20161116-农银国际证券-China_Alternative_Energy_Sector__Strong_fundamentals_with_supportive_policies_40页_4mb

Summary of China Alternative Energy Sector Analysis (November 16, 2016)

Core Content

The China Alternative Energy Sector is highlighted as having strong fundamentals and supportive policies, leading to an OVERWEIGHT rating. The report focuses on nuclear power and wind power as key growth areas, driven by government initiatives to reduce pollution and increase renewable energy usage.

Main Investment Themes

• Nuclear Power: Expected to grow at a 16% CAGR from 2015 to 2018, with a target of 58GW by 2020, a 114% increase from 2015.
• Wind Power: Targeted to grow at 14% CAGR from 2015 to 2020, with a goal of 250GW installed capacity by 2020.
• Policy Support: The government's new policy mandates that non-hydro renewable energy (wind and solar) should account for at least 9% of each Independent Power Producers (IPP)’s total generation by 2020, with a potential 15% standard leading to 28% CAGR.
• Valuation Opportunities: The sector has experienced a 15% decline in share price over 3 months, considered overdone. Valuations are attractive, with 2017E forward P/E for nuclear at 10x and wind at 9x, close to historical lows.
• Key Companies: Huaneng Renewables (HNR, 958 HK) and CGN Power (CGN, 1816 HK) are highlighted as top picks with BUY ratings.

Key Financial Metrics (as of Nov 15, 2016)

Sector Performance (3 months, 12 months)

Key Companies Overview

Investment Highlights

• Nuclear Power: Expected to grow at 16% CAGR through 2018. Unit production cost is RMB 0.28/kWh, lower than coal-fire (RMB 0.4/kWh), wind (RMB 0.5/kWh), and solar (RMB 0.9/kWh).
• Wind Power: Expected to grow at 14% CAGR through 2020. The government's target is 250GW installed capacity by 2020, a 95% increase from 2015. The 2017E forward P/E is 9x, close to the historical low of 8x in Feb 2016.
• Valuation Opportunities: The sector's share price has corrected significantly, offering a good entry point for investors. The report suggests a re-rating is likely due to improved economic conditions and market sentiment.

Key Risks

• High gearing of players
• Natural resources risks
• Grid connection risks
• Policy risks
• Economic slowdown
• Safety issues in nuclear power operations

Company-Specific Highlights: CGN Power

• 1H16 Results: Net profit was RMB 3.6bn (+3% YoY), with adjusted net profit at RMB 3.8bn (+36% YoY).
• Capacity Growth: Operating capacity increased by 24% YoY to 17GW due to new nuclear units.
• Construction Capacity: 14GW of capacity under construction, equivalent to 82% of existing operating capacity.
• Guangdong Operations: High utilization hours in Guangdong (~3,718hr in 1H16) due to the province's strong power demand and economic transformation.
• Disposal of Stake: CGN plans to dispose of 17% stake in Yangjiang power plant, which may reduce adj. net profit by 8% annually.
• Future Earnings Drivers: Injection of Fangchenggang Unit 1 and 2 in 1H17 and Unit 3 under construction are expected to boost earnings.

Conclusion

The report recommends BUY ratings for CGN Power and Huaneng Renewables, citing strong policy support, capacity growth, and attractive valuations. It suggests that the recent price correction presents an opportunity for investors. However, key risks such as power curtailment, safety concerns, and economic slowdown remain potential challenges to the sector's growth.