06 July 2007 Flash Comment

Transcription

1 06 July 2007 Flash Comment CR Power (0836.HK) Acquisition of Jinzhou Power Plant Expected Return Rating : Reduce Price (05/07/07) : HK$19.50 Target Price : HK$16.66 Expected Capital Gain : -14.6% Expected Dividend Yield : 1.3% Expected Total Return : -13.3% Key Data Stock Code : 0836.HK 12-month High/Low ($) : 20.40/5.82 Hang Seng Index : Issued Shares (m) : 3,852 Market Cap (HK$m) : 75,109 Average Daily Turnover (K) : 4,901 Major shareholders : CRH (65.6%) Rel. Performance - 1 month (%) - 3 months (%) - 12 months (%) : : : Chart Investment Highlights Acquisition of Jinzhou Power Plant CR Power (CRP) announced that the company has finalized the acquisition of Eastern (Jinzhou) Investment Co., Ltd. (Eastern Jinzhou) for a total consideration of Rmb1,968 mn (equivalent to approximately HK$2,022 mn). The sole asset held by Eastern Jinzhou is 55% equity interest in Jinzhou Power Plant, which is principally engaged in the operation of power generation in Liaoning Province, PRC. The remaining 45% stake is held by Liaoning Power, a 100% owned subsidiary of State Grid. Under 920 Project, Eastern Jinzhou will acquire the 45% interest from Liaoning Power and therefore Jinzhou Power Plant will become a sole owned subsidiary by Eastern Jinzhou. Payment Method Payment method Description Value Cash N.A. Rmb521.5 mn Shares mn shares@hk$17.11 HK$912.9 mn (Rmb887.8 mn) Cash Holdback amount used for the Rmb558 mn acquisition of 45% interest in Jinzhou Power Plant Total Rmb1,968 mn Source: the Company Information on Jinzhou Power Plant If we assumed the utilization hours were 5,500 hours in 2006, the power generation would be approximately 6,600GWh and the net realized tariff (tax exclusive) would be Rmb310/MW. Backgrounds of the Power Plant Features Description Type Coal-fired Capacity (generating units) 1,200MW (6 x 200MW) Expansion plan Potential to construct 4 x 600MW generating units Power supply Liaoning Province Source: the Company Jacky Choi (852) jacky.choi@cash.com.hk Financial Information of Eastern Jinzhou, Before 45% Interest Acquisition Year-end Dec 2005A 2006A YoY % Change (Rmb mn) (Rmb mn) Income Statement Turnover 1,460 2, EBT (299) 195 N.A. EAT (165) 107 N.A. Balance Sheet Owner s equity N.A N.A. Minority interest N.A N.A. Total equity N.A N.A. Source: the Company

2 Information on Power market in Liaoning Province Backgrounds of the Power Market in Liaoning Province Items Description Benchmark tariff (tax inclusive) Rmb347.1/MW (without desulphurization) Rmb356.7/MW (with desulphurization) Power production growth rate (for Liaoning Province: -4% the first five months of 2007) National average: +14% Source: National Development and Reform Commission, National Bureau of Statistics The growing momentum of the power market in Liaoning Province is not very strong. For the first five months of 2007, the growth rate was 4% (vs. +14% for the national average). It will bring a greater operating pressure to Jinzhou Power Plant. Is this acquisition reasonable? 1. PER valuation CRP pays 13x FY06A net profit to acquire 55% stake, while it is going to pay 6x FY06A PER to acquire the remaining 45% interest from Liaoning Power. In short, the FY06A PER of this acquisition (100% stake) is 10x. We think that the acquisition valuation is reasonable, but we also note that the net margin, on a 100% owned basis, is quite low at 9.5% (vs. CRP: 24% in FY06). Looking ahead, after taking the coal cost hike (-ve factor), the delay in tariff increment (-ve factor) and the more sophisticated management imposed by CRP management (+ve factor) into consideration, we believe that the profit contribution from this power plant will be flat at around Rmb200 mn in the future, unless there are any significant re-structuring processes, such as building additional generating units. 2. Unit cost valuation Based on the total consideration of Rmb1,968 mn, the unit acquisition price is Rmb1,640/kW, lower than the unit construction cost of Rmb3,500 4,000/KW for a new power plant. However, after considering the fact that the power plant has been in production for more than 20 years, the acquisition price is not particularly attractive. 3. Other non-financial benefits As the NDRC has restricted its regulations to approve new power plant projects, mainland IPPs will close down small plants in order to gain an approval for building a new and efficient power plant with large installed capacity. It would not be surprising if CRP were to install larger generating units and crack down a small one in the plant in the future. Investment opinion: With limited information available, we assume that the net profit for Jinzhou Power Plant will be approximately Rmb200 mn in FY07F & 08F and thus to enhance CRP s corresponding net profit by 3% & 5% to HK$3,294 mn & HK$4,218 mn, respectively. CRP s valuation is quite demanding, trading 18.7x FY08F PER, representing 20% premium to its listed peers. Our DCF based target price rises from HK$14.44 to HK$16.66, translating to 19.8x FY07F PER or 16.0x FY08F PER. Maintain Reduce. Earnings Estimates Yr-end Dec 2005A 2006A 2007F 2008F Reported Net Profit (HK$ mn) 2,858 2,365 3,294 4,218 Recurring Net Profit (HK$ mn) 1,747 2,312 3,294 4,218 Reported Diluted EPS (HK$) Change (%) Recurring Diluted EPS (HK$) Change (%) Reported PER (x) Adjusted PER (x) DPS (HK$) Yield (%) CR Power (0836.HK)

