Investment positives

We initiate coverage on China Nuclear Engineering & Construction Corporation Limited (CNEC) with an OUTPERFORM rating and a target price of Rmb10.50, implying 15x 2024e and 13x 2025e P/E based on the SOTP valuation method, offering 19% upside. CNEC is a leading nuclear power, industrial, and civil engineering construction company in China.

Why an OUTPERFORM rating?

As China shifts towards a positive nuclear power policy stance, there has been a spike in the approval of nuclear power projects. The

Chinese government proposed in the 2021 government work report developing nuclear power in an active, safe and orderly manner. This was the first explicit mention of a positive policy stance on nuclear power in years. The 14th Five-Year Plan for Establishing a Modern Energy System released in 2022 reiterated the need to develop nuclear power in an active, safe and orderly manner, setting a target to grow operational nuclear power capacity to 70mn kW by 2025. The annual number of approved nuclear power units in China has reached double digits for three consecutive years over 2022-2024. We think that CNEC may see a surge in the recognition of revenue from nuclear power projects in 2024, as it usually takes five years to build a nuclear power unit, and construction firms' revenue recognition tends to peak 2-3 years after construction starts.

A leading player in China’s nuclear power project construction industry with extensive expertise. According to the firm’s

announcement, since the 1980s, it has been involved in the construction of nuclear islands for all operational nuclear power units in China, establishing a leading position in the industry. It constructed the nuclear and conventional islands for the Qinshan Nuclear Power Plant in Zhejiang and the Daya Bay Nuclear Power Plant in Guangdong. The construction of nuclear island projects has high technological requirements, and project owners tend to partner with more experienced contractors to reduce risks.

Therefore, we think CNEC could maintain its leadership in the industry. In November 2024, the firm signed a special agreement with Electricite De France (EDF) to promote cooperation between the two parties in various　　aspects, such as construction of global nuclear power projects.

Optimizing order structure; likely to reduce the proportion of housing construction orders and improve competitiveness in energy projects.

According to corporate filings, CNEC’s housing construction projects have been under pressure since 2022 due to external headwinds. The firm has responded to the pressure on its traditional business orders by increasing the percentage and growth of revenue from new energy project. In 1H24, for example, revenue from the firm's industrial and civil engineering segment fell 5.7% YoY to Rmb35.7bn, while the value of new energy contracts increased significantly. In 1H23, revenue from its industrial and civil engineering segment fell 3.2% YoY to Rmb43bn, while the value of newly signed new energy contracts grew 46% YoY to Rmb6.8bn.

How do we differ from the market? The market is concerned that the

decline in the firm's traditional business will weigh on its earnings.

However, we believe that: 1) The firm's new orders for the nuclear power business are growing rapidly. 2) The profitability of nuclear power projects is stronger than that of the traditional business, which may improve the firm’s blended profit margin. 3) CNEC is exploring new energy projects in the industrial and civil engineering fields, which may boost the growth of its orders.

Potential catalysts: Domestic and overseas nuclear power orders beat expectations; revenue and profit margin of traditional businesses improve.

Financials and valuation

We expect the firm's EPS to be Rmb0.70 in 2024 and Rmb0.80 in 2025, implying a CAGR of 8%. The stock is trading at 13x 2024e and 11x 2025e P/E. We initiate coverage on CNEC with an OUTPERFORM rating and a target price of Rmb10.5, implying 15x 2024e and 13x 2025e P/E, offering 19% upside.

Risks

Pace of approval of nuclear power projects disappoints; profit margin fluctuates; weak housing construction drags the growth of traditional projects; public-private partnership (PPP) projects weigh on accounts receivable, resulting in credit impairment and thus dampening earnings.