for FY13 hydro output is 13.2bn kWh.
• Thermal Power Output: CPID's thermal power generation in July increased by 20% MoM, and the company forecasts higher thermal output in 2H13 compared to 1H13.

Valuation and Investment Thesis

• Price Objective: The report maintains a Price Objective (PO) of HK$3.90, implying a 2013-14 PB of 1.0-0.9x, which is higher than the current share price's implied PE of 0.8-0.7x.
• ROE: CPID's ROE for 1H13 was 16.3%, compared to 8.4% in 1H12.
• Investment Opinion: The Buy rating is maintained due to the company's improved financial position, potential for free cash flow positivity, and limited downside risk given the near-trough valuation.

Risks and Assumptions

• Tariff Cuts: The report assumes no hydro tariff hike but a 0.5% thermal tariff cut in 2H13 and a 1% cut in 2014, which is less than for coastal thermal plants.
• Coal Price Forecasts: The coal team has lowered PRC coal price forecasts to RMB590/t in 2013, RMB550/t in 2014, and RMB530/t long-term, due to rising imports, overcapacity, and railway de-bottlenecking.
• Utilization Rates: The report assumes a 4-8% YoY drop in thermal power plant utilization rates for 2013, reflecting slower power demand growth.
• Downside Risks: Potential risks include lower-than-expected unit fuel cost drops, successful vertical integration strategies, better-than-expected rainfall, and the sale of non-core assets.

Summary of Key Changes

• Revised Earnings Estimates: The report has revised 2013-14 earnings estimates, which are 5.5-51% above consensus.
• Debt Reduction: Total debt dropped to RMB43bn in 1H13 from RMB44.9bn in FY12.
• Capital Expenditure: CPID expects to incur RMB4.6bn in capex in 2H13, but is projected to turn free cash flow positive in 2013.
• Asset Disposal: The disposal of the Heimifeng hydro power plant in July 2013 is expected to lift pre-tax income and reduce related debt of RMB2.2bn.

Conclusion

The report concludes that CPID's financial performance and operational metrics have shown significant improvement, supported by lower fuel costs, higher hydro output, and reduced debt levels. Despite the risks associated with tariff cuts and hydro output variability, the Buy rating and Price Objective remain unchanged, reflecting the company's strong fundamentals and potential for future growth.