20140922-高盛-Moderating_growth_on_industry_woes_inadequately_priced_in__down_to_Sell_14页_368kb

Summary of China Longyuan Power Analysis

Core Content

This document provides an analysis of China Longyuan Power (0916.HK), focusing on its financial performance, valuation, and the impact of industry challenges on its stock. The firm has been downgraded to a Sell rating from Neutral, primarily due to the underpricing of industry headwinds such as unstable wind resources and the threat of imminent tariff cuts. The analysis also highlights the slowdown in earnings growth and the potential for future earnings compression.

Main Points

1. Downgrade to Sell

• The downgrade is based on the belief that the market has not adequately priced in the challenges facing Longyuan and its peers.
• Key issues include:
  • Unstable wind resources
  • Imminent wind power tariff cuts
  • Potential tapering of earnings growth from the coal-fired power segment
• The company's 2014/2015/2016 EPS estimates have been cut by 9%/10%/11%, respectively.
• The 12-month P/E-based target price has been reduced by 10% to HK$6.9, with the 2015E P/E multiple remaining at 12X.

2. Wind Farm Capacity and Utilization

• Wind farm capacity did not increase in 1H14, but the company expects 1.7GW/1.8GW annual growth in 2014/2015.
• Wind farm utilization is expected to fall by 1.9% in 2014 to 2,070 hours, then rise by 4.6% in 2015.
• The company assumes that wind resources in China will normalize from recent lows and grid curtailment will decline further from already eased levels.

3. Tariff Cuts

• A Rmb0.02/kWh wind power tariff cut is now included in the forecast, effective April 1, 2015.
• The government is concerned about renewable energy subsidies, and the cut is seen as a signal rather than an immediate impact on EPS.
• The tariff cut may be extended to Rmb0.02-0.04/kWh by year-end, and it could lead to further cuts in the future.
• Earnings are sensitive to tariff changes, and a 10% cut in wind power tariffs would reduce 2015E EPS by 21%.

4. Dividend and Financials

• Dividend per share fell by 25% yoy last year, but the dividend payout ratio is expected to remain at 19%, which could lead to an increase in dividends.
• Free cash flow yield has declined, but dividend yield is expected to rise from 0.8% to 1.5% by 2016.
• Net debt-to-equity ratio is expected to remain around 150%.

5. Valuation

• On 2015E estimates, Longyuan trades at 14X P/E and 1.4X P/B.
• Bloomberg consensus estimates for 2015 EPS are close to Goldman Sachs’ estimates, but the implied P/E multiple is 17X, higher than the 12X used in the target price.
• EV/EBITDA is expected to decline from 10.8X in 2013 to 8.3X in 2016.

6. Key Risks

• Higher-than-expected tariff cuts, operating costs, utilization, and capacity growth.

Key Forecasts

Wind Power Business

• Capacity growth is expected at 13% in 2015 and 12% in 2016.
• Utilization rate is expected to rise by 4.6% in 2015.
• Average tariffs are expected to rise slightly from Rmb0.498/kWh in 2014 to Rmb0.504/kWh in 2016.

Coal-Fired Power Business

• Installed capacity remains constant at 1,875MW.
• Utilization rate is expected to fall by 6% in 2014 to 5,547 hours and then rise slightly in 2015.

Financial Metrics

• EPS growth is expected to slow from 45% in 2014 to 21% in 2015 and 8.9% in 2016.
• ROE is expected to rise from 6.8% in 2013 to 10.4% in 2016.
• P/E multiple is expected to decline from 24.7X in 2013 to 12.8X in 2016.
• P/B is expected to decline from 1.6X in 2013 to 1.3X in 2016.

Investment Profile

• Current price: HK$7.87
• 12-month price target: HK$6.90
• Market cap: HK$63,246.4 million / US$8,159.6 million
• Foreign ownership: Not disclosed

Key Assumptions

• Wind farm utilization is expected to recover in 2015.
• Repair and maintenance expense per MW is expected to moderate in 2016.
• Dividend is expected to rise if the payout ratio remains at 19%.
• The tariff cut is expected to be Rmb0.02/kWh, effective April 1, 2015.

Comparison with Peers

• Longyuan is expected to trade at a lower P/E multiple than the Bloomberg consensus and Huaneng Renewables.
• Despite being a leader in the industry, Longyuan has a slower EPS growth and lower ROE compared to Huaneng Renewables.
• P/B is expected to fall while Huaneng Renewables’ P/B is expected to rise.

Conclusion

• The Sell rating reflects concerns about underpriced risks and slower earnings growth.
• The tariff cut is a key risk factor, with potential to reduce future earnings.
• Dividend yield is expected to rise, but EPS growth is expected to slow due to tariff cuts and lower utilization.
• The valuation is expected to decline over the next few years, with P/E and P/B multiples decreasing.