China Suntien Green Energy [0956.HK] Profit decline largely due to provision; Current valuation of 0.4x PBR already reflected significant impairment Suntien preannounced that its net profit in 2015 would drop 45-60% YoY. While the earnings decline looks substantial, we believe the major factor is an impairment provision for the account receivable. We expect the operating performance to improve in 2016E, given (1) 400MW of new wind power capacity was completed in 2015 and will make contributions this year, (2) grid curtailment rate in Hebei remains low at 8% which offers room for improvement in utilization hours; and (3) gas sales volume is expected to stabilized as we expect more gas tariff cut. We took our earnings estimates down by 30%/30%/24% for 2015E/2016E/2017E to reflect lower utilization hours and gas sales growth assumptions. Our DCF-based TP is revised down to HK$1.20 from HK$1.68. 2015E net profit down 45-60% YoY to RMB134m-184m. Suntien explained that the profit decline was due to (1) significant drop of natural gas sales volume; (2) impairment provision for the relatively large account receivable; and (3) drop in wind power utilization hours. Weak utilization hours largely due to weak wind resources. We estimate the wind power utilization to be ~1,900 hours in 2015E (-5% YoY), largely due to the weak wind speed in Q4 as we understand that the grid curtailment rate in Hebei remains low at ~8%. That said, we estimate the wind power generation still increased ~13% in 2015E given the increased operating capacity. Impairment provision should be the key of profit decline. We expect the natural gas sales volume to have dropped 26% YoY. Besides, we understand that certain customers of Suntien, such as some glass manufacturers, have been delaying their payment for more than a year, which resulted in a need for impairment provision. Maintain BUY as the valuation largely reflected the weakness. The account receivable with past due for six months or above was ~RMB680m as of end-june 2015 (for both wind power and gas). Assuming a worse case scenario that this amount is to be written off totally, the book value will be reduced by 9%. We think the current valuation of 0.4x PBR looks overly bearish. Major risks: (1) Significant impairment; (2) further weakness in gas demand; (3) unexpected decline in wind speed; (4) project delay; (5) policy change. Key financials (RMB m) 2013 2014 2015E 2016E 2017E Revenue 4,661 5,149 4,336 4,020 4,462 Change (YoY) 25.9% 10.5% -15.8% -7.3% 11.0% Other income 31 56 47 44 42 Adjusted EBIT 1,194 1,067 750 1,020 1,157 Change (YoY) 19.4% -10.6% -29.8% 36.0% 13.4% Recurring net profit 479 382 286 327 402 Change (YoY) -3.7% -20.3% -25.1% 14.2% 23.2% Recurring EPS 0.148 0.104 0.077 0.088 0.108 Change (YoY) -3.7% -29.8% -25.8% 14.2% 23.2% PER (x) 5.3 7.7 11.0 9.6 7.8 Dividend yield 5.8% 3.9% 0.8% 1.6% 1.9% PBR (x) 0.4 0.4 0.4 0.4 0.4 EV/EBITDA (x) 6.8 7.1 7.9 6.0 5.2 Net debt/equity 101.8% 89.7% 124.8% 130.7% 135.7% ROE 8.3% 5.7% 3.9% 4.3% 5.1% January 25, 2016 Wind Power & Gas Sector BUY (Unchanged) Close: HK$1.00 (Jan 22, 2016) Target Price: HK$1.20 (+20%) Share Price Performance Market Cap US$477m Shares Outstanding 3,715m Auditor Ernst & Young Free Float 49.5% 52W range HK$0.96-2.43 3M average daily T/O US$0.68m Major Shareholding HECIC (50.5%) Wayne Fung, CFA Analyst (852) 3698-6319 waynefung@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) 3698-6317 cmwong@chinastock.com.hk 1
