Company profile: The main force in nuclear power engineering construction, leading comprehensive strength. The company has a rich heritage and is the main support for China's nuclear engineering construction. The company's business areas mainly cover nuclear power engineering, industrial and civil engineering. The controlling shareholder of the company is CNNC. As of the first quarter of 2024, the company's top five shareholders held 71.58% of their shares, and their shares are concentrated. In Q1 2024, the company achieved operating income of 29.036 billion, up 0.37% year on year; net profit to mother was 0.557 billion yuan, up 9.60% year on year. In 2023, industrial, civil engineering, and nuclear power projects accounted for 68.68% and 21.87% of revenue respectively. Among them, the share of revenue from nuclear power projects increased rapidly. In Q1 2024, the company's gross margin was 8.53%, down 0.19pct year on year; net margin was 2.57%, up 0.15pct year on year.
Nuclear power industry: benefits from accelerated construction in the short to medium term, and there is more room for long-term penetration rate improvement
Short- and medium-term perspective: Nuclear power development has returned to the landscape channel. A nuclear power plant is a power facility that uses heat generated by one or more power reactors to generate electricity or generate both heat. The barriers to the construction of nuclear power projects are extremely high, mainly reflected in the long construction cycle, high technical requirements, and high investment amounts. The nuclear power industry chain can be divided into five parts: design, equipment manufacturing, construction installation, operation management, and nuclear fuel supply systems (including nuclear waste disposal). The development of nuclear power in China began in the 80s of the last century. In the middle, it went through three stages of “start-up - contraction - recovery”. Since 2019, the policy has turned positive. Since 2019, China has resumed approval for nuclear power construction, reaching a peak in 2022 to 2023, with an annual approval number of 10 units.
By the end of 2023, the installed capacity of China's nuclear power generation was 56.91 million kilowatts, an increase of 2.49% over the previous year; the installed capacity of new nuclear power generation was 1.39 million kilowatts. The nuclear power unit construction cycle is about 5 years, and capital expenditure is expected to increase significantly from 2024. In 2023, China's completed investment in nuclear power engineering construction was 94.9 billion yuan, the highest level in nearly five years.
Long-term perspective: Nuclear power is an ideal baseload energy source, and the penetration rate is expected to gradually increase. Nuclear power is clean and efficient, and is the best choice in a dual-carbon context. Nuclear power has the characteristics of environmental protection, economic reliability and high efficiency. Nuclear power has a stable supply and is an ideal baseload energy source. China's share of nuclear power generation is lower than the global average, and there is plenty of room for improvement in the penetration rate. According to the China Nuclear Energy Association, it is estimated that by 2035, China's nuclear power generation will account for 10%, and by 2060 it will reach 18%.
Company business: The moat for nuclear power engineering is deep, and the order structure continues to be optimized
Nuclear power engineering: The moat is deep, and there are sufficient orders in hand to lay the foundation for future growth. The company's nuclear power business is mainly the construction of nuclear power plants, and the operating entities are major subsidiaries. The company has strong competitiveness in the field of nuclear power engineering, which is mainly reflected in: the highest market share; rich construction experience, largest scale, and leading capacity and technology. The company's nuclear power engineering revenue grew rapidly, reaching 23.926 billion yuan in 2023, a year-on-year increase of 42.86%. There was a slight decline in the gross margin of nuclear power projects. The nuclear power engineering business is full of on-hand orders and is expected to continue to grow rapidly in the future.
Industrial and civil engineering: The order structure continues to be optimized, and the impact of housing construction is gradually decreasing. The company relies on its experience in nuclear construction to develop the industrial and civil engineering markets, and the business has now grown into a major source of revenue.
New and ongoing orders for industrial and civil engineering continue to grow. The order structure continues to be optimized, and the share of housing construction has decreased significantly, falling below 30% in Q1 2024. The gross margin of industrial and civil engineering has remained around 8% for a long time, with a slight increase in 2023. PPP projects are gradually entering the operation period, and financial pressure is expected to ease. The company actively explores foreign markets and creates new volume.
Credit impairment erodes profits and is expected to ease in the future. Credit impairment losses have a greater impact on a company's profits, and the impact is significantly higher than that of comparable companies. The company's accounts receivable age structure is reasonable, and the calculation of accounts for younger years is relatively cautious with comparable companies.
Investment advice: The industry is recovering, and nuclear construction leaders are expected to take advantage of the wind, cover for the first time, and be given an increase in holdings rating. The company's net profit from 2024 to 2026 is estimated to be 2.373, 2.736, and 3.089 billion yuan, respectively, up 15%, 15%, and 13% year-on-year, respectively, and corresponding PE is 11, 9, and 8 times, respectively. The boom in the nuclear power industry is recovering, benefiting from accelerated construction in the short to medium term, and there is plenty of room for long-term penetration; the company's main business has a deep moat, sufficient orders in progress, and continuous structural optimization. Short-term profits are mainly affected by credit impairment, which is expected to ease in the future.
Risk warning: accounts receivable recovery risk; nuclear power safety risk; risk of policy fluctuations; increased risk of market competition, etc.