Lower-than-expected performance in 2018

CGN New Energy announced its 2018 results: revenue rose 23% year-on-year to $1.4 billion, and net profit rose 43% year-on-year to $88 million, below our and market consensus expectations (about $110 million). We believe that the company's lower-than-expected performance is mainly due to: excluding non-recurrent losses of US $23.4 million and US $2.9 million from the impairment and disposal of fixed assets of CHP, the core profits of the company's domestic coal power, cogeneration and gas power generation business (that is, the domestic thermal power sector) showed a 39 per cent year-on-year decline. The company plans to pay a final dividend of US $0.0051 (or HK $0.0401) per share in 2018, corresponding to a 25 per cent dividend payout rate.

Trend of development

The performance of the domestic thermal power sector fell short of expectations. For the whole of 2018, the profits of the company's domestic thermal power sector fell 39% compared with the same period last year, mainly due to: although the power generation utilization hours of coal-fired power units increased by 15% compared with the same period last year, the standard coal price rose (up 7% year-on-year). At the same time, the number of power generation utilization hours of cogeneration units decreased (down 6% from the same period last year).

However, the company's new energy sector and South Korean gas power generation business have brought positive contributions to the company's performance. In 2018, the company's wind power business and photovoltaic business profits achieved 44% and 34% year-on-year growth respectively, mainly due to: 1) wind power utilization hours improved (up 17% to 1894 hours compared with the same period last year); 2) the company installed new wind power 113.4MW and photovoltaic 224MW. Excluding non-recurrent gains from carbon quota sales, core profits in South Korea's gas generation business rose 24 per cent year-on-year, mainly due to cold weather and growing demand for clean energy, which led to a 19 per cent year-on-year increase in utilization hours. at the same time, the average electricity price rose 15%.

The company has a large number of wind power reserve projects; focus on potential asset restructuring. As of December 2018, the company has more than 8GW offshore wind power projects, of which the transportation projects are mainly located in Guangdong Province, Jiangsu Province and Zhejiang Province. We expect that the company will eventually complete the long-awaited wind power asset injection plan of the parent company, which is expected to further improve the company's asset quality and project return.

Profit forecast

We maintain the company's profit forecast of $134 million in 2019 and $139 million in 2020, and suggest that we pay attention to the company's new installation guidelines on March 21.

Valuation and suggestion

At present, the company's share price corresponds to 5.2 times 2019 earnings and 5.0 times 2020 earnings. We maintain the "recommended" rating of CGN New Energy and the target price of HK $1.50 (corresponding to 6.2 times 2019 and 6.0 times 2020 earnings, respectively), which is 19% upside from the company's current share price.

Risk

The number of hours of wind power utilization is lower than expected; the progress of subsidized recycling is delayed.