20141107-高盛-Recent_rally_fails_to_price_in_ongoing_fundamental_challenges__Sell_11页_322kb

Summary of China Longyuan Power Analysis

Core Content

This report provides an analysis of China Longyuan Power (0916.HK) and highlights key financial and operational metrics. The firm maintains a Sell rating due to concerns over its recent stock performance not aligning with its negative investment thesis, despite a rally. The analysts from Goldman Sachs argue that the stock's valuation is not fully reflecting the ongoing fundamental challenges.

Main Points

• Investment Thesis: The recent stock rally is inconsistent with the firm's negative outlook due to unstable wind resources and the threat of a tariff cut.
• Tariff Cut: The Rmb0.02/kWh reduction for new capacity, effective July 1, 2015, has been incorporated into the forecast, potentially limiting future project returns.
• Capacity Growth: Wind farm capacity growth for 2015 is now estimated at 2.0GW, up from 1.5GW, in line with the company's guidance. The firm aims to complete installations by July 1, 2015, to avoid the tariff cut.
• Utilization Rate: Wind farm utilization is expected to fall by 5.4% yoy in 2014 to 1,997 hours, but rise by 5.8% yoy in 2015 and 2.3% in 2016. However, potential oversupply in the China power market, especially along the coast, may pose downside risks.
• Valuation: Based on 2015 estimates, Longyuan trades at 14X P/E (with 27% yoy growth in 2015E EPS) and 1.4X P/B (with 10% ROE). The Bloomberg consensus suggests a 16X P/E target, which is higher than the 12X P/E estimate by Goldman Sachs.
• Key Risks: The report highlights higher-than-expected tariff, utilization, operating margin, and capacity as potential risks.

Key Financial Data

Financial Highlights

• Net Income: Expected to grow from Rmb2,049.5 mn (2013) to Rmb3,974.9 mn (2016E).
• EPS Revisions: Revised by -5% in 2014E, 0% in 2015E, and +1% in 2016E.
• EBITDA: Projected to increase from Rmb10,391.3 mn (2013) to Rmb17,100.0 mn (2016E).
• Capital Expenditures: Increased from Rmb10,318.4 mn (2014E) to Rmb21,479.3 mn (2016E).
• Free Cash Flow Yield: Expected to be -14.7% in 2014E, and -10.1% in 2016E.

Key Forecasts

• Wind Power Business:
  • Installed Capacity: Expected to grow from 6,556 MW (2010) to 18,209 MW (2016E).
  • Utilization Rate: Projected to fall in 2014 to 1,997 hours, then rise to 2,113 hours (2015E) and 2,161 hours (2016E).
  • Wind Power Tariff: Expected to increase slightly to Rmb0.506/kWh (2016E).
• Coal-fired Power Business:
  • Installed Capacity: Remains stable at 1,875 MW.
  • Utilization Rate: Expected to decrease in 2014 to 5,075 hours, then gradually increase in 2015 and 2016.

Key Trends

• Wind Power Growth: Wind power's share of total generation capacity is expected to increase from 3% in 2010 to 9% in 2016E, contributing to a reduction in reliance on coal.
• Utilization Trends: Utilization in curtailment regions has improved, while that in non-curtailment regions has generally declined.
• Tariff Sensitivity: Earnings are highly sensitive to tariff changes, with a 10% decrease in tariffs leading to a 22% drop in 2015E EPS.

Analysts

• Franklin Chow, CFA – Lead Analyst
• Marcus Chu – Supporting Analyst

Conclusion

Goldman Sachs maintains a Sell rating on Longyuan, citing unstable wind resources and the potential tariff cut as key concerns. The firm's valuation is considered low compared to the Bloomberg consensus, but uncertainties in wind utilization and tariff changes may affect future performance. The report emphasizes the importance of wind power growth in reducing reliance on coal and improving long-term sustainability.