The Zhitong Finance App learned that Bank of China International released a research report stating that it reaffirmed the “buy” rating of Longyuan Electric Power (00916), lowered the profit forecast for 2024-25 by 11%-14%, and adjusted the target price to HK$10.8, but it is believed that the company's stock has regained its appeal and is worth re-examining. The bank noted that each province's differentiated renewable energy trading policies did not help reduce end-user costs, nor was it necessarily beneficial to China's ambition to promote new energy development. It is also believed that other negative factors of green power operators, such as subsidy arrears and minor depreciation from generation to generation, are also fully reflected in the stock price. Currently, Longyuan's P/B and P/B valuations are at historically low levels.
Bank of China International's main views are as follows:
Fundamental risk has been fully calculated
There are three main reasons for the poor performance of Longyuan's stock price: 1) subsidy arrears; 2) pressure on electricity prices and electricity restrictions; 3) depreciation of large and small projects. The bank believes that 1) China's electricity demand growth rate exceeding expectations will help renewable energy funds to increase revenue, and the subsidy gap may be closed ahead of schedule; 2) short-term electricity prices and power restrictions are indeed under pressure, but they are expected to gradually ease with policy support, UHV line construction, and new load construction in the north; 3) the 1.5 billion dollar impairment in small assets last year is anticipated for 2024-25, so the possibility of making another provision this year is declining. Looking at large and small jobs over the long term, it will enhance Longyuan's profitability.
Behind the pressure on electricity prices
The bank noticed that in the first five months of this year, the national average grid electricity purchase price dropped 3.7% or 1.56 cents/kilowatt-hour compared to 2023, and the drop was less than the 2-2.5 cents/kilowatt-hour capacity electricity price starting in 2024. This means that the new Tianliang affordable new energy projects added last year and the drop in new energy electricity prices have not fully benefited end users. This situation may require some policy response to be optimized.
Bringing long-term benefits from big to small
As stated in the previous October 2022 report, although the removal of old fans will cause partial value loss in the short term from generation to generation, it will eventually increase Longyuan's long-term ROE. In an exchange after the quarterly report, management mentioned that the utilization hours of the Dabancheng project in the company's first batch of renovation projects can now reach 3,700 hours, which is in line with the bank's estimate of 3,500-3,900 hours when the project was analyzed the year before, so you can refer to the full life cycle yield analysis of the transformation carried out at the time. This also confirms the importance of Longyuan promoting work from generation to generation, and helps the company realize the full potential of the high-quality wind resources it obtained in the early stages.