20130825-美银美林-1H13_results_beat__further_M_A_potential__Buy_15页_456kb

Fuxin Energy Corp. Ltd. 1H13 Results Summary

Core Content

Fuxin Energy Corp. Ltd. reported strong results for the first half of 2013 (1H13), with a 28% YoY increase in net profit to RMB854 million, exceeding the analysts' forecast by 6%. The company's ROIC for 1H13 was 7.6%, outperforming Longyuan's 6.6% but lower than Huaneng RE's 8.3%. This performance is attributed to several factors, including increased wind power utilization, lower unit fuel costs, and the contribution from newly acquired assets.

Key Financial Highlights

• Net Profit: RMB854 million (up 28% YoY)
• ROIC: 7.6% (vs. 6.6% for Longyuan, 8.3% for Huaneng RE)
• Accounts Receivable: Increased to RMB5,323 million by end June 2013 (up from RMB2,867 million in 2012)
• R&M Expense: Rose by 52% YoY, primarily due to wind turbine warranty expiry
• CDM Provision: Assumed to be RMB62 million for 2013, as the company did not book CDM revenue in 1H13
• Debt-Capital Ratio: Rose to 75.1% in 1H13 from 74.2% in 2012
• Average Cost of Debt: Dropped to 6.3% in 1H13 from 6.7% in 2012
• Effective Tax Rate: Increased to 19.6% in 1H13 from 15.7% in 2012

Operational Performance

• Wind Power Utilization Hours: Increased by 8.5% YoY to 1,058 hours, better than Suntien but lower than Huaneng Renewable
• Hydro Power Utilization Hours: Dropped by 12.5% YoY to 2,021 hours, due to lower rainfall
• Thermal Power Unit Fuel Cost: Dropped by 20% YoY to RMB669/ton, driven by the low unit fuel cost at the newly acquired Kemen II power plant
• Thermal Power Tariff Cut: Projected at 1.2% for 2013, aligning with projections for other thermal IPPs
• Wind Power Capacity: Increased to 3,028 MW by end June 2013, up 39.4% YoY
• Wind Power Projects in Pipeline: 974 MW have received NDRC approval, with an additional 700 MW expected to be approved in 2013

Investment Analysis

• Earnings Estimates: Adjusted upwards by 1.7% for 2013, and downwards by 1.2–2.1% for 2014–2015
• Price Objective (PO): Maintained at HK$2.90, with a BUY rating
• Valuation Metrics:
  • Price to Book (PB): 1.1–1.0x (2013–2014), lower than the implied PO of 1.5–1.4x
  • Price to Earnings (PE): 9.6–8.3x (2013–2014), lower than the implied PO of 12.8–10.9x
• ROIC Estimate: 6.5% for 2013–2014, suggesting the current PO is conservative relative to industry peers

Outlook and Risks

• Wind Power Curtailment: Reduced to 10% in 1H13, down 2% YoY
• VAT Rebate: Ceased for most PRC wind farms, with only Xinjiang and Hainan still enjoying the exemption
• Coal Price Forecasts:
  • 2013: RMB590/ton
  • 2014: RMB550/ton
  • Long-term: RMB530/ton
• Unit Fuel Cost Drop: Assumed at 16.4% YoY for 2013, 12.3% for 2014, and 11.2% for 2015
• M&A Potential: Fuxin is expected to benefit from further M&A activity in the clean energy sector
• Investment Opinion: BUY, with a Price Objective (PO) of HK$2.90
• Risk Level: MEDIUM

Industry Context

• National Wind Power Development:
  • Total pre-approved wind projects in first three batches: 1,349, with total capacity of 80.8 GW
  • 1H13 Wind Power Generation: 69.5bn kWh, up 48% YoY
  • Wind Power Utilization Hours: Increased to 1,059 hours in 1H13, up 70 hours YoY
• Regional Performance:
  • Xinjiang: Utilization hours increased by 300 hours YoY
  • Yunnan: Highest utilization hours at 1,385
  • Jilin: Lowest utilization hours at 835, up 100 hours YoY
• Curtailment: 7.7bn kWh loss in 1H13 due to curtailment, with a 10% curtailment rate

Analyst Notes

• The analysts await more details from the results briefing on 26 August 2013, including receivables breakdown and nuclear power unit commissioning
• Fuxin is considered a leading diversified clean energy provider in the PRC, well-positioned to benefit from the country's push for renewable energy
• The investment thesis highlights the company's potential in wind, hydro, thermal, and distributed energy, with a projected 25–56% CAGR in renewable capacity from 2011–2015

Conclusion

Fuxin Energy Corp. Ltd. demonstrated strong performance in 1H13, driven by improved wind utilization, lower fuel costs, and the integration of new assets. The company's valuation appears attractive relative to its peers, and the analysts maintain a BUY rating with a PO of HK$2.90, despite the need for more clarity on receivables and tax expectations. The outlook for wind power utilization and renewable energy development remains positive, with potential for further growth and M&A opportunities.