1、Asia Pacific Equity Research 05 August 2010 China Power International Initiation Neutral 2380.HK, 2380 HK Hydro asset offers long-term value; Concern on thermal asset Price: HK$1.70 Price Target: HK$1.86 China China IPPs Chapman DengAC (852) 2800-8577 Boris Kan (852) 2800-8573 J.P. Morgan Securiti
2、es (Asia Pacific) Limited 1.42.23.0HK$Aug-09 Nov-09 Feb-10 May-10 Aug-10Price Performance2380.HK share price (HK$HSI (rebased)YTD 1m 3m 12mAbs -12.3% 0.0% -4.5% -31.9%Rel -8.7% -4.5% -4.1% -35.8%China Power International (Reuters: 2380.HK, Bloomberg: 2380 HK) Rmb in mn, year-end Dec FY08A FY09A FY10
3、E FY11E FY12ERevenue (Rmb mn) 9,632 10,937 14,793 14,834 17,097Net Profit (Rmb mn) -689.3 519.0 428.5 628.2 751.7EPS (Rmb) (0.19) 0.12 0.08 0.12 0.15DPS (Rmb) 0.00 0.05 0.04 0.05 0.07Revenue growth (%) 63.1% 13.5% 35.3% 0.3% 15.3%EPS growth (%) -345.2%-162.3%-29.6% 46.6% 19.6%ROCE -0.3%3.1%4.3%4.8%5
4、.3%ROE 7.2%5.1%3.4%4.9%5.7%P/E (x) -7.8 12.4 17.7 12.1 10.1P/BV (x) 0.7 0.5 0.6 0.6 0.6EV/EBITDA (x) 23.2 19.1 11.1 11.2 10.3Dividend Yield 0.0% 3.6% 2.5% 3.7% 4.4%Shares O/S (mn) 5,107Market cap (Rmb mn) 7,575Market cap ($ mn) 1,118Price (HK$) 1.70Date Of Price 04 Aug 10Free float (%) 31.0%3mth Avg
5、 daily volume 4,386,919.003M - Average daily Value (HK$ mn) 7.39Average 3m Daily Turnover ($ mn) 1.09HSI 21,550Exchange Rate 7.76Fiscal Year End DecSource: Company data, Bloomberg, J.P. Morgan estimates. See page 14 for analyst certification and important disclosures, including non-US analyst disclo
6、sures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in mak
7、ing their investment decision. Initiate with Neutral, Jun-11 PT of HK$1.86: CPI is uniquely positioned as a hydro generator with close to 30% of its asset portfolio in hydro power after the acquisition of Wuling Hydro in 2009. We are positive on CPIs hydro asset for its highly cash-generative nature
8、, immunity to fuel cost fluctuation and dispatching priority. Negatives: Constrained by the ability to source coal from other sources, mine-mouth power plants have faced higher pressure in fuel cost control over the past two years and we believe this would continue to drag down CPIs profitability in
9、 the medium term. In addition, CPIs growth profile is less exciting as it will not have new capacity commencement until late 2010 or 2011. Also, we highlight that capacity growth in hydro generation would be slower than that in thermal power, constrained by limited exploitable hydro resources. Coal
10、strategy: According to the company management CPI is in negotiation to acquire a minority stake in a Shanxi coalmine to secure coal supply to its Shanxi power plants. We believe a clear coalmine stake acquisition could support share price; downside risk: mine-mouth coal price could be resilient. 2 A
11、sia Pacific Equity Research 05 August 2010Chapman Deng (852) 2800-8577 Company Description P tariff hike subject to regulatory risk. Upside risks: hydro power generation could exceed management guidance, coalmine stake acquisition could support share price. CPI CRP Datang Huadian Huaneng-H 2010E 20
12、11E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E Revenues 14,793 14,834 45,134 55,390 60,698 69,556 44,903 50,763 97,466 106,764 Net income (reported) 429 628 5,624 7,047 1,380 2,382 404 790 3,703 4,794 EPS (reported) 0.08 0.12 1.20 1.50 0.11 0.19 0.06 0.12 0.28 0.34 Net profit growth -17% 47% 6%
13、 25% -14% 73% -65% 96% -25% 29% EPS growth -17% 47% 6% 25% -16% 69% -65% 96% -31% 20%PER 17.3x 11.2x 14.4x 11.5x 24.9x 14.1x 27.1x 13.2x 13.8x 10.9x PBR 0.6x 0.5x 2.0x 1.8x 1.1x 1.1x 0.7x 0.6x 0.9x 0.9x Dividend Yield 2.6% 3.9% 3.7% 3.9% 2.0% 3.6% 0.8% 2.3% 3.5% 4.7% Net debt to equity 284.9% 301.5%
14、 157.9% 157.8% 507.0% 548.3% 515.6% 597.2% 226.1% 245.5% Source: Company reports and J.P. Morgan estimates. 3 Asia Pacific Equity Research 05 August 2010Chapman Deng (852) 2800-8577 Investment thesis CPI stands out as the only listed IPP with significant exposure to hydro power generation. However,
15、 it has been underperforming peers YTD due to investors concern about the drop in its hydro power generation caused by the drought in China in the early part of 2010. We believe this concern could be overdone and management confirmed that its hydro generation has picked up after the recent rainfall
16、and reiterated its full-year hydro generation target of 11.5 billion kWh. That said, we are concerned about its thermal generation as CPI has high exposure (68% approximately) to the mine-mouth power plants in Shanxi and Henan provinces. Positive Driver: Hydro generation: A long-term stable and cash
