China Renewable Energy Investment Ltd (987_HK)

Transcription

1 Wednesday, March 21, Target Price HK$ 0.50 Current Price HK$ 0.23 Upside Potential 117% Market Cap. Shares Outstanding HK$ 525 mn $ mn 2,364.7 mn Free Float (FF %) / 27.3% 52 Week Range (HK$) 0.29 / 0.20 Avg. Daily Value HANG SENG Index Level 31,414 Insider Holding % 72.7% HK$ 0.15 mn EV/EBITDA 4.8x (FY12/2018E) P/B 0.31x Risk: Above Average Analyst: Ajeya Patil ajeya@evaluateresearch.com Client Servicing: Pooja Burgul pooja@evaluateresearch.com China Renewable Energy Investment Ltd (987_HK) Earnings Update Report Utilities: Renewable Energy FY2017 [ended December] Earnings Update Strong Results; EPS up 52% China Renewable Energy [CRE] reported strong results for the second half and year ended December 31, 2017 which were in-line with our estimates. For the second half of FY2017, EPS came in at HK1.08 cents vs. HK0.71 cents in 2H2016, an increase of about 52% YoY while revenue increased by 3.4% to HK$64.7 mn from HK$62.6 mn in 2H2016. The higher EPS growth came on the back of a 48.3% increase in income from associates which came in at HK$34.0 mn in 2H2017 vs. HK$22.9 mn in the corresponding period last year. After a slow first half, wind resources at the company s associate windfarms improved substantially during the second half resulting in higher income from associates. For the full year FY2017, revenue was flat at HK$131.3 mn [HK$131.0 mn in FY2016], while EPS declined slightly to HK2.54 cents from HK2.59 cents in FY2016, mainly due to lower associate income during the first half of the year. Attributable EBITDA for the year was HK$283 mn. 74 MW Henan Windfarm to Begin Operations in 2H2018 For the year, the company dispatched a total of 1,325.2 GWh of electricity, similar to the FY2016 level of 1,345.5 GWh. The average utilization hours for the year were 2,010 hours, 62 hours higher than the national average. The company s continued outperformance as compared to the national average is a strong positive indicator of its selective investment approach and technical expertise in operating its windfarms. In the fourth quarter, the company began construction of its 74 MW Henan Songxian windfarm. After the earnings, we spoke to management and they mentioned that they expect the Henan windfarm to become operational in the second half of FY2018. Furthermore, the company s pilot 4 MW solar project at Nanxun also became operational in the last quarter of the year, ahead of schedule. Given that its parent HKC Holdings [190_HK] is a property developer, CRE has a strong advantage in the distributed solar space and we expect the company to further explore more opportunities in the space. 1

2 Forecast 38% Revenue Growth for FY2018 During the year, performance of CRE s wholly-owned windfarms improved strongly mainly due to the reduction in curtailment. Utilization at the Mudanjiang and Muling windfarms increased by 27% YoY to 1,215 hours. On the other hand, the associate windfarms recorded lower utilization mainly due to lower than average wind resources especially during the first half of the year. However, wind conditions improved during the second half resulting in higher electricity generation at these farms. For FY2018, we forecast revenue to grow at 37.6% to HK$180.8 mn and EPS to grow at 18.6% to HK3.02 cents, driven mainly by the upcoming Henan Songxian windfarm which will become operational at the start of the second half of the year. For the year, we forecast revenue contribution of approximately HK$45 mn from the Henan windfarm. Maintain PT; 117% upside The stock continues to trade at attractive multiples of 4.8x FY2018E Attributable EV/EBITDA [please see the calculation further in the report] and 0.31x P/B. While the stock price has been flat since we initiated coverage last year, we believe that the upcoming completion of the Henan Songxian windfarm by the end of the first half of FY2018 will be a major catalyst for the stock price. We maintain our 12-month price target of HK$0.50 per share on the stock, which represents an upside of about 117% over the current stock price. Our price target is based on DCF and EV/EBITDA methodologies. Our DCF model, which assumes a WACC of 10.7% and a terminal growth rate of 2.5%, gives a price of HK$0.55 per share. Applying a 7x multiple to our FY2018 total attributable EBITDA estimate of HK$354.2 mn gives a price of HK$0.52 per share. On a P/B basis, our price target implies a 2018E P/B multiple of 0.77x. Financial Update The company distributed dividends of HK0.70 cents during the year, indicating a yield of approximately 3% on the current stock price. The company continues to have a conservative balance sheet with net debt to equity ratio at just 21%. On 19 May 2017, the Company issued mn warrants [Warrant Code: 1677] on the basis of one bonus warrant for every 5 existing shares of the Company held by the Shareholders. Each Bonus Warrant entitles its holder to subscribe for one new ordinary share of the company at a subscription price of HK$0.23 at any time during 19 May 2017 to 18 May If all the warrants are converted that will result in 20% increase in the number of shares outstanding. Till now, negligible numbers of these warrants have been converted. 2

