China Longyuan Power - Becoming a pure renewable energy play
- Upgrade H-share to BUY for earnings growth recovery, and higher HKD7.8 TP; maintain HOLD for A-share, Rmb19.0 TP
- More government policies to address climbing curtailment rate and falling electricity tariffs are catalysts for revenue growth
- Expect more asset injections from parent
- Project portfolio capacity to grow 13%/15% in FY24/FY25
Related Stories
- China Longyuan Power - 1HFY24 results below expectations from lower-than-expected wind and solar project tariffs30 Aug 2024
- China Longyuan Power - Pressure on tariff and curtailment rate in 1QFY24 higher than expected29 Apr 2024
- China Longyuan Power - Project upgrade for long term earnings growth despite short term impairment losses02 Apr 2024
As of the end of 9MFY24, China Longyuan had total power generation capacity of 37GW with 28.4GW of wind power and around 8GW other renewable sources (mainly solar power). After disposing of the remaining 660MW of coal-fired power capacity, China Longyuan will become a pure renewable energy play. In addition, after the recent acquisition of around 2GW of renewable assets from the parent, another 2GW will also be injected upon completion of due diligence. These will bring the company’s total portfolio to 41GW, up from around 25GW in 2020. To achieve its target of adding 30GW of renewable energy during 14th Five-year plan (“FYP”), the company will focus on mega-based projects. We expect the company’s total power generation capacity to climb 13-15% in FY24/FY25.
During 9MFY24, average tariff of market transactions declined 3.4% for wind power and even more for solar power. Climbing curtailment rate is also another issue to be faced. However, there are three positive factors ahead for the stock and the industry:
- Government is trying to increase market liquidity of carbon markets (both compliance and voluntary markets) by extending the scope to more industries. Revenue from carbon trading, though the amount was still small currently, can partly offset downward pressure on tariff.
- Grid companies are increasing investment in the power network. In particular, the ultra-high voltage line from Ningxia to Hunan, which is the first one connecting the mega-based project in the desert to other cities, will be completed in 2025. This will significantly increase the inter-provincial transmission, which usually has higher tariff; thus downward pressure on tariff can be alleviated.
- Government has recent released a guiding opinion to step up adoption of renewable energy. It is a clear sign that high installation level of renewable power is required. And we expect government to release more policies to address the main issues, including declining tariff and climbing curtailment rate, which will help re-rate the stock. More asset injections from parent will also be a share price catalyst.
We have fine-tuned our earnings forecasts. We expect growth of core profit (stripping out asset impairments) to rebound from -14% in FY24 to +5% in FY25, on the back of increase in generation capacity and reduction in operating expenses after disposal of coal-fired units. Given the improvement in market sentiment and potential catalysts from asset injections and government policies, we have raised our target PE for H-share from 6.5x to 8x (which is -0.5SD from historical average) to give a new TP of HKD7.8; upgrade to BUY. We raised our target PE for A-share from 17x to 20x (which is -1SD) to give a new TP of Rmb19.0; maintain HOLD.
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Related Stories
- China Longyuan Power - 1HFY24 results below expectations from lower-than-expected wind and solar project tariffs30 Aug 2024
- China Longyuan Power - Pressure on tariff and curtailment rate in 1QFY24 higher than expected29 Apr 2024
- China Longyuan Power - Project upgrade for long term earnings growth despite short term impairment losses02 Apr 2024
Related Stories
- China Longyuan Power - 1HFY24 results below expectations from lower-than-expected wind and solar project tariffs30 Aug 2024
- China Longyuan Power - Pressure on tariff and curtailment rate in 1QFY24 higher than expected29 Apr 2024
- China Longyuan Power - Project upgrade for long term earnings growth despite short term impairment losses02 Apr 2024