Huaneng Group suspends negotiations to purchase controlling shares of the company
Poly Xiexin Energy (3800 HK; unrated) said in June that it was likely to sell its 51.0% stake (9.73 billion shares) in Xiexin New Energy to Huaneng Group, a major state-owned enterprise. At that time, the market expected that Huaneng Group could effectively significantly reduce the high debt ratio of Xiexin New Energy through asset injection and financing convenience / transfer. After months of discussion, Poly Xiexin Energy and Xiexin New Energy recently announced that Huaneng Group had suspended negotiations to buy a controlling stake. On the contrary, Xiexin New Energy has formulated a cooperation framework agreement on the sale of individual photovoltaic power generation projects to Huaneng Group, details to be determined.
The market is worried that the poor debt situation will intensify.
The company said in a conference call with investors yesterday that Huaneng Group's main reason for suspending the purchase of a controlling stake is that approval by relevant government agencies will be very time-consuming; on the contrary, the approval time for relatively simple transactions such as the transfer of project interests will be shorter. We believe that equity buyers and sellers should have considered the relevant policy risks before the negotiations, and the market may not accept this explanation. Coupled with the fact that the asset sale has not yet been implemented, we expect the market to worry that the company's poor debt situation will intensify.
Downgrade to "neutral"
We maintain our profit forecast, but increase our risk premium assumption in the company's discounted cash flow (DCF) analysis model, thus lowering the target price from HK $0.32 to HK $0.21. This corresponds to 3.7 times 2020 price-to-earnings ratio and 4.5% downside space. We accordingly downgraded the rating from "overweight" to "neutral".
Risk tips: (1) delay in project development, (2) risk of accounts receivable, and (3) sharp drop in grid-connected electricity price.