20210120-招银国际-龙源电力-00916.HK-Absorption_and_merger_to_enhance_leading_position_and_release_Company_value_5页_891kb

CMB International Securities | Equity Research | Company Update Summary

Core Content

China Longyuan Power (CLY, 916 HK) announced a detailed plan to merge with Pingzhuang Energy (PZE, 000780 CH), aiming to enhance its leading position and unlock company value. The merger involves issuing 342 million A-shares at RMB11.42 per share, equivalent to RMB3.80 per PZE share, with a 10% premium over PZE's 20-day average closing price before the trading halt. This non-cash consideration represents a 7.5% premium over PZE's book value as of September 2020.

The transaction also includes a swap of PZE's coal mining assets with CHN Energy's renewables assets, with the latter being valued in cash. CLY identified a 2.04GW wind farm asset from CHN Energy's subsidiaries, which is expected to generate net profit of ~RMB560 million in 9M20 and has an annualized ROE of 16.8%, significantly higher than CLY's recent ROE of ~9%.

Post-merger, CLY will become an A+H dual listing platform, enhancing its financing capabilities. The merger is expected to be completed by December 2021, pending approvals from SASAC, CSRC, and SGM. The research firm believes the merger will accelerate CLY's earnings and boost its valuation, leading to a target price increase of 103% to HK$15.00, up from HK$7.38.

Key Points

Merger Details

• Transaction Type: Absorption and merger with Pingzhuang Energy
• A-share issuance: 342 million shares at RMB11.42
• Exchange rate: 1:0.3771, RMB3.80 per PZE share
• Valuation: Fair to both sides with minimal shareholder objections
• Expected completion: By December 2021
• Post-merger platform: A+H dual listing, enhancing financing capabilities

Asset Swap

• Coal mining assets: Disposal of PZE's coal mining assets
• Renewables assets: Swap with CHN Energy's renewables assets
• Wind farm asset: 2.04GW wind farm with ~RMB560mn net profit in 9M20
• ROE: 16.8% (annualized), significantly higher than CLY's 9%

Earnings and Valuation

• Earnings growth: Expected to accelerate with increased capacity additions
• Capacity plan: ~20GW renewables capacity addition in the next five years
• EPS growth: Projected to rise from 0.59 in FY20E to 0.83 in FY22E
• P/E ratio: Expected to decrease from 16.0 in FY20E to 11.3 in FY22E
• P/B ratio: Expected to decrease from 1.45 in FY20E to 1.21 in FY22E
• DCF valuation: Adjusted based on terminal growth, FX assumptions, and solar farm inclusion
• Valuation components:
  • Terminal value: RMB310,023 million
  • Total discount FCF: RMB51,707 million
  • Equity value: RMB90,055 million
  • Share fair value: HK$13.50

Key Financial Metrics

• Revenue: Expected to grow from RMB28,431 million in FY20E to RMB35,118 million in FY22E
• Net Income: Projected to increase from RMB4,710 million in FY20E to RMB6,685 million in FY22E
• EPS: Expected to rise from RMB0.59 in FY20E to RMB0.83 in FY22E
• ROE: Projected to increase from 9.1% in FY20E to 10.7% in FY22E
• Net gearing: Expected to increase from 168% in FY20E to 173% in FY22E
• Free cash flow: Projected to increase from RMB2,980 million in FY20E to RMB15,959 million in FY22E

Analyst Recommendation

• Rating: BUY (Maintain)
• Target Price: HK$15.00 (+33.0% upside from current price of HK$11.28)
• Reason: Merger is expected to enhance CLY's position, accelerate earnings, and unlock value through improved financing and asset injection

Key Risks and Considerations

• Transaction uncertainty: Approval process may take time and involve regulatory hurdles
• Valuation assumptions: Based on current market conditions and may change
• Subsidy collection: Expected to be a key driver of future performance
• Market volatility: Potential for fluctuation due to external factors

Analyst Certification

• The analyst certifies that the views expressed reflect their personal opinions and are not influenced by compensation
• Confirms no trading in covered stocks within 30 days prior to report release and no trading for 3 business days after
• No financial interests in the companies covered

CMBIS Ratings

Important Disclosures

• Risk Note: Investing in securities involves risk. The information may not be suitable for all investors.
• Disclaimer: CMBIS does not provide individually tailored investment advice.
• Liability Note: CMBIS and its affiliates are not liable for any losses or damages arising from reliance on the report.
• Accuracy Note: Information is based on analyses and may not be accurate or complete.
• Use Note: Report is for intended recipients only and may not be reproduced without consent.

Contact

• Analyst: Robin Xiao
• Phone: (852) 3900 0849
• Email: robinxiao@cmbi.com.hk