CGN New Energy's performance in the first half of 2019 is in line with expectations

CGN New Energy announced its results for the first half of 2019: revenue of US $660 million, down 4.2% from the same period last year, and net profit of US $73 million, up 6.7% from the same period last year, in line with market expectations.

The disappearance of one-off factors in South Korea is a drag on revenue growth. The company's revenue fell 4% in the first half of the year compared with the same period last year, including a 12% drop in South Korean business compared with the same period last year, mainly due to a decline in the output of other local power plants in the same period in 2018, and the power generation of the company's power plants was higher than that in the same period in history. This factor disappeared in the first half of this year, and the utilization hours of South Korean power plants decreased by 16% compared with the same period last year, dragging down revenue growth. The recovery of domestic thermal power business supports profit growth. The company's first-half net profit rose 6.7% from a year earlier, mainly due to a 23% year-on-year increase in domestic division profits to $75 million. Among them, the utilization hours of the thermal power sector increased by 19.5% year-on-year and coal prices fell 3.8% from the same period last year, pushing the division's profit 1.8 times higher to $29 million.

Trend of development

In the first half of the year, new energy projects will be connected to the grid again, with active reserves for parity and bidding projects. The company installed 185.6 megawatts of wind power in the first half of the year, breaking the zero installed situation in the second half of last year, while photovoltaic installed 84.2 megawatts. At the same time, the company won 75 megawatts of onshore wind power in the first half of the year, and 300 megawatts of onshore wind power and 310 megawatts of photovoltaic power in the first batch of parity projects. Offshore wind power projects comply with the policy and strive to lock in subsidized electricity prices to support future development. Taking into account the update of the national offshore wind power management policy, the company has fully launched the 582 MW offshore wind power project that has been approved and not started, and is expected to be connected to the grid by the end of 2021, locking in the subsidized electricity price of 0.85 yuan per kilowatt-hour to support the company's future revenue and profit growth.

Profit forecast and valuation

Taking into account the first half of the earnings performance in line with expectations, and the smooth progress of the project, we maintain the full-year profit forecast unchanged.

The current share price corresponds to a price-to-earnings ratio of 3.9 times / 3.7 times earnings in 2019 / 2020.

Maintain an outperform industry rating and a target price of HK $1.50, corresponding to 6.2 times 2019 price-to-earnings ratio and 5.9 times 2020 price-to-earnings ratio, with 59.6% upside compared to current share prices.

Risk

Natural gas prices rose faster than expected; wind power projects were less than expected to be connected to the grid.