Net profit of shareholders increased by 18.8% in the first half of 2019 compared with the same period last year.
The company's shareholder net profit in the first half of 2019 rose 18.8% year-on-year to RMB 410 million, mainly due to: (1) revenue increased by 17.3% year-on-year; (2) higher-than-expected other income; (3) the net exchange loss fell sharply from RMB 210 million in the first half of 18 to RMB 15.79 million in the first half of 19; and (4) the company recorded a negative goodwill gain of RMB 73.86 million in the first half of 1919. As a result of the government's reduction in the electricity price of grid-connected projects, gross profit margin fell from 68.7% in the first half of 18 to 67.5% in the first half of 19.
Negotiations on the sale of controlling shares by major shareholders are still ongoing.
The company's main shareholder, Poly Xiexin Energy (3800 HK; unrated), said in June that it might sell its 51.0% stake (9.73 billion shares) in Xiexin New Energy to Huaneng Group. Huaneng Group has basically completed the preliminary due diligence of Xiexin New Energy. The buyer and seller are negotiating the contents of the control transfer agreement. We expect that the transfer of control will be an upward catalyst for the company.
Raise the profit forecast
Taking into account higher-than-expected other income and earnings in the first half of 19, we raised our 19-year shareholder net profit forecast by 31.1% (see chart 2). As some of the other income and income are only one-off, we ended up only slightly raising the 20-year shareholder net profit forecast by 0.4%.
Upgrade the rating to "increase holdings"
Based on discounted cash flow (DCF) analysis, we slightly raised the target price from HK $0.31 to HK $0.32, corresponding to 5.7 times 2020 price-to-earnings ratio and 12.3% room for growth. As the share price has fallen earlier, the company's current valuation has become relatively attractive, so we have upgraded our rating from "neutral" to "overweight".
Risk hint
(1) delays in project development; (2) grid-connected electricity prices have dropped sharply; (3) interest rates have risen sharply; and (4) RMB has continued to depreciate.