20160823-招商证券_香港_-华电福新-00816.HK-Hydropower_to_support_2016E_net_profit_growth_15页_1mb_1mb

Huadian Fuxin Energy (816 HK) Summary

Core Content

Huadian Fuxin Energy (816 HK) is a key player in the energy sector, with a focus on renewable energy, particularly wind power, and traditional hydropower. The report highlights the company's performance in 2016 and forecasts for the next few years, emphasizing the shift towards renewable energy and the impact on its earnings and valuation.

Main Points

• Hydropower Performance in 1H16: Hydropower utilization surged by 116% YoY to 3,172 hours due to abundant rainfall in Fujian province. Management expects full-year utilization to exceed 4,000 hours, but the report suggests this is a non-recurring event and utilization will normalize to around 3,860 hours in subsequent years.

• Wind Power Growth: The company has a total consolidated wind capacity of ~7.0 GW by the end of 1H16 and is expected to add ~1 GW annually. Wind power is projected to account for 50% of operating profit by 2018E, significantly increasing its share compared to coal-fired power, which is expected to decrease from 24% to 18% over the same period.

• Earnings Revision: The report upgraded HDFX's net profit forecast for 2016E, 2017E, and 2018E by 6%, 5%, and 4% respectively. This is attributed to higher hydro utilization, lower fuel costs, and increased wind capacity. However, the forecast was adjusted downward for coal-fired utilization and on-grid tariffs due to participation in the direct electricity sales market.

• Valuation and Target Price: The target price was raised from HK$2.3 to HK$2.5, reflecting a 7.7x FY16E P/E ratio. The current valuation at 6.5x FY16E P/E is considered attractive, especially compared to wind IPPs which are trading at a 56% premium.

• Market Position: The company is part of the Hang Seng Small Cap Index and is eligible for SZ-HK Stock Connect, which may enhance its trading liquidity and valuation in the future.

Key Financial Forecasts (RMB mn)

Earnings Revisions

• 2016E: Net profit revised up by 6% (from 2,250 to 2,360), driven by higher hydro utilization and lower fuel costs.
• 2017E: Net profit revised up by 5% (from 2,543 to 2,493), offset by lower coal utilization and tariffs.
• 2018E: Net profit revised up by 4% (from 3,019 to 2,811), with continued tariff reductions and utilization trends.

Segment Utilization and Revenue

Revenue and Operating Profit Breakdown

Key Assumptions for Valuation

• WACC: 7.5% (derived from 0.9% risk-free rate, 9.7% market risk premium, beta of 1.8, and 4.5% cost of debt)
• Terminal Growth Rates: Vary by segment, with wind power expected to grow at a higher rate than coal-fired power.
• DCF Model: Used to derive the target price, with a sum-of-the-parts approach considering the company's diverse segments.

Valuation Analysis

• Current P/E: 6.5x FY16E, close to coal-fired power stocks but significantly discounted compared to wind IPPs (56% discount).
• Target Price: HK$2.5/share, representing a 7.7x FY16E P/E and a 17% potential upside from the current market price.
• Market Position: Eligible for SZ-HK Stock Connect, which may improve liquidity and valuation.

Conclusion

Huadian Fuxin Energy is transitioning from a coal-fired power operator to a significant renewable energy player, particularly in wind power. While its current valuation is in line with coal-fired stocks, the report suggests it is undervalued relative to its renewable segments. The company is expected to benefit from the growth in wind power and improved operational efficiency, leading to a re-rating and a higher target price. The DCF model supports this view, with the company's equity value derived from its future cash flows and segment-specific growth assumptions.