17、 generative asset; watch out for near-term headwinds CPI acquired a 63% stake in Wuling Hydro Power back in 2009, and after the transaction, CPI controls 3,324MW hydro capacity, which accounts for 29% of its total capacity, and is the only listed IPP with significant exposure to hydro power generati
18、on. Compared to coal-fired power, the competitiveness of hydro power includes immunity to fuel cost risk, dispatching priority, and strong operation cash flow. However, we are also concerned about the uncertainty in hydrology and limited exploitable hydro resources, which imply limited growth potent
19、ial in future. Figure 1: CPI: Wuling project historical hydro utilization hours 30003500400045001999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009HoursAverage utilization hoursSource: Company reports. Although the drought in the early part of 2010 had caused a drastic drop in Wulings generation
20、(c. 50% Y/Y drop), the rainfall in recent months has changed the picture. Management mentioned that Wulings generation in 2Q10 has picked up significantly due to the rainfall in recent months, and reiterated its generation target of 11.5 billion kWh for FY10, slightly up from 11bn kWh in last year.
21、Based on historical numbers, although water flow could fluctuate from year to year, over a long period, we believe hydro power should maintain relatively stable utilization rate. 4 Asia Pacific Equity Research 05 August 2010Chapman Deng (852) 2800-8577 Figure 2: CPIBulk of operational cost was in n
22、on-cash cost (FY08) Financial ex penses48%Labor Cost13%Depreciation so is the case with Wulings projects, which had a net gearing of 394% as of end-08, but we believe its gearing will gradually drop and its profitability will improve. As the gearing of the company remains high, we believe management
23、 is unlikely to increase its payout in the near-term. In addition, financial expense is also a key item for Wuling given its high gearing capital structure. In FY08, financial expense accounted for close to 50% of Wulings major expenses. Therefore in our view, the profitability of Wuling will be hur
24、t by any interest rate hike in China. As per J.P. Morgan China Economist Qian Wangs forecast, we factor in a 27bp interest rate hikes in 4Q2010. In order to secure long-term low cost funding, Wuling had issued a Rmb1 billion 10-year corporate bond back in early 2009 in China at the interest rate of
25、4.6%. 5 Asia Pacific Equity Research 05 August 2010Chapman Deng (852) 2800-8577 Figure 4: CPIThermal vs. hydro net profit breakdown 152349424316302353-2004006008001,0002010 2011 2012(Rmbmn)Thermal Hy droSource: Company reports, J.P. Morgan estimates. Figure 5: CPIThermal vs. hydro capacity breakdow
26、n 8,320 8,32010,1203,324 3,3243,723-5,00010,00015,0002010 2011 2012(MW)Thermal Hy droSource: Company reports, J.P. Morgan estimates. Last but not the least; we believe CPIs hydro portfolio is likely to grow much slower than the thermal portfolio due to the limited exploitable hydro resources in Chin
27、a. In addition, although Wuling will have a 1,200MW pump-storage power station (PSPS), Heimifeng plant is coming on stream in 2010-11, we highlight that this power plant will be leased to the State Grid Comapny and CPI will earn a 5% ROE from leasing fee. This is a minor disappointment as the projec
28、t is the only new capacity for Wuling in last two years and management also mentioned that the profit contribution could be immaterial in the near term. Based on total investment of Rmb3.6 billion, and capital structure of 20% equity plus 80% debt, and ROE guidance of 5%, we estimate that the net pr
29、ofit contribution from Heimifeng is likely to be Rmb36 million per annum, starting from 2012. Although management believes that the asset will bring long-term value for the company, we are concerned by its relatively low project return, which will be a drag on the companys profitability. Negative Dr
30、iver: A victims of mine-mouth power plants We believe that over 50% of CPIs thermal power capacities are mine-mouth power plants, and we are concerned about fuel cost control on mine-mouth power plants due to the need for a sole coal supplier. Management confirmed that its mine-mouth power plants in
31、 Henan and Shanxi have suffered high coal price hikes than that in the QHD spot market. We understand that the CPI group has a large coalmine portfolio; however, management believes that the listco cannot procure coal from the parent in the near-term as bulk of the parents coal assets is located in
