20160120-大和证券-华电福新-00816.HK-Recovery_in_sight_24页_1mb

Fuxin Summary

Core Content

Fuxin is a diversified clean-energy company in China, primarily engaged in the development, management, and operation of hydropower, coal-fired power, wind power, and nuclear power projects. The company has a 39% stake in a 4GW nuclear power project in Fujian. Following a 44% share-price correction since the proposal for a wind-tariff cut in early November, the company's valuation is considered appealing.

Main Points

• Profitability Rebound: Fuxin is expected to see a rebound in profitability due to the incremental contribution from additional wind power capacity and the commissioning of Fuqing Nuclear Units 2-4 from 4Q15 to 2017.
• Shift in Profit Sources: The company's major profit contributors are expected to shift from traditional coal-fired and hydro businesses to wind and nuclear businesses. By 2017, nuclear is projected to contribute ~58% of net profit, while coal-fired will drop to 12% (down from 30% in 2015).
• Wind Power Growth: Fuxin is forecasted to add 1.0-1.5GW of wind power capacity annually over 2015-17. Despite the proposed wind tariff cuts, the company is still expected to deliver a 41% net profit CAGR for its wind business.
• Nuclear Power Contribution: With the commissioning of Fuqing Nuclear Units 2-4, the net profit from the nuclear power business is expected to more than double, rising from CNY450m in 2015 to over CNY1.1bn in 2017, representing a 58% net profit CAGR.
• Valuation: Fuxin is currently trading at 4.3x 2016E PER and 0.6x 2016E PBR, which are at their past-3-year lows. The company's valuation is seen as undervalued due to weak sentiment toward the wind sector, but it is considered a balanced clean-energy operator with limited downside risks.
• EPS and Profitability: The company's core EPS is expected to grow at a 16% CAGR over 2015-17, driven by the growth in wind and nuclear segments. The EPS is forecasted to be 0.250 in 2015E, 0.304 in 2016E, and 0.341 in 2017E. However, the forecasts are 8-16% below consensus due to a more cautious outlook on the coal-fired business.
• Tariff Cuts Impact: The proposed wind tariff cuts may lead to a moderating pace of wind capacity expansion, especially in Zones I and II. This could result in lower IRRs for new wind projects and may affect Fuxin's future capacity additions in those regions.
• Financials: Fuxin's operating cash flow is strong enough to support future capital expenditures. The company may consider equity financing to reduce its high gearing level slightly. The company's net debt to equity ratio is expected to remain around 289.3x in 2017E.

Key Information

• Share Price Performance: The 12-month range is 1.54-4.72, with a market cap of USD1.65bn.
• Share Details: Shares outstanding are 8,408 million, with Huadian Group as the major shareholder at 62.8%.
• Forecast Revisions:
  • Revenue change: -10.0% (2015E), -13.1% (2016E), -15.3% (2017E)
  • Net profit change: -17.3% (2015E), -21.3% (2016E), -22.5% (2017E)
  • Core EPS (FD) change: -17.3% (2015E), -21.3% (2016E), -22.5% (2017E)
• Valuation Metrics:
  • PER: 5.2 (2015E), 4.3 (2016E), 3.8 (2017E)
  • PBR: 0.6 (2016E), 0.5 (2017E)
  • EV/EBITDA: 7.0 (2015E), 6.9 (2016E), 6.8 (2017E)
• Recommendation: Fuxin has been downgraded from Buy (1) to Outperform (2), with the target price reduced to HKD1.75 from HKD4.60.
• Earnings Revisions: The Bloomberg-consensus EPS has been revised down due to the company's disappointing 2014 results and wind curtailment issues in 2015.

Financial Summary

Risks and Outlook

• Coal-fired Power: The coal-fired business is expected to face difficult years ahead due to declining profitability and reduced utilization.
• Wind Power: Despite the proposed tariff cuts, the company is still expected to add 1.0-1.5GW of wind power capacity annually. However, the pace may slow to ~1.0GW pa from 2016 onwards.
• Nuclear Power: The nuclear segment is projected to significantly increase in profitability, with net profit expected to rise from CNY450m in 2015 to over CNY1.1bn in 2017.
• Curtailment Issues: Wind curtailment issues are expected to stop worsening by 2H17, leading to a slight improvement in wind utilization.

Conclusion

Fuxin is positioned to recover from its current challenges, with a strong focus on wind and nuclear power. The company's valuation is considered attractive, and its strong operating cash flow supports future investments. While the wind sector faces some headwinds, the company's diversified clean-energy portfolio and the projected growth in nuclear power should help drive long-term profitability.