20160707-招商证券_香港_-华电福新-00816.HK-Leaning_towards_renewable_energy_30页_2mb_2mb

Summary of Huadian Fuxin Energy (816 HK) Report

Core Content

Huadian Fuxin Energy (HDFX) is a listed platform under China Huadian Group, focusing on clean energy development. It is positioned as a key player in the renewable energy sector, with a growing emphasis on wind and solar power. The report highlights the company's strategic shift towards renewable energy and its potential for improved profitability and valuation.

Main Points

• Company Overview:

  • HDFX is a sole listed platform for developing clean energy under China Huadian Group.
  • It is a constituent stock of the Hang Seng Small Cap Index, which could benefit from SZ-HK Connect.
  • The report initiates coverage with a BUY rating and a target price (TP) of HK$2.3, representing a 7.5x FY16E P/E.

• Renewable Energy Growth:

  • Wind power is expected to be a major growth driver.
  • HDFX's attributable wind capacity is projected to increase from 5,918MW in FY15 to 8,913MW in FY18E, with an estimated 20% CAGR in wind power sales and 18% CAGR in operating profit.
  • Wind utilization is expected to improve due to supportive policies such as RPS and Minimum Utilization Hours, as well as the expansion of UHV lines.
  • The company's wind power business has a high exposure to curtailed regions (~82% in zone I-III areas), but this is expected to improve as more projects are located in zone IV areas.

• Nuclear Power Contribution:

  • HDFX owns 39% equity interest in Fujian Fuqing Nuclear Power Plant and 10% in Zhejiang Sanmen Nuclear Power Plant.
  • The share of profit from Fuqing Nuclear Units is expected to grow at a 50% CAGR from RMB320 mn in FY15 to RMB1,084 mn in FY18E, representing 12% to 29% of total pre-tax profit.
  • The report notes that China's nuclear power capacity is expected to rise from ~28GW in 2015 to 58GW by 2020E, with nuclear power contributing ~5.4% to national power generation by 2020E.

• Hydropower Stability:

  • HDFX's hydropower segment provides a stable income source.
  • It has a consistently high operating margin of 46-48%, and its utilization hours have been higher than the provincial average in Fujian.
  • Assuming stable capacity and utilization, the operating profit margin is expected to remain at ~47-48% in the coming years.

• Valuation and Investment Thesis:

  • The current valuation of HDFX is 5.5x FY16E P/E, close to that of coal-fired companies but ~60% discount to wind farm operators.
  • The report believes that the current valuation is attractive and that the company deserves a premium to coal-fired companies.
  • Net profit is expected to grow at a 12% CAGR from FY15 to FY18E, driven by wind and nuclear capacity expansion.

Key Information

• Financial Forecast (FY15-FY18E):

  • Revenue: RMB15,347 mn (FY15) to RMB18,573 mn (FY18E), with a CAGR of ~7%.
  • Net Profit: RMB1,902 mn (FY15) to RMB2,698 mn (FY18E), with a CAGR of 12%.
  • EPS: RMB0.22 (FY15) to RMB0.32 (FY18E).
  • DPS: RMB0.04 (FY15) to RMB0.06 (FY18E).
  • P/E: 6.7x (FY15) to 4.5x (FY18E).
  • P/B: 0.6x (FY15) to 0.4x (FY18E).
  • ROE: 10% (FY15) to 10% (FY18E).

• Capacity Expansion:

  • Wind capacity is expected to grow at ~1.0-1.2GW p.a. during the 13th Five-Year-Plan period (FY16E-FY20E).
  • Nuclear capacity is expected to grow at a 26% CAGR from 849MW in 2015 to 1,699MW in 2018.

• Utilization and Policy Impact:

  • Wind utilization is expected to improve due to new policies and UHV line expansions.
  • Minimum Utilization Hours policy is expected to significantly boost wind utilization and project IRR, especially in zone I-III areas.

• Market Position:

  • HDFX is a key player in the renewable energy sector with a diverse asset portfolio including hydro, wind, coal-fired, solar, distributed-gas, and biomass.
  • Wind power is expected to become the largest revenue and operating profit source in the coming years, outpacing other segments.

Investment Highlights

• Target Price: HK$2.3 (upside of 37% from current price of HK$1.68).
• Growth Drivers: Wind power expansion, nuclear power growth, and stable hydropower margins.
• Valuation: The company is currently undervalued compared to its peers and is expected to see improved valuation as renewable energy becomes a larger part of its business.

Conclusion

Huadian Fuxin Energy is positioned to benefit from the growing renewable energy market in China, with a strong focus on wind and nuclear power. The company's diversified assets, supported by its parent company's expertise, and its strategic expansion plans make it an attractive investment opportunity. The report forecasts strong net profit and operating profit growth, driven by renewable energy expansion, and recommends a BUY rating with a target price of HK$2.3.