Description of the event
Star Power released its 2016 semi-annual report: during the reporting period, the company achieved operating income of 649 million yuan, an increase of 8.42% over the previous year; the net profit of Guimu was 477.421 million yuan, an increase of 3.08% over the previous year.
Incident comments
The increase in sales volume of the main business increased operating income, and the increase in fixed costs led to a narrowing of the company's performance growth. In the first half of 2016, the company sold 808 million kilowatt-hours of electricity, an increase of 3.87% over the previous year; the wholly-owned subsidiary Water Company sold 149.48,800 tons of water, an increase of 2.64% over the previous year. As investment promotion in Suining City gradually showed results, the company's operating income increased year-on-year due to rising demand in the supply region. From January to May 2016, the total amount of incoming water from the Fujiang River Basin where the company's power stations are located was 3,048 million cubic meters, which was 22.92% higher than the previous year. The company's own power stations achieved feed-in electricity capacity of 226 million kilowatt-hours, an increase of 27.75% over the previous year. Since the price of outsourced electricity from the State Grid is higher than the company's self-generating production cost, the company's electricity purchase costs have been optimized. However, during the reporting period, the company stepped up settlement work for overhaul projects such as power grids and water networks, and depreciation expenses increased due to the increase in fixed assets due to infrastructure and technical improvement projects being put into operation at the end of 2015, so the company's gross margin did not rise but fell. Operating profit fell 17.35% year on year during the reporting period, Guimu's net profit increased 3.08% year on year, and performance growth was compressed.
Located at the junction of the Chengdu-Chongqing economic circle, economic growth is expected to bring high demand for electricity. The economic base of Suining City, where the company is located, is relatively weak (Suining's GDP in 2015 was 91,581 billion yuan, ranking 16th in Sichuan Province), but since Suining is located at the link between Chengdu and Chongqing, economic growth was rapid: in 2015, Suining's GDP growth rate reached 13.2%, ranking first in Sichuan Province. The company's main power supply business areas are Chuanshan District and Anju District of Suining City. It is the central urban area of Suining. Electricity demand in this region is expected to grow rapidly. Currently, in addition to building the ASEAN International Industrial Park and Wanda Plaza, Suining City is also planning to build a Sino-German China-Europe industrial park. The commissioning of such large-scale industrial and commercial projects will effectively increase the company's demand for electricity in the supply region, and the prospects for sales growth in the main business are good.
The phased completion of the restoration of the Quhe River will no longer be affected, and it is expected that the supply costs of electricity will be further reduced over a long period of time. The company began river remediation for the Quhe River in 2013, and infrastructure projects to lower the water level are needed. Since the Quhe River blocks Fujiang River, incoming water from the Fujiang River Basin where the company's power stations are located has been affected, making it difficult to increase self-generated electricity. At the end of 2015, the treatment of the Quhe River was completed in stages. The amount of incoming water from the Fujiang River was no longer affected by the construction. The company's power generation supply capacity was increased this year. In addition, the power stations under the company are all connected to this network and are not limited by the current weak electricity demand of the whole society, and since Suining is currently in a period of rapid development and supply in the supply area is in short supply, the power plants under the company are expected to be in full bloom for a long time. Furthermore, the power to approve the company's electricity sales prices rests with the Suining Development and Reform Commission. The current reduction in electricity sales and sales prices across the country is expected to further reduce the company's power supply costs and improve the company's performance.
Water prices are expected to rise, and the water supply business is expected to grow. On February 2, 2015, the Suining Municipal Development and Reform Commission issued the “Notice Concerning the Adjustment of Urban Water Supply Prices and Sewage Treatment Fees in Urban Areas”. The price of water supply in Suining was adjusted for the first time in nearly 10 years, with an average increase of 0.6 yuan/cubic meter, in two installments: the first adjustment was implemented on March 1, 2015, and the second is expected to be implemented in 2017. The local market share of Star Water Co., Ltd., a holding subsidiary of the company, is high, about 90%. After the second price adjustment is implemented, it will significantly increase the profit of the company's water supply business. Furthermore, the water loss rate of the company's water supply business has been reduced from around 42% in 2012 to around 32% now through scientific technical means and management methods. It is expected to continue to decrease in the future, and water supply costs will be further controlled.
Investment advice and valuation: The company is expected to achieve EPS of 0.341 yuan, 0.384 yuan and 0.403 yuan in 2016-2018, corresponding to PE38.77 times, 34.49 times, and 32.79 times. Considering: 1) Fujiang's incoming water supply is significantly abundant, and the company's marginal cost of electricity sales has been optimized; 2) Suining's economic growth is fast, and the company's electricity sales volume is expected to soar; 3) the Quhe River is completed, and its own power plants are expected to be fully developed for a long time; 4) there are expectations of an increase in water prices, and the water supply business is expected to grow, and coverage was given an “increase in holdings” rating for the first time.
Risk warning: systemic risk, risk of incoming water falling short of expectations, demand growth falling short of expected risk