Event: Mindong Electric Power released its three-quarter report in 2016, with operating income of 485 million yuan in the first nine months, down 34.36% from the same period last year; net profit belonging to shareholders of listed companies was 120 million yuan, up 95.11% from the same period last year; and basic earnings per share was 0.3226 yuan.
Comments:
There has been a substantial increase in hydropower generation and a sharp change in profits. The company's main business is hydropower and real estate, which was affected by the increase in precipitation in 2016, the company's hydropower generation increased significantly, the real estate sector was affected by the settlement cycle, and sales fell sharply. As the decline in real estate revenue was higher than the increase in hydropower revenue, the company's revenue fell 34.36% in the first three quarters compared with the same period last year. The hydropower business is characterized by relatively fixed costs, and the increase in power generation leads to a decline in unit costs. In the first three quarters, the company's comprehensive gross profit margin rebounded 19.72 percentage points year-on-year to 60.85%. From the perspective of the three expenses, the proportion of sales expenses decreased by 0.09 percentage points compared with the same period last year, administrative expenses increased by 9.92 percentage points, and financial expenses increased by 2.19 percentage points. Due to the collection of payment and current payments by subsidiaries, the loss of asset impairment decreased by 114.45% compared with the same period last year. In addition, the company's investment income increased by 200.43% compared with the same period last year, mainly due to the increase in profits of the Niutoushan Hydropower Company.
Set up a rare earth development company to expand profit growth. Ningde Huansan Mining Co., Ltd. is the company's mining platform, since its establishment, there has been no progress in business. In August 2016, Huan San Mining Co., Ltd. and Xiamen Tungsten Industry Co., Ltd. and Pingnan Zhijin Development Co., Ltd. jointly established Pingnan County rare Earth Development Co., Ltd., which is conducive to expanding the business scope of Huan San Mining. As Xiamen tungsten industry is the rare earth integration platform of Fujian Province, and the rare earth resources in the province are mainly developed by Xiamen tungsten industry, the new company will make use of Xiamen tungsten's advantages in the development and comprehensive utilization of rare earth resources to carry out business in the future. to add new profit growth points for Huansan Mining.
The adjustment of the non-public offering plan will consolidate the development of the main industry. Since its listing, the company has been mainly engaged in clean energy business based on hydropower and wind power. Due to the relatively fixed installed capacity of hydropower, the revenue and profits of the power sector from 2013 to 2015 are relatively stable. According to the feasibility report of the private placement project, the construction period of Xiapu floating Eagle Island wind farm project is 18 months, with an average after-tax profit of 31.4423 million yuan, while that of Ningde Hubei wind farm project is 12 months, with an average after-tax profit of 25.7246 million yuan. We believe that this private placement will help consolidate the company's main business development and improve its profitability in the future.
Profit forecast and rating: due to the higher-than-expected hydropower generation, we raised the company's EPS to 0.28,0.28,0.30 yuan in 2016-2018, maintaining the "overweight" rating.
Risk factors: a sharp drop in precipitation and a reduction in hydropower generation; a reduction in electricity prices; lower-than-expected real estate sales; lower-than-expected speed of mining consolidation; and unapproved private rights issues.