3 Positive Sector Tailwinds The Chinese government continues to emphasize the use of renewable sources of energy. In FY2017, total wind power output in the country increased by 26.3% YoY, accounting for 4.8% of the country s total power generation output. The National Energy Administration [NEA] announced goals to further reduce wind and solar power curtailment from 20% in 2016 to less than 5% by The results can already be seen as both wind power and solar power curtailment [energy wastage] decreased from around 17% and 10% in FY2016 to around 12% and 6%, respectively in FY2017. The government is also constructing ultra-high voltage [UHV] transmission lines to reduce power curtailment especially in the Northern provinces of the country. Given these positive changes, we remain optimistic on the Chinese renewable energy sector. 3

4 Henan Windfarm (in mn HK$) CAPX/MW 9.15 Total CAPX (in 2017 and 2018) Assumed Debt Capacity in MW Utilization hours Capacity factor 25% 26% 26% Total Annual Power Generated in kwh 66,600, ,800, ,720, ,200,000 Tariff/KWh in HK$ Income Statement (in mn HK$) Total Annual Revenue Depreciation Expense Other Expenses Total Gross Profit Gross Profit Margin 47.0% 60.2% 62.5% 62.7% Administrative Expenses Total Operating Profit Interest 6.2% PBT Tax Rate 0% 0% 0% 12.5% Income Tax Expense PAT Net income Margin 7.4% 32.6% 35.7% 31.6% Per MW calculations (in mn HK$) Revenue Net income

5 EV/EBITDA Calculation EV Calculations (in mn HK$) FY2016 FY2017E FY2018E FY2019E FY2020E FY2021E Market value of CRE's Equity Add: Gross CRE Add: Attributable net debt in Associates Add: Minority interest Less: Cash Total attributable Enterprise Value EBITDA Calculations (in mn HK$ unless otherwise stated) FY2016 FY2017E FY2018E FY2019E FY2020E FY2021E Attributable Net Debt in associates (mn RMB) CRE's total initial equity investment (mn RMB) Total initial debt attributable to CRE (mn RMB) Gross PPE attributable to CRE (mn RMB) Gross PPE attributable to CRE (mn HKD) Assumed depreciation rate - 3.7% 5.0% 5.0% 5.0% 5.0% Depreciation attributable to CRE Assumed interest rate - 6.2% 6.2% 6.2% 6.2% 6.2% Interest expense attributable to CRE Associate income on CRE's IS Assumed tax rate 10% 10% 10% 10% 10% 10% PBT attributable to CRE Add: Attributable depr and interest expense of associates Total associate EBITDA attributable to CRE CRE's reported EBITDA Total EBITDA attributable to CRE EV/EBITDA