Oct-10 Jan-11 Apr-11 Aug-11 Nov-11 Feb-12 May-12 Sep-12 Dec-12 Mar-13 Jun-13 Oct-13 Jan-14 Apr-14 Jul-14 Nov-14 Feb-15 May-15 Aug-15 Dec-15 Figure 1: DCF valuation Figure 2: Suntien PER Band (RMB m) Enterprise Value 13,049 Net cash / (net debt) (7,859) Minority interest (1,403) Equity Value 3,788 Fair value (Rmb/shr) 1.02 RMB/HK$ 1.18 TP (HK$/shr) 1.20 HKD 5.0 4.5 4.0 3.5 3.0 DCF Assumptions Risk free rate 3.5% Risk premium 9.7% Beta 1.0 Cost of equity 13.2% After tax cost of debt 5.0% Debt/total capital 60.0% WACC 8.3% Terminal growth rate 1% 2.5 2.0 1.5 1.0 0.5 0.0 23x 19x 15x 11x 7x Sources: Company, Bloomberg, CGIS Research estimates Figure 3: Suntien s utilization hours versus wind speed in Hebei Figure 4: Monthly wind speed in Hebei 40% 30% 20% 10% 0% -10% -20% -30% -40% Hebei average wind speed (Change YoY) Suntien's utilization hours (Change YoY) 6 30% 5 19% 18% 18% 20% 14% 12% 13% 14% 12% 16% 12% 17% 9% 11% 12% 4 10% 7% 7% 5% 6% 6% 4% -1% 0% 2% 3% 4%5% 5% -6% -4% -5% -5% -4%-4% -2% 1% 3% 7% 5% 3% 6% -6% -2% 0% 1% 0% 3-7% -8%-7%-6% -12% -11% -10% -10% 2-16% -16% -15% -16% -16% -20% -24% 1-29% -30% 0 Hebei wind speed (m/s) - LHS Change (YoY) 33% 40% 30% -40% Sources: Bloomberg, CGIS Research 2
Figure 5: Key assumptions change on wind power segment 2015E 2016E 2017E Wind Power Wind power installed capacity (MW) Consolidated New 2,097 2,397 2,597 Old 2,147 2,447 2,647 chg -2.3% -2.0% -1.9% Average New 1,629 1,973 2,243 Old 1,629 2,082 2,367 chg 0.0% -5.3% -5.3% Average utilization hours New 1,900 2,000 2,100 Old 2,120 2,120 2,149 chg -10.4% -5.7% -2.3% Weighted average tariff (Rmb/kwh, incl. VAT) New 0.547 0.543 0.542 Old 0.547 0.543 0.542 chg 0.0% -0.1% -0.1% Sources: CGIS Research estimates Figure 6: Key assumptions change on natural gas segment 2015E 2016E 2017E Natural gas Sales Wholesale Sales volume (m cubic meter) New 797 837 879 Old 797 861 904 chg 0.0% -2.8% -2.8% Retail Sales volume (m cubic meter) New 258 263 277 Old 258 279 293 chg 0.0% -5.6% -5.6% CNG Sales volume (m cubic meter) New 73 80 84 Old 73 80 84 chg 0.0% 0.0% 0.0% Total Sales volume (m cubic meter) New 1,128 1,181 1,240 Old 1,128 1,220 1,281 chg 0.0% -3.2% -3.2% Sources: CGIS Research estimates 3
Figure 7: Key Assumptions (Wind Power Segment) 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Wind power installed capacity (MW) Consolidated 61 234 407 855 1,201 1,346 1,445 1,697 2,097 2,397 2,597 Change YoY - 285.4% 74.1% 110.2% 40.5% 12.1% 7.4% 17.4% 23.6% 14.3% 8.3% Annual addition 173 173 448 346 145 99 252 400 300 200 Average 40 104 279 509 855 1,104 1,266 1,373 1,629 1,973 2,243 Change YoY - 161.4% 168.1% 82.7% 67.9% 29.1% 14.7% 8.4% 18.7% 21.1% 13.7% Consolidated power generation (GWh) Gross 81 221 635 1,202 1,751 2,528 2,927 2,740 3,096 3,945 4,710 Change YoY - 172.2% 186.6% 89.4% 45.7% 44.4% 15.8% -6.4% 13.0% 27.4% 19.4% Net 76 167 555 1,099 1,672 2,443 2,861 2,661 2,926 3,768 4,498 Change YoY - 120.0% 233.0% 98.2% 52.1% 46.1% 17.1% -7.0% 9.9% 28.8% 19.4% Average utilization hours 2,045 2,130 2,276 2,360 2,048 2,290 2,312 