Key points of investment:
“Energy+Environmental” two-wheel drive. The company is the first large-scale joint stock company listed in Shenzhen in the domestic power industry. It is also the first public utility joint stock company listed in Shenzhen. The actual controller is the Shenzhen State-owned Assets Administration Commission, with a shareholding ratio of 47.82%, and Huaneng International Electric Power Co., Ltd. has a shareholding ratio of 25.02%. It has now established an “energy+environmental” two-wheel drive business pattern, covering thermal power, heating, gas, waste incineration power generation and other industries. As of the first half of 2018, the company held an installed capacity of 98593 million kilowatts, including 4.914 million kilowatts of coal-fired power generation, 2.45 million kilowatts of gas power generation, 822,500 kilowatts of hydropower, 615,400 kilowatts of photovoltaics, 185,000 kilowatts of waste power generation, and the daily treatment capacity of waste incineration power generation reached 9050 tons.
In the first three quarters of 2018, the company achieved total operating income of 12.377 billion yuan, an increase of 18.49% over the previous year; Guimu's net profit was 604 million yuan, a decrease of 24.86% year on year, mainly due to the increase in electricity market transactions. The cost of coal combustion increased compared to the same period last year, and financial expenses increased due to the increase in early-stage projects.
The bidding spread for electricity transactions in Guangdong Province has narrowed, expectations of a decline in coal prices are strong, and coal power performance is expected to bottom out and pick up. Electricity market transactions in Guangdong Province are gradually returning to rationality. The average monthly bid price for the full year of 2018 was -40.2 cm/kWh, the weighted average monthly bidding price for the full year of 2017 was -68.9 cm/kwh, and the average price difference in 2018 increased by 28.7 cm/kWh over the same period last year. The average price difference for annual electricity transactions in 2019 was -44.16 cm/kWh, which was 32.45 cm/kWh higher than -76.61 cm/kWh in 2018. The annual electricity transaction spread clearly rebounded. We believe that the bidding price spread for electricity transactions in Guangdong Province is expected to narrow and stabilize in the context of rational competition, and the company's comprehensive feed-in tariffs is expected to rise.
Currently, coal prices have strong downward expectations against the backdrop of macroeconomic pressure. The company has established close cooperative relationships with key suppliers such as Shencoal, China Coal, and Yitai. According to the company's 2017 annual report, major coal suppliers such as Shenhua, China Coal, and Yitai together accounted for nearly 20% of the company's total annual purchases. In December 2018, the company signed a “3+2" medium- and long-term coal supply and demand strategy agreement with China Coal Group, involving multiple types of coal and multiple resources. A long-term stable coal strategic cooperative relationship will provide stable coal sources and strong coal-fired cost competitiveness for the company's coal-fired power plants.
Investments in clean energy are increasing. The company's subsidiaries, North Energy Holdings Co., Ltd., Nanjing Energy Holdings Co., Ltd., and the Xinjiang branch are the main wind power and photovoltaic project developers of the company. Currently, there are wind farms and photovoltaic power plant operations and project reserves in Inner Mongolia, Hebei, Gansu, Liaoning, Jilin, Xinjiang, East China and other regions. The problem of wind abandonment in the northern region has improved markedly, and the profitability of the company's wind power projects is expected to increase further. At the same time, most of the company's photovoltaic projects are located in the eastern region, which has large-scale access conditions and is well consumed by the local electricity market. The layout is reasonable. Continued optimization of the clean energy business structure is conducive to the company's sustainable development and can also complement the company's thermal power business to a certain extent.
Waste incineration power generation production capacity has expanded and is at the forefront of the industry. As of the first half of 2018, the waste incineration power generation projects under construction had a processing capacity of about 13,000 tons/day, mainly in more developed regions such as Guangdong, Zhejiang, Jiangsu, Shandong, etc., and the level of garbage disposal fees was high. It is expected that after putting into operation, the company's overall waste incineration power generation project will reach 2,050 tons per day, ranking among the highest in the industry.
The first coverage gave an “increase in holdings” rating: We are optimistic about the company's “energy+environmental protection” two-wheel drive business pattern. As the transaction price difference in the electricity market in Guangdong Province narrows and expectations of falling coal costs are strong, the thermal power business is expected to bottom out. The company has large reserves of waste incineration power generation capacity, and is expected to reach a peak in production in 2019-2020. We forecast that the company's 2018-2020 EPS will be 0.22, 0.36, and 0.43 yuan/share, respectively. Corresponding to the current stock price PE is 23.83, 14.66 and 12.15 times, respectively, and PB is 1.05, 1.21 and 1.50 times respectively. This is covered for the first time, giving the company an “increase in holdings” rating.
Risk warning: risk of a sharp drop in electricity prices; risk of a sharp increase in coal prices; risk of project expansion and commissioning falling short of expectations.
