Investment Highlights
Integrated clean energy player seeking nationwide presence. Asthe major energy supplier in Shijiazhuang (capital of Hebei province),the Company is primarily engaged in combined heat and powergeneration (CHP) and centralized heat supply. In 2015, powergeneration and heat supply accounted for 61.7%/33.9% and68.0%/22.5% of its total revenue and gross profit respectively. With acombined indirect and direct stake of 42.3%, State Power InvestmentCorporation (SPIC) is the controlling shareholder of the Company.
Bolstering earnings by acquiring thermal power assets. TheCompany acquired “Liangcun Thermal Power” and “Liangcun HeatSupply” in 2015 funded by a private placement. The acquisitionsboosted its installed capacity by 660MW. The two acquired entitiesbecame main pillars to its earnings for 2015, contributing 58.6%/36.6%and 92.4%/10.1% of its revenue and net profit respectively for the year.Despite positives from falling coal prices, cut to the on-grid tariff andheat tariff means its 2016 earnings are likely to decline moderately.
SPIC aiming to accelerate its asset securitization with clean energy assets to be listed full in the pipeline. The ratio of securitizedassets for the Company’s parent group, SPIC, is relatively low currently,at merely 31%. This is far below that of other major power groups(50-60%). As such, SPIC will be devoted to accelerate its assetsecuritization during the 13th FYP period. As the injection of coal andpower assets are hampered by low valuations in the secondary marketcurrently, clean energy assets have become the prime target to swiftlylift SPIC’s securitization ratio. Hence, we anticipate SPIC will inject astring of clean energy assets into its listed arms over the coming twoyears. As for installed capacities, unlisted clean energy assets held bythe Group stand at 16.16mn kW, 8.52mn kW and 4.25mn kW of hydro,wind and PV power generation. We estimate these assets will generateprofits of Rmb2.33bn, Rmb1.36bn and Rmb810mn respectively. Inaddition, SPIC also holds attributable interests in combined 3.10mn kWof nuclear power capacity, which generate ~Rmb1.0bn in investmentincome for the Group.
Positioning is in line with SPIC’s development strategy, assetinjections may fuel leapfrog growth. The Company has successivelyestablished eight subsidiaries across the nation to engage in alternativeenergy projects. Such initiatives are in line with SPIC’s developmentstrategy. As such, we anticipate SPIC will inject clean energy assetsinto the Company going forward, paving the way for rapid expansion ofthe latter. From a timing perspective, SPIC made the commitment whenthe Company undertook its private placement in May 2013, that theGroup will progressively inject qualified thermal power as well as otherquality assets in Hebei province into the Company over the subsequentthree years, in order to eliminate horizontal competition (thiscommitment will expire in Jan 2017). Installed capacities of wind (150,000kW) and solar power(350,000kW) generation assets held by SPIC in Hebei total ~500,000 kW.
Risks: (i) pace of asset injections disappoints; (ii) rising coal price undermines earnings; (iii) weakdemand results in lower-than-expected utilization rate.
Earnings forecast, valuation and investment rating. Currently, the Company is actively expandinginto other nationwide markets (ex-Hebei) for clean energy, with installed capacity for its proposed windand solar projects hitting 1.53mn kW. Hence, the clean energy business will become the driverunderpinning its sustained earnings growth after 2016. We forecast its 2016-18E EPS to beRmb0.71/0.75/0.82. The stock is currently trading at 2016-18E P/E of 20.8/19.8/18.1x. SPIC has sizableclean energy assets, with those not yet listed (clean energy assets) generating more than ten times theprofit of the Company at present. The Company has come up with a clear development path over the lasttwo years while its strategy of focusing on clean energy business is also in line with the objectives of itsparent group. As such, it could become a key platform for the accelerated securitization of the group’sassets, implying a certain level of valuation premium. We set its target price at 28x 2016E P/E,translating into Rmb19.9, initiate coverage with BUY.