6 5-year Price Chart 6

7 Income Statement ( millions HK$ ) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2019E FY 2020E FY 2021E CAGR ( ) Revenue % y/y 14.3% -14.4% 36.6% -1.4% 0.3% 37.6% 37.6% 19.9% 6.6% Cost of Revenue Gross Profit % Gross margin (%) 37.1% 24.7% 33.3% 33.5% 34.8% 39.3% 47.8% 50.5% 51.1% Other Operating Revenue as a % of sales 3.2% -1.1% 0.0% 0.1% 5.0% 0.0% 0.0% 0.0% 0.0% Selling, General & Admin Expense as a % of sales 25.8% 22.0% 17.8% 17.4% 19.3% 14.5% 11.6% 10.6% 10.2% Other Operating expenses as a % of sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Operating Income % y/y % -90.8% % 2.8% 26.4% 66.9% 100.8% 32.1% 9.4% Operating margin (%) 14.4% 1.6% 15.6% 16.2% 20.5% 24.8% 36.2% 39.9% 40.9% Interest Expense Interest income Equity in (losses)income of affiliates % Other recurring (expenses)/income Amortization of intangibles Goodwill impairment Other non recurring (expenses) income Pretax Income (reported) % y/y % -56.2% 202.5% 44.3% 8.2% 11.1% 50.1% 24.2% 10.2% Pretax Income (adjusted) % y/y 98.9% -53.4% 203.4% 44.3% -0.7% 21.1% 50.1% 24.2% 10.2% - Income Tax Expense Effective tax rate (%) 18.8% 12.9% 12.6% 10.5% 13.3% 7.6% 5.8% 5.2% 8.4% - Minority Interests Income Before XO Items % y/y % -48.7% 179.7% 51.0% -1.3% 18.6% 53.4% 25.2% 6.5% - Extraordinary Loss Net of Tax Net Income (reported) % y/y % -48.7% 179.7% 51.0% -1.3% 18.6% 53.4% 25.2% 6.5% Discontinued Operations Net Income (adjusted) % y/y -6.6% -44.6% 180.6% 51.0% -10.8% 31.2% 53.4% 25.2% 6.5% Basic EPS in HK cents (reported) Basic EPS in HK cents (adjusted) Basic Weighted Avg Shares 2,356 2,356 2,356 2,356 2,359 2,359 2,359 2,359 2,359 Diluted EPS in HK cents (reported) % y/y % -49.8% 192.4% 66.6% -1.9% 18.6% 53.4% 25.2% 6.5% Diluted EPS in HK cents (adjusted) % y/y -17.1% -45.9% 193.3% 66.6% -11.3% 31.2% 53.4% 25.2% 6.5% Diluted Weighted Avg Shares (mn) 2,656 2,717 2,599 2,356 2,371 2,371 2,371 2,371 2,371 7

8 Reference Items FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2019E FY 2020E FY 2021E EBITDA Total Attributable EBITDA Dividends per Share Dividend payout ratio 0% 0% 0% 7.71% 30.44% 33.14% 28.09% 27.63% 30.79% Dep & Amor as a % of sales 54.9% 63.4% 58.8% 63.0% 53.7% 52.8% 45.6% 43.0% 42.8% as a % of gross PPE 5.7% 4.3% 5.8% 5.7% 5.0% 5.0% 5.0% 5.2% 5.3% Balance Sheet (millions HK$) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2021E FY 2020E FY 2019E Assets + Cash & Near Cash Items Short-Term Investments Accounts & Notes Receivable Inventories Other Current Assets Total Current Assets Interest in Associates 1, Gross Fixed Assets 1, , , , , , , , , Accumulated Depreciation Net Fixed Assets , , , , , , Other Long-Term Assets Goodwill & other Intangible Assets Total Long-Term Assets 2, , , , , , , , ,695.1 Total Assets 2, , , , , , , , ,128.5 Liabilities & Shareholders' Equity + Accounts Payable Short-Term Borrowings Other Short-Term Liabilities Total Current Liabilities Long-Term Borrowings Other Long-Term Liabilities Total Liabilities , , , Total Preferred Equity Share Capital & APIC Retained Earnings & Other Equity 1, , , , , , , , ,049.1 Total Shareholders' Equity 1, , , , , , , , , Minority Interest Total Liabilities & Equity 2, , , , , , , , ,

9 Cash Flow (millions HK$) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2019E FY 2020E FY 2021E + Net Income Depreciation & Amortization Other Non-Cash Adjustments Changes in Non-Cash Capital Cash From Operating Activities Disposal of Fixed Assets Capital Expenditures Increase in Investments Decrease in Investments Other Investing Activities Cash From Investing Activities Dividends Paid Change in Short-Term Borrowings Increase in Long-Term Borrowing Decrease in Long-term Borrowing Increase in Capital Stocks Decrease in Capital Stocks Other Financing Activities Cash from Financing Activities Net Changes in Cash Effect of foreign exchange rate changes Opening cash Closing cash Ratio Analysis FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2019E FY 2020E FY 2021E Growth Ratios % Revenue 14.3% -14.4% 36.6% -1.4% 0.3% 37.6% 37.6% 19.9% 6.6% Total attributable EBITDA -5.4% -7.1% 27.6% 19.4% 10.9% 4.6% Operating Income % -90.8% % 2.8% 26.4% 66.9% 100.8% 32.1% 9.4% Net income reported % -48.7% 179.7% 51.0% -1.3% 18.6% 53.4% 25.2% 6.5% Net income adjusted -6.6% -44.6% 180.6% 51.0% -10.8% 31.2% 53.4% 25.2% 6.5% Diluted EPS reported % -49.8% 192.4% 66.6% -1.9% 18.6% 53.4% 25.2% 6.5% Diluted EPS adjusted -17.1% -45.9% 193.3% 66.6% -11.3% 31.2% 53.4% 25.2% 6.5% 9

