20130826-美银美林-1H13_results_beat__further_M_A_potential__Buy_15页_456kb

1H13 Results Summary: Fuxin Energy Corp Ltd

Core Content Overview

Fuxin Energy Corp Ltd (Fuxin) reported its 1H13 financial results, showing strong performance with a 28% YoY increase in net profit to RMB854 million, which exceeded the analysts' initial forecast by 6%. The company also demonstrated improved return on invested capital (ROIC) at 7.6%, outperforming Longyuan's 6.6% but trailing Huaneng Renewable Energy's 8.3%. This ROIC is within the 6.3-9.0% range for thermal independent power producers (IPPs).

Fuxin's accounts receivable increased to RMB5,323 million by end June 2013, up from RMB2,867 million in 2012. The company is expected to book RMB62 million in CDM provision for 2013, but did not report CDM revenue in 1H13.

Main Financial Highlights

• Net Profit (1H13): RMB854 million (+28% YoY)
• ROIC (1H13): 7.6% (vs. Longyuan's 6.6%, Huaneng RE's 8.3%)
• R&M Expense: Increased by 52% YoY
• Unit Fuel Cost (Thermal): Dropped 20% YoY to RMB669/ton, driven by the newly acquired Kemen II plant
• Hydro Power Utilization Hours: Decreased 12.5% YoY to 2,021 hours due to lower rainfall, but is expected to remain at historical averages in 2013
• Wind Power Utilization Hours: Rose 8.5% YoY to 1,058 hours, surpassing the analysts' full year forecast of 5% YoY
• Debt-Capital Ratio: Increased 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 (1H13): Increased to 19.6% from 15.7% in 2012

Key Investment Insights

• Earnings Estimates: Updated by 1.7% for 2013 and 1.2-2.1% lower for 2014-15
• Price Objective: Maintained at HK$2.90, with the current trading price at 1.1-1.0x 2013-14 PB multiple and 9.6-8.3x 2013-14 PE
• Investment Rating: BUY pending further information from the results briefing on 26 August 2013
• Growth Prospects: The company is well-positioned to benefit from China's push for clean energy, with a projected 25%-56% CAGR in wind, nuclear, solar, and distributed energy project capacity from 2011-2015

Wind Power Performance

• Wind Utilization Hours (1H13): 1,058 hours (+8.5% YoY)
• Wind Capacity (End June 2013): 3,028 MW, up 39.4% YoY
• Wind Power Generation (1H13): 69.5bn kWh (+48% YoY), accounting for 2.8% of total power generated in China
• Curtailment Rate (1H13): 10%, down 2% YoY
• Wind Projects Approved: Total of 1,349 projects with 80.8GW capacity, with 48% of the total capacity already approved by end July 2013

Thermal Power Trends

• Thermal Unit Fuel Cost Drop: Projected at 16.4% YoY for 2013, with a 1.2% on-grid tariff cut
• Thermal Utilization Hours: Not directly reported, but impacted by the 20% drop in standard coal price
• Thermal Power Tariff Cut: Expected to be asymmetric, with 7% cut for coastal IPPs and smaller cuts for inland IPPs

Coal Price Projections

• 2013 Coal Price Forecast: RMB590/ton (down 16.1% YoY from previous estimate)
• 2014 Forecast: RMB550/ton (down 6.8% YoY)
• Long-Term Forecast: RMB530/ton
• Reasons for Coal Price Drop: Continued rising imports, overcapacity, and railway de-bottlenecking

Key Changes in Estimates

Valuation Metrics

Investment Thesis

Fuxin is positioned as a leading clean, diversified, and distributed energy provider in China, with a strong growth outlook due to the country's commitment to reduce emissions and expand clean energy capacity. The company's performance in 1H13 highlights its resilience in thermal and wind segments, with a notable improvement in wind utilization and reduced curtailment rates. The analysts believe that the current Price Objective (PO) is conservative compared to PRC IPP and wind farm peers.

Risks and Pending Information

• Results Briefing: Scheduled for 9:30am HK time on 26 August 2013, where more details on accounts receivables and VAT rebate will be provided
• VAT Rebate: Reduced for PRC wind farms, as only Xinjiang and Hainan continue to enjoy the exemption
• Curtailment: Expected to improve further in the coming quarters, with 7.7bn kWh lost in 1H13 due to curtailment

Conclusion

Fuxin Energy Corp Ltd is showing positive momentum in its clean energy portfolio, particularly in the wind segment, with a solid 1H13 performance that exceeds forecasts. Despite challenges in hydro power output due to lower rainfall, the company remains well-positioned for growth in the renewable energy sector. The Buy rating is maintained, with the Price Objective of HK$2.90 based on conservative assumptions, and the results briefing is expected to provide further clarity on the company's financial health and future prospects.