1,996 1,900 2,000 2,100 Change YoY - 4.1% 6.9% 3.7% -13.2% 11.8% 1.0% -13.7% -4.8% 5.3% 5.0% Weighted average on-grid tariff (Rmb/kwh, Incl-VAT) 0.587 0.576 0.558 0.549 0.535 0.540 0.543 0.546 0.547 0.543 0.542 Weighted average on-grid tariff (Rmb/kwh, ex-vat) 0.502 0.492 0.477 0.469 0.457 0.462 0.464 0.467 0.468 0.464 0.463 Change YoY - -2.0% -3.0% -1.7% -2.6% 1.1% 0.5% 0.6% 0.2% -0.8% -0.2% (RMB m) Revenue Sales of electricity 38 87 265 513 764 1,128 1,328 1,240 1,368 1,748 2,082 Others 0 0 0 3 1 5 6 6 0 0 0 Total 38 87 265 516 765 1,133 1,333 1,246 1,369 1,748 2,082 COGS (20) (37) (119) (203) (336) (450) (533) (596) (682) (902) (1,060) Gross profit 18 49 146 313 429 683 800 650 687 846 1,022 Operating expenses (8) (21) (25) (60) (73) (134) (118) (116) (99) (136) (162) EBITDA 38 81 281 521 792 1,025 1,182 1,078 1,210 1,513 1,804 Adjusted EBITDA 29 63 232 443 674 959 1,160 1,053 1,188 1,489 1,772 D&A (20) (35) (111) (190) (318) (409) (477) (518) (599) (780) (912) EBIT 18 46 170 331 473 616 705 560 610 733 892 Adjusted EBIT 9 28 121 253 356 549 683 535 588 709 860 Gross margin 46% 57% 55% 61% 56% 60% 60% 52% 50% 48% 49% EBITDA margin 101% 93% 106% 102% 104% 91% 89% 87% 88% 87% 87% Adjusted EBITDA margin 77% 72% 88% 86% 88% 85% 87% 85% 87% 85% 85% EBIT margin 48% 53% 64% 65% 62% 55% 53% 45% 45% 42% 43% Adjusted EBIT margin 25% 32% 46% 49% 47% 49% 51% 43% 43% 41% 41% 4
Figure 8: Key Assumptions (Natural Gas Segment) 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Natural gas Sales Wholesale Sales volume (m cubic meter) 267 380 491 637 740 694 757 839 797 837 879 ASP (Rmb/cubic meter; Ex-VAT) 1.40 1.51 1.53 1.66 1.77 1.78 1.92 2.25 2.36 1.66 1.66 Revenue (Rmb m) 374 575 750 1,057 1,311 1,234 1,457 1,890 1,881 1,389 1,459 Retail Sales volume (m cubic meter) 92 140 193 249 426 492 665 615 258 263 277 ASP (Rmb/cubic meter; Ex-VAT) 1.53 1.82 1.85 2.08 2.17 2.21 2.41 2.66 2.81 2.11 2.11 Revenue (Rmb m) 141 255 357 518 924 1,086 1,605 1,635 726 556 584 CNG Sales volume (m cubic meter) 35 43 46 49 47 60 62 69 73 80 84 ASP (Rmb/cubic meter; Ex-VAT) 1.72 1.75 1.85 2.06 2.30 2.15 2.34 2.80 3.10 2.40 2.40 Revenue (Rmb m) 60 76 85 101 108 129 145 193 227 193 203 Gas sales volume growth rate Wholesale n/a 42% 29% 30% 16% -6% 9% 11% -5% 5% 5% Retail n/a 52% 38% 29% 71% 15% 35% -8% -58% 2% 5% CNG n/a 24% 6% 7% -4% 28% 3% 11% 6% 10% 5% Average n/a 43% 30% 28% 30% 3% 19% 3% -26% 5% 5% Gas revenue growth rate Wholesale n/a 54% 31% 41% 24% -6% 18% 30% 0% -26% 5% Retail n/a 81% 40% 45% 78% 18% 48% 2% -56% -23% 5% CNG n/a 27% 13% 18% 7% 19% 12% 33% 17% -15% 5% Average n/a 58% 32% 40% 40% 5% 31% 16% -24% -25% 5% Total gas sales Volume (m cubic meter) 394 563 730 935 1,213 1,246 1,484 1,523 1,128 1,181 1,240 ASP (Rmb/cubic meter; Ex-VAT) 1.46 1.61 1.63 1.79 1.93 1.97 2.16 2.44 2.51 1.81 1.81 Revenue (Rmb m) 575 906 1,192 1,673 2,343 2,449 3,207 3,718 2,834 2,138 2,245 Construction and connection of natural gas pipelines Revenue (Rmb m) 16 22 26 23 34 73 72 127 79 79 79 Provision of gas transportation services annd others Revenue (Rmb m) 0 4 34 30 28 47 49 58 55 55 55 Total Revenue (Rmb m) 591 932 1,253 1,727 2,405 2,569 3,327 3,903 2,968 2,272 2,379 Gas COGS (506) (730) (972) (1,378) (1,921) (2,014) (2,669) (3,259) (2,534) (1,857) (1,961) Gross profit 84 202 280 349 483 555 659 644 433 416 418 Operating expenses (27) (35) (45) (32) (67) (86) (112) (98) (297) (125) (131) EBITDA 92 202 276 364 467 527 619 622 213 385 398 D&A (34) (35) (41) (47) (50) (58) (72) (76) (76) (94) (111) EBIT 58 167 235 317 416 469 547 546 137 291 287 Gross margin 14% 22% 22% 20% 20% 22% 20% 17% 15% 18% 18% EBITDA margin 16% 22% 22% 21% 19% 21% 19% 16% 7% 17% 17% EBIT margin 10% 18% 19% 18% 17% 18% 16% 14% 5% 13% 12% 5