3 Power Production (Liaoning Province) Power Production (Liaoning Province) YoY % Change GWh 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, % 25% 20% 15% 10% 5% 0% -5% -10% -15% Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 YoY % Change Feb-07 Mar-07 Apr-07 May-07 Source: National Bureau of Statistics YoY % Change Power Production Power Production (National Average) Power Production (Liaoning) 50% 40% YoY % Change 30% 20% 10% 0% -10% -20% Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Source: National Bureau of Statistics CASH s Earnings Estimates Vs. Market Consensus Yr-end Dec CASH s Estimates Market Consensus Variance (%) FY07F 3,294 3, FY08F 4,218 3, Source: Celestial Securities estimates, IBES, Bloomberg CR Power (0836.HK) 3

4 Key Financial Summary Year-end Dec 2005A 2006A 2007F 2008F (HK$ mn) (HK$ mn) (HK$ mn) (HK$ mn) Consolidated Income Statement Net Revenue 5,927 9,740 15,621 21,793 Fuel cost (3,231) (5,133) (8,323) (11,797) Profit after Fuel Cost 2,696 4,608 7,298 9,996 Repairs and maintenance (111) (179) (290) (403) Personnel costs (309) (456) (703) (1,000) Others (392) (604) (1,001) (1,374) EBITDA 1,885 3,369 5,305 7,220 D&A (588) (986) (1,578) (2,378) EBIT 1,297 2,383 3,727 4,842 Interest income Interest expenses (580) (779) (1,546) (2,223) Others Net Finance Costs (336) (371) (848) (1,306) Share of results of associates/jointly controlled entity 1, ,015 1,526 Others 1, EBT 3,082 2,745 3,894 5,062 Taxation (11) (11) (24) (29) EAT 3,071 2,734 3,870 5,032 Minority interests (213) (369) (576) (815) Reported Net Profit 2,858 2,365 3,294 4,218 Consolidated Balance Sheet PP&E 17,561 27,341 31,225 32,447 Other fixed asset 4,439 5,115 6,154 6,798 Inventories ,064 A/R 1,579 2,317 4,015 5,345 Other current assets Cash 4,411 2,747 3,324 3,890 Total Assets 28,456 38,038 45,613 49,601 LT loans 9,062 12,597 15,411 18,512 Other LT liabilities A/P 3,452 4,098 4,615 5,015 ST loans 1,983 3,994 6,121 2,451 Other current liabilities Total Liabilities 14,542 20,904 26,277 26,150 Net Assets 13,915 17,135 19,337 23,451 Share capital 3,810 3,831 3,859 3,873 Reserves 9,283 11,454 12,754 15,890 Total Capital and Reserves 13,093 15,285 16,613 19,763 Minority interests 822 1,850 2,547 3,145 Total Equity 13,915 17,135 19,160 22,908 Consolidated Cash Flow Statement EBT 3,082 2,745 3,894 5,062 D&A ,578 2,378 Share of results of associates/jointly controlled entity (1,050) (687) (1,015) (1,526) Changes in working capital (558) (830) (694) (762) Others (1,134) 14 (54) (74) Operating CF 927 2,229 3,708 5,078 CAPX (3,909) (4,992) (6,878) (7,815) Others 2,950 (1) (56) (104) Investing CF (960) (4,994) (6,934) (7,920) Net borrowings 1,733 1,688 4,342 3,952 Equity financing Others (609) (708) (659) (683) Financing CF 1,130 1,040 3,716 3,315 Net Changes in Cash 1,097 (1,725) Beginning Cash 3,247 4,411 2,747 3,324 FX Adjustments Ending Cash 4,411 2,747 3,324 3,890 Source: the Company, Celestial Securities estimates 4 CR Power (0836.HK)

5 Key Ratios Year-end Dec 2005A 2006A 2007F 2008F Current ratio (%) 118% 67% 76% 136% Quick ratio (%) 110% 61% 68% 121% Total debt to total equity (%) 105% 122% 137% 114% EBIT interest coverage (x) EBITDA margin (%) 31.8% 34.6% 34.0% 33.1% EBIT margin (%) 21.9% 24.5% 23.9% 22.2% Net margin (%) 48.2% 24.3% 21.1% 19.4% ROAE (%) 24.6% 16.7% 20.7% 23.2% ROAA (%) 11.5% 7.1% 7.9% 8.9% Source: the Company, Celestial Securities estimates Historical Weekly PER (x) Pe Ratio Mean +1SD -1SD Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Source: Bloomberg CR Power (0836.HK) 5

6 Our Rating System Stock Buy Accumulate Hold Reduce Sell Expected to outperform the benchmark index by >15% over the next six months Expected to outperform the benchmark index by 5 15 % over the next six moths Expected to outperform or underperform the benchmark index by <5% over the six months Expected to underperform the benchmark index by 5 15% over the next six months Expected to underperform the benchmark index by >15% over the next six months Industry Outperform Fundamentals/valuations of most stocks in the sector are expected to be improving over the next six months. Marketperform Fundamentals/valuations of most stocks in the sector are expected to be steady, neither improving nor deteriorating, over the next six months. Underperform Fundamentals/valuations of most stocks in the sector are expected to be deteriorating over the next six months. Selective Fundamentals/valuations of the stocks in the sector are expected to be diverging over the next six months. Head Office: 21/F, Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel: (852) Fax: (852) The above information is provided and distributed by Celestial Securities Limited ( CSL ). CSL is a licensed corporation under the Securities and Futures Ordinance. The document is for information purpose only. Neither the information nor opinion expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement, recommendation or representation of any kind or form whatsoever. While the information contained herein has been obtained from sources believed to be reliable, CSL or its affiliates ( CASH ) do not represent that it is accurate or complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the accuracy and completeness of the contents and information herein contained. The contents and information in this document will be subject to change without further notice. Trade in securities covered by this report may be made only in those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be reproduced or furnished to any person other than the addressee. 6 CR Power (0836.HK)