20140911-新鸿基金融集团-Huaneng_Renewables_China_Renewable_Energy_Sector_14页_818kb

Huaneng Renewables (958.HK) Summary

Core Content

Huaneng Renewables is a state-owned alternative energy company primarily engaged in wind and solar power generation. The company is being recommended for a Buy rating with a HK$3.45 12-month target price, implying a 23% upside. The recommendation is based on three main factors: accelerating capacity growth in non-curtailed regions, lower curtailment and normalising wind speeds, and improved cost control with sufficient funding.

Main Points

1. Accelerating Capacity Growth in Non-Curtailed Regions

• China's wind power capacity addition target for 2014 is 18GW, up from 13GW in 2012 and 16GW in 2013.
• Huaneng Renewables plans to add 2.0GW of total capacity by the end of 2014, representing a 31% increase in total capacity.
• Most of the capacity is expected to be in non-curtailed regions (eastern, central, and southern China), which have higher utilisation levels and higher tariffs.
• In the fourth batch of pre-approved wind projects, Huaneng Renewables had 1,915MW approved, the highest among peers, with 1.7GW of wind power capacity added in 2014 and 300MW of solar power capacity.

2. Lower Curtailment, Lower Wind Speeds and Lower Expectations

• China's wind power curtailment rate dropped from 17% in 2012 to 8.5% in the first half of 2014, indicating improving grid infrastructure and policy support.
• Wind speeds have normalised in 2014, meaning wind power generation can grow without the need for above-average wind conditions.
• The market is currently pricing in weak wind performance, expecting a 2014E ROE of 7%, which implies utilisation levels of 1,925 hours.
• The consensus estimates are higher at 8.5% ROE, implying 2,000 hours of utilisation, but the market has already adjusted for this year's underperformance.

3. Improved Cost Control and Sufficient Funding

• The company has managed to reduce interest costs, offsetting cost inflation from 2012.
• Depreciation costs are expected to remain stable, and cash costs are being reduced.
• Huaneng Renewables is expected to have over RMB3bn of surplus cash and over RMB7bn of surplus debt capacity by the end of 2015.
• The company has sufficient internal funding and debt capacity to support its capital expenditure plans, which include RMB12.7bn in 2014 and RMB12.4bn in 2015.

Key Financials (RMB M)

Valuation

• Target Price: HK$3.45 (based on a P/B of 1.7X and 2014E BVPS of HK$2.05).
• Implied P/Es: 24.8X for 2014E and 19.3X for 2015E.
• Valuation Range:
  • Bear Case: HK$2.50 (P/B of 1.2X)
  • Base Case: HK$3.45 (P/B of 1.7X)
  • Bull Case: HK$4.40 (P/B of 2.15X)

Risks

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

Catalysts

• Policy announcements
• Power generation reports

Key Data

Conclusion

Huaneng Renewables is positioned to benefit from accelerated capacity growth in non-curtailed regions, improved curtailment rates, and cost control improvements. With sufficient funding and positive earnings growth, the company is expected to outperform the market in the coming year. The Buy rating is supported by strong fundamentals and favorable macroeconomic trends in the renewable energy sector.