Income Statement Projection (RMB m) 2013 2014 2015E 2016E 2017E Revenue 4,661 5,149 4,336 4,020 4,462 Sales of electricity 1,328 1,240 1,368 1,748 2,082 Sales of natural gas 3,207 3,718 2,834 2,138 2,245 Construction & connection of natural gas pipelines 72 127 79 79 79 Natural gas transportation revenue and others 49 58 55 55 55 Wind power services 6 6 0 0 0 COGS (3,202) (3,854) (3,216) (2,759) (3,021) Gross profit 1,459 1,296 1,120 1,261 1,440 Other net income 31 56 47 44 42 VERs income, net 3 0 0 0 0 VAT refunds 6 7 10 12 20 Others 13 18 12 12 12 Bank interest income 9 31 25 20 10 Operating expenses (274) (259) (395) (261) (293) EBITDA 1,767 1,690 1,507 2,004 2,303 Adjusted EBITDA 1,745 1,665 1,485 1,980 2,271 D&A (550) (598) (735) (960) (1,115) EBIT 1,216 1,093 772 1,044 1,189 Adjusted EBIT 1,194 1,067 750 1,020 1,157 Finance expenses (424) (487) (608) (640) (659) Share of profit/(loss) of JV and associates 40 69 108 107 116 Pretax profit 832 675 272 511 645 Income tax (158) (176) (46) (92) (123) After tax profit 675 498 226 419 523 Minority interest (215) (163) (50) (92) (120) Net profit 460 335 176 327 402 Recurring net profit 479 382 286 327 402 Recurring EPS (RMB) 0.148 0.104 0.077 0.088 0.108 EPS (RMB) 0.142 0.091 0.047 0.088 0.108 DPS (RMB) 0.046 0.031 0.007 0.013 0.016 Note: Adjusted EBITDA and adjusted EBIT exclude "other net income" Net interest coverage = EBITDA/net finance expenses Growth rates (YoY) 2013 2014 2015E 2016E 2017E Revenue 25.9% 10.5% -15.8% -7.3% 11.0% Sales of electricity 17.7% -6.6% 10.3% 27.8% 19.1% Sales of natural gas 30.9% 15.9% -23.8% -24.5% 5.0% Gross profit 17.8% -11.2% -13.5% 12.6% 14.2% EBITDA 15.1% -4.3% -10.8% 32.9% 14.9% Adjusted EBITDA 18.8% -4.6% -10.8% 33.3% 14.7% EBIT 14.0% -10.2% -29.4% 35.2% 13.9% Adjusted EBIT 19.4% -10.6% -29.8% 36.0% 13.4% Pretax profit 3.6% -18.9% -59.7% 87.8% 26.3% After tax profit -15.2% -26.2% -54.7% 85.6% 24.8% Net profit -16.4% -27.1% -47.4% 85.6% 23.2% Recurring net profit -3.7% -20.3% -25.1% 14.2% 23.2% Recurring EPS -3.7% -29.8% -25.8% 14.2% 23.2% EPS -16.4% -35.8% -48.0% 85.6% 23.2% Margins 2013 2014 2015E 2016E 2017E Gross margin 31.3% 25.2% 25.8% 31.4% 32.3% EBITDA margin 37.9% 32.8% 34.8% 49.8% 51.6% Adjusted EBITDA margin 37.4% 32.3% 34.3% 49.2% 50.9% EBIT margin 26.1% 21.2% 17.8% 26.0% 26.6% Adjusted EBIT margin 25.6% 20.7% 17.3% 25.4% 25.9% Pretax profit margin 17.9% 13.1% 6.3% 12.7% 14.5% After tax profit margin 14.5% 9.7% 5.2% 10.4% 11.7% Net margin 9.9% 6.5% 4.1% 8.1% 9.0% Recurring net margin 10.3% 7.4% 6.6% 8.1% 9.0% Net Interest coverage 4.3 3.7 2.6 3.2 3.5 6