32、Inner Mongolia and transportation facilities are not yet ready. According to the company management CPI is under negotiation with China Coal for 30% stake in a coalmine with 20 million ton production per annum in Shanxi province to supply coal to Shentou power plant in Shanxi. However, CPI does not
33、expect any material conclusion in the near-term. We believe until CPI can control relevant coal assets to supply to its mine-mouth power plants, fuel cost control will continue to be a drag on its profitability. 6 Asia Pacific Equity Research 05 August 2010Chapman Deng (852) 2800-8577 Risks to our
34、rating and PT We see following key downside risks to our rating and price target: (1) a spot coal price spike-up: we are concerned that any natural disaster could disrupt railway transportation, thus resulting in coal price spike-up; and (2) tariff hike is subject to regulatory risk: we believe our
35、tariff hike assumption is subject to the risk that inflation concern could last longer than expected. Upside risk: (1) High quality hydro asset injection from parent, (2) tariff adjustment could trigger valuation re-rating for the whole sector. SWOT Analysis Strength: Hydro generation has highly cas
36、h-generative nature, immunity to fuel cost fluctuation and dispatching priority in China Disciplined in capex control Weakness: Heavy exposure to mine-mouth power plants CPI has not made any coalmine investment so far less exciting growth profile Opportunity: CPI is in negotiation with China coal fo
37、r minority stake in a Shanxi coalmine Parent will inject high quality hydro asset into the company Threat: Without a cost pass through mechanism, CPIs profitability is subject to fuel cost price fluctuation risk Capacity growth in its operating region could have downward pressure on CPIs utilization
38、 hoursValuation and share price analysis We believe sum-of-the-parts (SOTP) is an appropriate valuation method for CPI as its two major businesses, hydro and thermal power generation, carry different risk profiles. For evaluating individual businesses, we adopt discounted cash flow (DCF) as the prim
39、ary valuation methodology with different WACC assumptions to reflect different risk profiles. Table 1: CPISOTP valuation SOTP (HK$) Valuation per share (2011e) % Thermal 1.37 74 Hydro 0.49 26 Subtotal 1.86 100 Source: Company reports, J.P. Morgan estimates. Table 2: CPI: WACC Assumption Details Rf -
40、China Equity Risk Premium Beta Cost ofequity Interest rate Tax rate After tax cost of debt Target debt to capital ratio WACC Thermal Generation 2.00% 6.50% 1 8.50% 6% 25% 4.50% 50% 6.5% Hydro Generation 2.00% 6.50% 0.8 7.20% 6% 25% 4.50% 70% 5.3% Source: Company reports and J.P. Morgan estimates. 7
41、Asia Pacific Equity Research 05 August 2010Chapman Deng (852) 2800-8577 Share price performance Based on our forecast, CPI is currently trading at 11x FY2011E forward PER and 0.6x PBR. In particular, its PBR ratio has been below its historical average by more than one standard deviation. We believe
42、 Price-to-book is a good valuation metric for the sector in valuation trough period. In particular, we see valuation support when value fell below history mean minors one standard deviation level in 2008 when the sector profitability was squeezed by rising coal price. Currently the stock is also tra
43、ding at close to history trough valuation, thus we see limited downside risk at current level. Meanwhile, we believe upside risk in share price could be triggered by unexpected tariff adjustment and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly r
44、elated to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Client of the Firm: China Power International is or was in the past 12 months a client of JPMSI. 012345678Price(HK$)Jul07Oct07Jan08Apr08Jul08Oct08Jan09Apr09Jul09Oct09Jan10Apr10J
45、ul10China Power International (2380.HK) Price ChartSource: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgans continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW =
46、 Overweight, N = Neutral, UW = Underweight.Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts
47、 (or the analysts teams) coverage universe. Neutral Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe. Underweight Over the next six to twelve months, we expect this stoc
48、k will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe. J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return
49、 of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage univers
