20150611-大和证券-Initiation__proxy_downstream_leader_set_to_climb_higher_39页_1mb

CGN Power Summary

Core Content

CGN Power is the leading downstream nuclear power generation company in China, owned by China General Nuclear Power Co. (CGNPC). The company is well-positioned to benefit from China's rapid nuclear capacity expansion, which is projected to grow at a 18.5% CAGR from 2014 to 2020, increasing from 20.3GW to 56.1GW. The report initiates coverage with an Outperform rating and a target price of HKD5.0, representing a 24.2x 2016E PER, with an upside of 6.4% from the 10 Jun price of HKD4.70.

Main Points

Growth Outlook

• Capacity Expansion: CGN is expected to grow its total nuclear capacity from 11.6GW in 2014 to 21.7GW in 2017E, representing a 23% CAGR.
• Project Additions: 3.3GW of capacity is expected to be added in 2H15E, and an additional 4GW in 2016E.
• Long-term Growth Drivers: Asset injections from the parent company (CGNPC) and overseas investments are identified as long-term growth drivers, with 24GW of potential asset injections and 6GW of overseas capacity additions from 2021 to 2030E.
• Market Share: CGN holds a 39% attributable market share in China as of 2014, but this may decrease slightly by 2020 due to competition from CPI and others.

Valuation

• Current Valuation: CGN is trading at 22.7x 2016E PER, a 155% premium to China IPPs and a 100% premium to clean energy IPPs.
• Justification for Premium: The premium is justified by CGN's high earnings visibility, stable tariff outlook, and diversified cost structure, along with the scarcity of pure downstream nuclear plays.
• DCF Target Price: HKD5.0, equivalent to a 24.2x 2016E PER.
• PEG Multiple: 1.3x, indicating a reasonable valuation based on growth expectations.

Earnings Visibility

• Stable Tariff: CGN has a stable on-grid tariff (ex. VAT), which is not highly sensitive to fuel costs (natural uranium accounts for only 15% of COGS).
• High Utilisation Rates: Nuclear power tends to have high utilisation rates and operates independently of weather conditions.
• Earnings Growth: Forecasted 19% net profit CAGR for 2014-17E, with a 27.8% EPS increase in 2017E compared to 2016E.

Catalysts

• Commissioning of New Plants
• Asset Injections by Parent
• Announcements of Overseas Projects

Key Assumptions and Financial Projections

Capacity

• 2014: 11.6GW
• 2017E: 21.7GW (23% CAGR)
• 2020E: 28GW (assuming 2.2GW asset injections)

Revenue and Profit

• 2015E: CNY22,680m
• 2016E: CNY27,137m
• 2017E: CNY35,619m
• Net Profit:
  • 2015E: CNY6,315m
  • 2016E: CNY7,536m
  • 2017E: CNY9,629m
• EPS (fully-diluted):
  • 2015E: CNY0.139
  • 2016E: CNY0.166
  • 2017E: CNY0.212

Valuation Metrics

• 2016E PER: 22.7x
• 2016E PBR: 2.8x
• 2016E EV/EBITDA: 14.8x
• ROE:
  • 2015E: 13.1%
  • 2016E: 15.2%
• Dividend Yield:
  • 2015E: 1.5%
  • 2016E: 1.8%
  • 2017E: 2.3%

Free Cash Flow

• 2015E: CNY11,888m
• 2016E: CNY13,307m
• 2017E: CNY18,620m

Industry Position

Market Structure

• China's nuclear power industry is oligopolistic, with only three companies holding majority stakes: CGNPC, CNNC, and CPI.
• CGNPC has a monopolistic position in Guangdong Province, with all nuclear power plants in the province owned by it.

Competitive Advantage

• Bargaining Power Over Suppliers: Medium, with diversified uranium procurement and central procurement from CGN Uranium.
• Threat of New Entrants: Low due to the capital-intensive nature and high technology barriers of the nuclear industry.

Investment Thesis

• CGN is positioned to benefit from China's nuclear development plans.
• Its superior earnings visibility is due to high utilisation rates, stable tariffs, and diversified cost structure.
• The premium valuation is justified by its strong growth prospects, high earnings visibility, and limited competition in the nuclear sector.

Risk Factors

• Delayed Construction: Risk of project delays affecting capacity growth.
• Tariff Cuts: Potential reduction in coal-fired tariffs may impact the nuclear sector.
• Nuclear Accidents: Global nuclear accidents could affect the industry's growth trajectory.

Conclusion

CGN Power is seen as a key beneficiary of China's nuclear expansion, with strong long-term growth potential through asset injections and overseas investments. Its premium valuation is considered justified by its superior earnings visibility and leading market position. The report recommends an Outperform rating, highlighting the attractive investment opportunity in the context of a high-growth nuclear sector.