Balance Sheet, Cash Flow Projection and Key Ratios Balance Sheet Cash Flow Statement (RMB m) 2013 2014 2015E 2016E 2017E (RMB m) 2013 2014 2015E 2016E 2017E Non current assets PP&E 10,180 11,731 14,814 16,822 17,926 Pretax profit 832 675 272 511 645 Prepaid land lease payments 214 256 256 256 256 Income tax (136) (164) (46) (92) (123) Goodwill 9 35 35 35 35 Depreciation 441 487 633 858 1,012 Intangible assets 2,247 2,163 2,060 1,957 1,855 Amortization 103 104 103 103 103 Investment in associates and JV 434 984 1,070 1,156 1,249 Interest expense 424 487 608 640 659 Others 581 128 128 128 128 Interest income (9) (31) (25) (20) (10) Deferred tax assets 4 4 4 4 4 Share of profit / (loss) of JV and associates (40) (69) (108) (107) (116) Prepayments and other receivables 622 979 979 979 979 Change in working capital (47) (598) (26) 637 (483) Total non current assets 14,291 16,279 19,346 21,336 22,431 Others 29 (5) 0 0 0 Operating cash flow 1,597 885 1,411 2,529 1,688 Current assets Inventories 43 43 27 33 33 Purchase/(disposal) of PP&E and intangible assets (1,192) (1,844) (3,880) (2,890) (2,060) Trade receivables 846 1,402 1,212 947 1,253 Payments for acquisition of subsidiaries/disposal of subsidiaries 0 0 0 0 0 Prepayments, depositis and other receivables 408 451 683 763 764 Investment in/(disposal of) financial assets, JV & associates (63) 0 0 0 0 Prepaid land lease payments 7 8 8 8 8 Others (15) (489) 46 41 33 Pledged depositis 0 30 30 30 30 Investing cash flow (1,270) (2,333) (3,834) (2,849) (2,027) Cash 1,670 3,167 1,754 1,512 407 Available for sale investments 150 230 230 230 230 Net proceeds from issuance of shares 0 1,256 0 0 0 Total current assets 3,123 5,331 3,944 3,523 2,726 Capital contribution - HECIC and HECIC Water 0 0 0 0 0 Capital contribution - minority interest 67 111 0 0 0 Total assets 17,414 21,610 23,290 24,860 25,157 Proceeds from /(repayment of) borrowings 1,398 2,067 1,800 800 0 Interest paid (487) (566) (676) (695) (716) Current liabilities Dividend paid to minority interest (184) (61) 0 0 0 Borrowings 1,359 1,730 2,530 3,130 2,930 Dividend paid to equity owner (65) (171) (115) (26) (49) Trade and bill payable 224 437 109 360 137 Others 0 (26) 0 0 0 Tax payable 39 52 52 52 52 Financing cash flow 728 2,610 1,009 78 (765) Other payables and accruals 1,122 1,311 1,408 1,535 1,581 Total current liabilities 2,744 3,531 4,100 5,077 4,700 Net change in cash 1,055 1,162 (1,414) (242) (1,105) Non current liabilities Borrowings 7,545 9,296 10,296 10,496 10,696 Valuation Other payables and accruals 19 21 21 21 21 PER (recurring) 5.3 7.7 11.0 9.6 7.8 Total non current liabilities 7,563 9,317 10,317 10,517 10,717 Dividend yield 5.8% 3.9% 0.8% 1.6% 1.9% PBR 0.4 0.4 0.4 0.4 0.4 Equity EV/EBITDA 6.8 7.1 7.9 6.0 5.2 Share capital & Reserves 5,966 7,360 7,421 7,721 8,074 Attributable to equity owner 5,966 7,360 7,421 7,721 8,074 Ratios Minority interests 1,141 1,403 1,452 1,545 1,665 Recurring net margin 10.3% 7.4% 6.6% 8.1% 9.0% 7,107 8,762 8,873 9,266 9,739 ROE 8.3% 5.7% 3.9% 4.3% 5.1% ROA 2.9% 2.0% 1.3% 1.4% 1.6% Total equity and liabilities 17,414 21,610 23,290 24,860 25,157 Net debt / Equity 101.8% 89.7% 124.8% 130.7% 135.7% Current ratio 1.14 1.51 0.96 0.69 0.58 BVPS (RMB) 1.84 1.98 2.00 2.08 2.17 Days inventories 4 4 4 4 4 Days receivables 66 80 110 98 90 Days payables 24 31 31 31 30 7
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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888. 8