Maintaining the “buy” rating: Our earnings per share forecast for 2023-2025 remains unchanged at RMB 0.41, RMB 0.51, and RMB 0.65, respectively. Our target price remains unchanged at HK$3.10 (based on 7.0 times the 2023 price-earnings ratio).
There was a steady increase in power generation in the first 8 months: Datang New Energy's wind power generation decreased by 21.26% year-on-year in August. We believe this may be due to the low wind speed in China's “Three North” regions in that month. However, since August is the traditional light wind season, the impact is limited. PV power generation continued to grow in August, with a year-on-year increase of 22.99%. In the first eight months of this year, driven by improvements in operational efficiency, overall improvements in wind and wind resources, and an increase in installed power generation capacity, the total power generation capacity of Datang New Energy maintained strong growth, with a year-on-year increase of 16.44%.
Business outlook: We believe that Datang New Energy is currently in a more favorable position to achieve an increase in installed capacity. This is because the main factors that limited the company's growth in the past, namely excessive internal rate of return requirements and limited project development autonomy, have been effectively resolved under the impetus of a series of corporate reforms implemented by the parent company China Datang Group since 2022. We believe that the company's target of 1.5-2.0 gigawatts of new installed capacity in 2023 is quite conservative, and its installed capacity is expected to accelerate from 2023. Meanwhile, Datang New Energy's continuous operational optimization has continued to improve asset utilization over the past few years, which is another key driving force for profit growth. There is also great potential to improve profitability through the renovation of old wind farms. We have determined that by the end of 2025, the company will have about 4.0 gigawatts of wind power that can be transformed “from big to small”. The renovation of old wind farms can increase the installed capacity by two times and the power generation capacity by three times on average.
The valuation after the recent sharp drop in stock prices is attractive: since August 30, the company's stock price has dropped sharply by nearly 20% due to weakening investor confidence in the power utilities industry. Currently, Datang New Energy's stock price corresponds to a forward price-earnings ratio of 4.5 times, which is lower than the historical average of the past three years by about 1.6 standard deviations (based on the unanimous expectations of the Bloomberg market). Given that the asset quality of Datang New Energy continues to improve and that there is still room for growth in the next few years, we believe that the current valuation has limited room for decline.
Downside risks: Electricity demand is lower than expected, project launch delays, regulatory and policy changes unfavorable to independent power generation companies, extreme weather conditions, etc.