20160926-招商证券_香港_-华电福新-00816.HK-NDR_takeaways_-_Hydropower_normalized_in_Aug_11页_1mb_1mb

Huadian Fuxin Energy (816 HK) - Summary

Core Content

Huadian Fuxin Energy (816 HK) is a company that operates in multiple power generation segments, including hydropower, wind, coal-fired, solar, and distributed energy. The report highlights the company's performance, strategic developments, and valuation considerations based on an NDR (Notable Discussion Review) held in Shenzhen with the IR manager, Ms. Jessie Lee.

Main Points

• Hydropower Utilization:

  • Hydropower utilization showed a YoY decrease in August 2016, marking the first time in 2016.
  • Cumulative utilization for Jan-Aug 2016 exceeded 4,000 hours, with an estimated full-year utilization of 4,300 hours (up 11% YoY).
  • 2H16 utilization is expected to be lower than 2H15 due to El Niño effects, leading to an estimated 1,128 hours for 2H16 (-53% YoY).

• Coal-Fired Power Utilization:

  • Coal-fired utilization improved in August 2016, after being squeezed in the first half of the year due to higher hydropower output.
  • Full-year coal-fired utilization is expected to be around 3,500 hours, slightly higher than the estimate of 3,000 hours.
  • The company plans to add 660MW of coal-fired capacity in 2017 and 2018, increasing consolidated capacity to 4,920MW by 2018.

• Wind Power Development:

  • Wind capacity is expected to increase by 1.0-1.2GW annually during the 13th Five-Year-Plan period.
  • Wind power is projected to account for approximately 50% of operating profit in 2018E, up from 46% in 2016E.
  • New wind capacity will be primarily located in zone IV areas where curtailment is less severe, with the proportion of zone IV capacity expected to rise to over 30% by 2018E.

• Power Demand:

  • Power demand in Fujian grew at a faster pace (6.3% YoY) compared to the national average (4.2% YoY).
  • Fujian transmitted 3,970GWh to Zhejiang in Jan-Aug 2016, a 162% increase YoY, reflecting strong regional demand.

• Valuation:

  • The company is an eligible stock under the SZ-HK Stock Connect, which is expected to improve liquidity and valuation.
  • Current P/E ratio (FY16E) is 6.1x, close to that of HK-listed coal-fired power IPPs (6.4x), but 60% lower than wind farm operators.
  • The company's wind power business is expected to become the largest contributor to revenue and operating profit in the coming years, justifying a higher valuation.
  • The target price (TP) remains at HK$2.5, representing a 25% potential upside from the current market price of HK$2.0.

Key Financials (FY14–FY18E)

Shareholding and Market Information

• Shareholding Structure:

  • Huadian Group: 59.57%
  • CPECG: 3.03%
  • Kunlun Trust: 2.43%
  • Wujiang Hydro Power: 2.25%
  • Huadian Engineering: 0.94%
  • Xingye Capital: 0.91%
  • Datong Capital: 0.3%

• Market Data:

  • Market Cap (HK$ mn): 5,140
  • 52-week range (HK$): 1.18–3.25
  • Avg. Daily Volume (mn): 20.58
  • BVPS (HK$): 3.29
  • No. of H Shares Outstanding (mn): 2,570
  • Free Float (H Shares): 30.57%

Valuation and Investment Outlook

• Dividend Yield:

  • Expected to be 3.3% for 2016E, rising to 3.9% for 2018E.
  • Payout ratio is estimated at 20%, with management targeting ~25%.

• Valuation Method:

  • A DCF (Discounted Cash Flow) model is used for valuation, based on a WACC of 7.5%.
  • The company is expected to trade at a premium to coal-fired companies due to the growing importance of its wind power business.

• DCF Valuation:

  • Value of Equity: RMB 18,084 mn
  • DCF/share (HKD): HK$2.5
  • TP (HKD): HK$2.5 (unchanged), with a potential upside of 25% from current price.

Strategic Outlook

• The company is transitioning towards renewable energy, with wind power expected to dominate future revenue and profit.
• The SZ-HK Stock Connect is seen as a positive catalyst for valuation and liquidity.
• Despite the challenges in the coal-fired segment, the company is expanding its wind capacity and improving its market position in renewable energy.