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Summary of Huadian Fuxin Energy (816 HK) Company Report

Core Content

Huadian Fuxin Energy (816 HK) is a company with diverse energy segments, including hydropower, wind power, coal-fired, solar, distributed, and biomass. The report discusses the company's performance in the second half of 2016, its growth expectations for 2018, and the potential impact of the SZ-HK Stock Connect on its valuation and liquidity.

Main Points

Hydropower Performance

• Hydropower utilization in August 2016 showed a YoY decrease for the first time in 2016, despite a cumulative utilization of over 4,000 hours for Jan-Aug 2016.
• The company expects utilization in 2H16 to be lower than 2H15 due to El Niño effects, leading to an estimated 1,128 hours in 2H16E (-53% YoY).
• Full-year hydropower utilization for 2016E is estimated at 4,300 hours (+11% YoY).
• Hydropower capacity is expected to remain stable at 2,508MW.

Coal-Fired Power

• Coal-fired power utilization improved in August 2016, marking the first increase in 2016, as hydropower normalized.
• Mgmt. guided full-year coal-fired utilization for 2016E to be ~3,500 hours, higher than the estimate of 3,000 hours.
• The company is expected to add 660MW of coal-fired capacity in both 2017E and 2018E, increasing consolidated capacity to 4,920MW in 2018.
• Coal price is expected to have limited upside, with a RMB30-40/t increase leading to a RMB1 cent/kWh increase in generating costs.

Wind Power Development

• Wind power capacity is expected to grow by 1.0-1.2GW per year during the 13th Five-Year-Plan period.
• As of end-1H16, the company had 7.0GW consolidated wind power capacity (or 6.5GW attributable capacity), with ~20% located in zone IV areas.
• Mgmt. aims to increase the proportion of wind power capacity in zone IV to >30% by 2018E.
• Wind power is expected to become the largest source of operating profit in the coming years, with a projected 35% of total revenue and 46% of operating profit in 2016E, rising to 39% and 50% in 2018E.

Power Demand in Fujian

• Power demand in Fujian grew at a faster pace than the national average, with a 6.3% YoY increase for Jan-Aug 2016.
• Fujian transmitted 3,970GWh to Zhejiang in Jan-Aug 2016, representing a 162% YoY increase.
• Zhejiang also showed strong power demand with a 8.7% YoY increase in the same period.

Valuation and Liquidity

• The stock is an eligible stock under SZ-HK Stock Connect, which is expected to improve trading liquidity and valuation.
• Current P/E ratio for FY16E is 6.1x, close to HK-listed coal-fired power IPPs (6.4x) but with a 60% discount to wind farm operators.
• The company's wind power business is expected to drive higher valuation in the future.
• The current price of HK$2.0 is expected to trade at a FY16E P/E of 7.7x, implying a 25% upside potential.
• The company is a constituent of the Hang Seng Small Cap Index with a market cap of HKD16.8bn.

Financial Highlights

• Revenue is projected to increase from RMB13,895mn in FY14 to RMB18,034mn in FY18E.
• Net profit is expected to grow from RMB1,867mn in FY14 to RMB2,811mn in FY18E.
• EPS is projected to increase from RMB0.23 in FY14 to RMB0.33 in FY18E.
• P/B ratio is expected to decrease from 0.8x in FY14 to 0.5x in FY18E.
• ROE is projected to remain stable around 10% in FY16E and FY18E.

Key Information

• Dividend payout ratio: The company distributed RMB4.0 cents of final dividend in 2015, with a payout ratio of 18%, and management targets to pay ~25% of its profit as dividend.
• Dividend yield: Expected to be 3.3% for 2016E, 3.4% for 2017E, and 3.9% for 2018E.
• Valuation: The company is currently undervalued compared to its peers and historical average, with a 1-year forward P/E at ~1.0 SD below its 4-year historical average (~9x).
• Rating: Maintain BUY rating with TP unchanged at HK$2.5/share.
• DCF Model: Based on assumptions of 7.5% WACC and different terminal growth rates for each segment.
• Terminal value: Wind power is expected to have the highest terminal value at RMB88,320mn, while coal-fired power is projected to have a lower terminal value of RMB15,019mn.

Conclusion

Huadian Fuxin Energy is expected to benefit from the expansion of its wind power business, which is projected to be the largest source of revenue and operating profit in the coming years. Despite a YoY decrease in hydropower utilization in August 2016, the company is expected to maintain stable capacity. The SZ-HK Stock Connect is expected to improve valuation and liquidity, and the current P/E ratio is considered attractive. The company is projected to grow in revenue and net profit, with an expected increase in EPS and a stable ROE. The wind power segment is expected to outperform the coal-fired segment in terms of growth and profitability.