Performance review
2019 Core Earnings Slightly Exceeded Our Expectations
China Electric Power announced 2019 operating results: operating income of 27.76 billion yuan, +20% year on year; Guimu's net profit was 1.28 billion yuan, +17% year on year. Excluding one-time impairment and disposal losses, the company's core profit was 1.94 billion yuan, +77% year on year, slightly exceeding our expectations.
The dividend is impressive, corresponding to the 2019 dividend rate of 11.0%. The company announced a dividend of RMB 0.13 per share (+18% year-on-year). The payout rates corresponding to book and core profits were 100% and 66%, all exceeding the previous commitment of 50%. At current stock prices, the dividend rate is as high as 11.0%.
Clean energy boosts core profit improvement: 1) Excluding one-time impairment such as small hydropower, etc., we expect the hydropower sector's core profit after tax to be +63% to 1.44 billion yuan year-on-year, mainly benefiting from strong incoming water during the flood season. The annual power generation and utilization hours were +29% and +23% compared to the same period last year. 2) Scenery after-tax profits rose sharply by 139% and 52% year-on-year, contributing 51% of the company's profits in total. Benefiting from new installations, wind power generation was +67% and +100% compared to the same period last year, fully offsetting the impact of the decline in comprehensive electricity prices for new energy sources.
The profit of thermal power after tax rose 7% year on year. The main benefits were: 1) power generation and electricity prices +9.8% compared to the same period, +1.2%, and 3) unit fuel cost -3.48% compared to the same period last year. However, the growth rate is slightly lower than the industry level, and improvements in engine profit in some regions have yet to be broken through.
Development trends
We expect the company to continue to increase investment in new energy in 2020, and the implementation of affordable projects will help increase both profits and cash flow. Looking ahead to 2020, unlike other power generation companies scrambling to buy high-priced electricity projects, we expect China Electric Power to continue to actively develop affordable and competitive clean energy projects. We believe this will help the company further optimize its energy structure, but it will not rely too much on government subsidies, creating a competitive advantage for both profit and cash flow.
Profit forecasting and valuation
We kept our 2020 profit forecast unchanged. At the same time, considering the company's new energy construction progress, we raised net profit in 2021 by 4.0% to 2,642 million yuan.
The company's current stock price corresponds to the 2020/2021 price-earnings ratio of 5.1 times/4.2 times. Maintaining an outperforming industry rating and a target price of HK$2.23 corresponds to 8.6 times the 2020 price-earnings ratio and 7.1 times the 2021 price-earnings ratio. There is room for an increase of 68.9% compared to the current stock price.
risks
Electricity demand was lower than expected, and coal prices were higher than expected.