20140919-新鸿基金融集团-Research_Idea__Larger_Pipeline,_Lower_Costs__Initiate_at_Buy_13页_808kb

China Longyuan (916.HK) Summary

Core Content

China Longyuan is a state-owned alternative energy company that is positioned as a key player in the renewable energy sector, particularly in wind power generation. The company is recommended for a Buy rating with a HK$9.60 12-month target price, indicating a 20% upside from the current price.

Main Points

1. Largest Pipeline of Approved Wind Power Capacity

• China Longyuan has the largest pipeline of pre-approved wind power projects among its peers, with 10.1GW (9%) of the total 108.3GW pre-approved capacity.
• As of June 2014, the company had 1.8GW under construction, 5.3GW approved, and 4.3GW pre-approved, indicating a strong capacity growth trajectory.
• The company plans to add 1.5–1.8GW of wind power capacity by the end of 2014 and 2.0GW in 2015, contributing to a 13%–15% and 15% increase in wind power capacity, respectively.
• A significant portion of its new projects is located in non-curtailed regions, which are more attractive due to higher utilisation levels and tariffs.

2. Lowest Costs and Strongest Cost Control

• Longyuan has the lowest unit operating costs at RMB0.74/Watt/year in 2013, compared to RMB0.80/Watt/year for Huaneng Renewables and RMB0.96/Watt/year for Datang Renewable.
• Its cost advantage is primarily due to lower interest costs, which are a result of its strong cash flow generation and lower debt-to-capital ratio (62% as of June 2014), compared to 73% and 77% for its peers.
• Operating cash flow in 2013 was over RMB10.8bn, significantly higher than its competitors.
• The company expects stable costs in the future due to fixed-rate borrowings and stable construction costs at RMB7,800/kW.

3. Lower Curtailment, Lower Wind Speeds and Lower Expectations

• Curtailment rates in China have been improving, falling from 13.6% in H1 2013 to 8.5% in H1 2014, with notable reductions in regions like Heilongjiang, Gansu, Hebei, Liaoning and East Inner Mongolia.
• Wind speeds have normalised in 2014, allowing for sustainable growth in wind power generation without relying on above-average conditions.
• The market is currently pricing in this year's weak performance, leading to lower expectations and lower ROE estimates.
• Longyuan is expected to benefit from improved grid access and reduced curtailment, which will support stronger earnings growth in 2015.

Key Information

• Target Price: HK$9.60 (based on a P/B of 1.85X and 2014E BVPS of HK$5.19).
• Implied P/E: 24.3X for 2014E and 19.7X for 2015E.
• Valuation Range:
  • Bear Case: HK$7.25 (P/B 1.40X, BVPS HK$5.18)
  • Base Case: HK$9.60 (P/B 1.85X, BVPS HK$5.19)
  • Bull Case: HK$11.00 (P/B 2.1X, BVPS HK$5.19)
• Utilisation Hours:
  • Market is pricing in ~2,000 hours for 2014E, implying a 7.5% ROE.
  • Consensus estimates suggest ~2,150 hours and ~9.4% ROE.
  • If utilisation reaches ~2,050 hours, Longyuan’s ROE in 2015 could reach ~9.4%, matching 2014E ROE at 2,100 hours.

Financial Highlights (2011–2015e)

Company Background

• China Longyuan is a state-owned enterprise under China Guodian Group, the third-largest power company in China, holding 58.44% of the shares.
• The company has been in operation since 1991, with its first wind power project, and was incorporated as a separate subsidiary in 1993.
• As of June 2014, it had:
  • 6.3GW of wind power capacity, primarily in Inner Mongolia, Liaoning, Shandong, and southern China.
  • 400MW of solar power capacity, mainly in Qinghai and Gansu.

Catalysts

• Policy announcements related to renewable energy.
• Monthly power generation reports.

Risks

• Lower than expected capacity growth.
• Higher than expected cost inflation.
• Lower than expected wind speed.

Conclusion

China Longyuan is well-positioned to benefit from the renewable energy macro theme in China due to its large approved project pipeline, strong cost control, and focus on non-curtailed regions. The company's lower curtailment rates, normalising wind speeds, and lower market expectations further support its strong earnings potential in the coming years. With a Buy rating and a target price of HK$9.60, the stock is expected to deliver significant upside.