Event: Mindong Electric Power released the 2016 annual report, the company achieved operating income of 645 million yuan, down 29.09% from the same period last year; net profit belonging to shareholders of listed companies was 26 million yuan, up 14.95% from the same period last year; and basic earnings per share was 0.07 yuan, which was lower than expected. The company plans to pay a cash dividend of 0.25 yuan (including tax) for every 10 shares.
Comments:
The decline in the contribution of real estate profits to management expenses and investment losses is a drag on performance. There are two reasons for the company's lower-than-expected performance in 2016: the profit contribution of the real estate sector decreased significantly, because the real estate projects developed by the company did not meet the revenue recognition conditions. Therefore, the real estate sector income decreased by 96.45% compared with the same period last year. In 2016, the company's management expenses increased by 32.2139 million yuan, and the investment loss increased by 21.0823 million yuan, which had an impact on the performance.
The hydropower business benefits from increased precipitation and the wind power business benefits from the commissioning of new units. The company's main business is power production and sales, with 11 hydropower branches, three hydropower holding subsidiaries and three wind power holding subsidiaries. Affected by the increase in precipitation, the company's hydropower generation increased significantly. In 2016, the company's hydropower generation capacity was 1.59487 billion kilowatt hours, an increase of 42.80 percent over the same period last year. Hydraulic power sales were 1.56283 billion kilowatt hours, 42.97 percent of the same period last year. Under the influence of the full operation of Aerospace Minjian New Energy (Xiapu) Co., Ltd., wind power generation and electricity sales also increased significantly. In 2016, the company's wind power generation capacity was 121.42 million kilowatt hours, an increase of 65.58 percent over the same period last year. Wind power sales were 117.09 million kilowatt hours, an increase of 65.83 percent over the same period last year.
The feed-in electricity price is raised and the gross profit margin picks up. In 2016, the company's comprehensive grid electricity price for hydropower was 0.3454 yuan per kilowatt hour (excluding tax), an increase of 0.0111 yuan per kilowatt hour, and that for wind power was 0.5553 yuan per kilowatt hour (excluding tax), an increase of 0.0106 yuan per kilowatt hour. As the cost of hydropower business is relatively fixed, the rise in electricity prices and generation prices have a significant impact on profits. In 2016, the gross profit margin of the company's power sector increased by 11.64 percentage points year-on-year to 57.12%, and the comprehensive gross profit margin increased by 10.86 percentage points to 56.9%.
The company's strategy steadily promotes the development of new profit growth points. In 2016, the company made progress in its development strategy of "main electric power industry, related diversification". In terms of the main power industry, the acquisition of 70% of Fucheng Hydropower has been completed, and the installed capacity of hydropower rights and interests has increased by 30,000 kilowatts. The Xiapu floating Eagle Island wind farm project with an installed capacity of 48,000 kilowatts started construction in September 2016 (the first batch of units are scheduled to be put into production by the end of 2017, and all completed and put into production in March 2018). The Ningde Hubei wind farm project with an installed capacity of 60,000 kilowatts has been completed and approved (construction is scheduled to start in May 2017). In terms of diversification, Ningde Xiamen Tungsten New Energy Materials Co., Ltd. was established as a joint venture with Xiamen Tungsten New Energy Co., Ltd., and jointly invested in the construction of a vehicle power lithium ion ternary material production line with an annual output of 20,000 tons. Pingnan County rare Earth Development Co., Ltd. was jointly established with Xiamen tungsten industry and Pingnan county government to participate in the recovery and utilization of pressed rare earth mineral resources in key construction projects.
Profit forecast and rating: the company's EPS in 2017-2019 is expected to be 0.09,0.12,0.14 yuan, maintaining the "overweight" rating.
Risk factors: a sharp drop in precipitation; a reduction in electricity prices; lower-than-expected real estate sales; a slower-than-expected pace of mining consolidation; and an unapproved private rights issue.