10 Per Share Data (HK$) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2019E FY 2020E FY 2021E Basic EPS (adjusted) Diluted EPS (adjusted) Dividend per share (DPS) Book Value per share (BVPS) Margins (%) Gross Margin 37.1% 24.7% 33.3% 33.5% 34.8% 39.3% 47.8% 50.5% 51.1% Operating Margin 14.4% 1.6% 15.6% 16.2% 20.5% 24.8% 36.2% 39.9% 40.9% Pre-Tax Margin (adjusted) 28.0% 15.2% 33.9% 49.6% 49.1% 43.2% 47.1% 48.8% 50.5% Net Income Margin (adjusted) 22.9% 14.8% 30.4% 46.6% 41.5% 39.6% 44.1% 46.0% 46.0% Dupont ROE (%) 1.5% 0.8% 2.5% 3.9% 3.1% 4.0% 5.9% 7.0% 7.1% Margin (%) 22.9% 14.8% 30.4% 46.6% 41.5% 39.6% 44.1% 46.0% 46.0% Turnover (x) Leverage (x) Return on Assets 1.0% 0.6% 1.8% 2.9% 2.2% 2.6% 3.6% 4.4% 4.7% Return on Capital Employed 3.6% 2.2% 4.2% 5.1% 4.9% 4.8% 6.1% 7.0% 7.5% Return on Invested Capital 3.0% 1.9% 3.7% 4.5% 4.2% 4.4% 5.7% 6.5% 6.8% FCF Calculation Op. cash capex FCF (HK$ million) FCF margin (%) 27.1% -55.8% 68.9% 30.5% 1.6% % -85.9% 12.8% 43.3% FCF per share Price/FCF per share Net Cash calculation Cash + short term investments Less: long term + Short term debt , , Net Cash

11 Valuation ratio's FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2019E FY 2020E FY 2021E P/B P/E P/S EV/sales EV/EBITDA EV/EBIT EV/FCF Dividend Yield (%) 0.00% 0.00% 0.00% 0.61% 2.12% 3.03% 3.94% 4.85% 5.76% Div payout on FCF 0.0% 0.0% 0.0% 11.8% 782.5% -4.2% -14.4% 99.7% 32.7% Working Capital Ratios Receivable days Inventory days payables days Current ratio Quick ratio Working capital Cash conversion cycle Leverage Ratios Debt / equity 35% 39% 35% 30% 25% 48% 54% 51% 44% Net cash (debt) / equity -20% -23% -23% -16% -8% -31% -42% -40% -33% Net cash (debt) / mkt cap -53% -62% -60% -32% -26% -103% -146% -144% -125% Net cash (debt) / capital -15% -16% -17% -12% -6% -21% -28% -26% -23% Enterprise Value Calculation FY 12/2015 FY 12/2016 current Market Cap Minority Interest Total Debt (ST & LT Debt) Attributable Net debt in associates Cash & Equivalents Enterprise Value

12 DCF model E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E (in HK$ million) EBIT % growth 0% -70% -207% -91% 1267% 3% 26% 67% 101% 32% 9% 8% 7% 5% 4% 4% 287% 14% 19% 13% 13% 11% 13% 8% 6% 5% 8% 8% 8% 8% 8% 8% EBIAT % growth 0% -114% -201% -90% 1273% 5% 22% 78% 105% 33% 6% 8% 7% 5% 4% 4% + D&A Capital expenditures Change in net WC Free Cash Flow to Firm FCY y/y growth -134% -168% -221% -294% -51% -86% -8566% -62% -118% 260% 1% 3% 3% 3% 2% Value per Share Cost of capital WACC 10.7% Terminal Growth 8.7% 9.7% 10.7% 11.7% 12.7% PV of Free Cash Flow % PV of Terminal Value % Add: Net Cash % Less: Minority Interest % Add: Value of associates 1, % Total Equity Value 1,305 Shares outstanding 2, DCF value

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