20150909-DBS_Group-中广核电力-01816.HK-Key_reverse_roadshow_takeaways_12页_376kb

CGN Power Summary (DBS Group Research - Equity)

Core Information

• Company: CGN Power
• Industry: Utilities (Electricity)
• Last Traded Price: HK$3.16
• Price Target: HK$4.60 (46% upside from current price)
• Analyst: Addison DAI (+852 2971 1931 | addison_dai@hk.dbsvickers.com)
• Date: 9 September 2015

Investment Thesis

• Profile: China's largest nuclear power producer, with 11 nuclear units and 11,624MW installed capacity in 2014.
• Rationale:
  • Visible earnings growth: Projected earnings growth at 26% CAGR in FY15-17, driven by power generation growth and stable EBITDA margins.
  • Key beneficiary of nuclear expansion: China's plan to increase nuclear capacity to 58 GW by 2020.
  • Valuation: The new price target of HK$4.60 corresponds to 0.75x P/NPV, implying 28x and 23x FY15F and FY16F PE, respectively.
  • Justification for valuation premium: Due to high entry barriers in the nuclear industry and strong organic capacity growth (20% CAGR in 2015-17).

Key Catalysts

• Better-than-expected utilisation hours
• Earlier-than-expected kick-off of Taishan project
• Asset acquisition of Fangchenggang Power Units 1&2

Financial Forecasts (RMB m)

DCF Valuation and Sensitivity Analysis

• DCF Valuation:
  • Enterprise Value: HK$342,759 million
  • Equity Value: HK$223,118 million
  • Value per share (RMB): 4.91
  • NPV/Value per share (HK$): 6.14
  • Target price (HK$): 4.60
• Sensitivity Analysis:
  • Electricity tariff ±1%: NP ±2.6%
  • Utilisation hours ±1%: NP ±1.3%
  • Finance cost ±25bp: NP ±2.9%

Key Assumptions

• Power Generation (GWh): Expected to grow at 10% in FY15, 18% in FY16, and 33% in FY17.
• Average electricity tariff (RMB/kWh): 0.4
• Unit COGS (RMB/kWh): 0.2
• Unit fuel cost (RMB/kWh): 0.1

Peer Comparison

Financial Highlights

• Power Generation:
  • FY14: 52,176 GWh
  • FY15F: 57,424 GWh
  • FY16F: 68,001 GWh
  • FY17F: 90,757 GWh
• EBITDA:
  • FY14: 13,920 m
  • FY15F: 15,327 m
  • FY16F: 18,069 m
  • FY17F: 23,175 m
• Net Profit:
  • FY14: 5,713 m
  • FY15F: 6,125 m
  • FY16F: 7,461 m
  • FY17F: 9,705 m
• EPS (HK$):
  • FY14: 0.21
  • FY15F: 0.16
  • FY16F: 0.20
  • FY17F: 0.26

Risks

• Business risks:
  • Power tariff risks
  • Utilisation hours risks
• Execution risks:
  • Construction delay in Taishan project
  • Capex overrun
• Impact of delay: If Taishan Unit 1 is delayed to 2017, it will impact FY16F earnings by 5.3%.

Summary of Key Points

• Investment Recommendation: Reiterate BUY
• Growth Outlook: Earnings are expected to grow at 26% CAGR in FY15-17
• Valuation: The target price of HK$4.60 reflects a 0.75x P/NPV multiple, implying a valuation premium over non-nuclear peers
• Capacity Growth: Organic capacity growth at 20% CAGR in 2015-17
• Market Share: 54% and 49% in 2014 for nuclear power generation
• Project Progress: Taishan project on track, expected to start operation in 4Q16
• Key Projects:
  • Taishan project (ERP GIII technology)
  • Fangchenggang Power Units 1&2 acquisition under review
  • Inner Mongolia-to-Shandong UHV line expected to alleviate power supply glut in Liaoning by 2016

Additional Information

• Major Shareholders:
  • China General Nuclear Power: 85.1%
  • Guangdong Hengjian Investment: 10.0%
  • Social Security Fund: 9.5%
  • GIC Private Limited: 5.0%
• H Shares Free Float: 85.5%
• Market Cap: HK$143,618 million
• 3m Avg. Daily Valuation (US$m): 63.8

Conclusion

CGN Power is a leading player in China's nuclear power industry, with a strong growth outlook and a justified valuation premium due to its significant market share, entry barriers, and organic capacity growth. The price target of HK$4.60 reflects conservative forecasts and a 0.75x P/NPV multiple. The company's visibility in the nuclear sector and the expected completion of key projects support the BUY recommendation, though risks such as construction delays and capex overruns remain.