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SHIJIAZHUANG DONGFANG ENERGY(000958):MULTIPLE POSITIVES

中信证券股份有限公司 2016-07-07

Event:

The Company announced 1) its board of directors had approved its proposal to investanother ~Rmb240mn into three alternative energy (wind and PV power respectively)projects and 2) it planned to set up a wholly funded power sales company with a totalregistered capital of Rmb201mn, of which the first contribution instalment talliesRmb40mn.

Comments:

Expectations of its organic growth have been heightened as its alternative energyprojects in progress have entered the stage of implementation. With wind and PVpower projects on which it has signed contracts totaling 1,358MW, the Company isinvesting more in these three projects already in progress, which marks these projectshave entered implementation stage. We expect them to become the Company’s freshprofit growth drivers over next two years. The additional investment in these three projectsis estimated to boost the Company’s profit by Rmb40mn, equivalent to a contribution ofRmb0.07 to its EPS assuming a ROE of 15%.

Tapping smart energy businesses with a premium user base amid power sectorreform. The Company planned to set up a wholly funded power sales company with atotal registered capital of Rmb201mn and this firm will be mainly engaged in electricitypurchase/selling, EPC (Energy Performance Contracting), integrated energy saving,power consumption consulting and construction/operation of charging pole/distributedenergy projects. The Company is setting up the power selling firm to seize opportunities inChina’s power sector reform by tapping integrated energy services, which fits in well withdevelopment of the entire power sector. The heat supply company under the Companycovers ~35% of Shijiazhuang’s area with centralized heat supply, has an industrial heatload of 690t/h and is heat supplier for 70% of industrial users in Shijiazhuang. As a result,this user base will be a major advantage riding on which the Company will tap integratedenergy services such as electricity selling and this implies a rosy prospect.Injection of the parent group’s remaining clean energy assets in Hebei is toaccelerate. The Company carried out a private placement in May 2013, when itsparent group committed to injecting eligible thermal power assets and other premiumassets in Hebei province into the Company over three years in a bid to reduce and finallyeradicate peer-competition (the commitment will expire in Jan 2017). According to itswebsite, the parent group’s Hebei subsidiary has unlisted wind and PV power capacitiestotaling ~600MW. We expect these assets, when injected into the Company, to boost itsEPS remarkably given their strong profitability.

Huge room for trans-regional consolidation of the parent group’s clean energyassets with the parent accelerating asset securitization. SPIC (State PowerInvestment Corporation)’s asset securitization rate stands at 31%, much lower thanlevels of its peers (50%-60%). It has designated accelerating asset securitization as astrategic task during the 13th FYP period. It has unlisted installed clean capacities asfollowing, hydro/wind/PV power capacities of 16.16mn/8.52mn/4.25mn kW, whoseprofits on estimation will be Rmb2.33bn/1.36bn/810mn respectively. It also hasattributable installed nuclear power capacity totaling 3.10mn kW, which is estimated tocontribute investment gain of ~Rmb1bn. The Company’s positioning fits in well with theparent group’s clean energy development strategy. We foresee huge room for theCompany to carry out trans-regional consolidation of the parent group’s clean energyassets.

Reiterate our BUY rating. We reiterate our 2016E EPS estimate of Rmb0.71 and liftslightly its 2017~18E EPS estimates of Rmb0.80/0.89 from0.75/0.82. Its last priceimplies 2016-18E PE of 21/19/17x. In addition, injection of the remaining assets that itsparent group committed to pour into the Company will likely accelerate and there is stillpotential for the Company to carry out trans-region consolidation of clean energyassets under its parent group so that the Company deserves some valuation premium.We apply 30x 2016E PE to it, equivalent to a TP of Rmb21.2, and reiterate our BUY.

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