Taiwan Strait Nuclear Power (002366) Follow-up Report: Leading Private Nuclear Power Equipment with Countercyclical Layout

中信證券 ·  04/07/2019  · Researches

According to China News Network, on April 1, 2019, Liu Hua, Vice Minister of Ecology and Environment and Director of the National Nuclear Safety Administration, explained at the China Nuclear Energy Sustainable Development Forum that construction of nuclear power projects will commence one after another this year. This is another clear sign that nuclear power will restart after the four “Hualong 1” units were approved in January. We believe that the nuclear power equipment industry will enter a boom cycle, and that nuclear power equipment companies with a countercyclical layout are worth paying attention to.

Nuclear power restart: 4 Hualong 1 units were approved, and a revival of industry sentiment was established. There has been no approval to commence construction of a new domestic unit for 3 years since 2016. On January 30, 2019, four new Hualong 1 units were approved (1/2 in Zhangzhou, 1/2 in Huizhou). The approval for the commencement of construction of the new unit this time indicates that the regulatory authorities have approved Hualong 1 technology. Subsequent queued crews are expected to be approved one after another. The country is expected to usher in a new wave of nuclear power construction, and the nuclear power equipment industry will enter a boom cycle.

The rest is king: the countercyclical layout of nuclear power in the Taiwan Strait has increased the company's competitiveness. We believe that enterprises that persist in the countercyclical layout of the nuclear power industry even at a low point in the industry are expected to be the biggest beneficiaries after the new cycle of nuclear power construction begins. Taihai Nuclear Power's business has covered everything from a single main channel to the seven major equipment on the nuclear island, from front-end construction to back-end processing. Additionally, the company is involved in offshore nuclear power plants. In January 2018, China's first offshore nuclear power plant project was launched in Yantai, Shandong. Offshore nuclear power plants are integrated energy supply platforms for electricity, heat, steam, fresh water, etc., and industrial parks in coastal cities are expected to be the first customers of offshore nuclear power plants. The company announced in December 2018 that it signed an order of no more than 5.85 billion yuan with parent company Taihai Group.

Key points of tracking: Follow catalytic events such as crew approvals and order tenders. According to the “Nuclear Power Safety Plan (2011-2020)” and the “Nuclear Power Medium- and Long-Term Development Plan (2011-2020)”, by 2020, domestic nuclear power units in operation will reach 58 million kilowatts, and plans for nuclear power units under construction will reach 30 million kilowatts.

According to this estimate, in order to achieve the 2020 target, approval is still needed to start construction of about 30 million kilowatts of nuclear power units, with a total investment of more than 200 billion yuan in equipment. After the four Hualong 1 units have been approved to commence construction, it is expected that CNNC and GN will continue to reserve new nuclear power units, and that the units that are waiting in line for approval to commence construction will also continue to be tendered for equipment. The landing of subsequent orders will be a key sign of a reversal in the company's business climate.

Risk factors: Nuclear power restart progress falls short of expectations; offshore nuclear power business development progress falls short of expectations.

Investment advice: The nuclear power industry has not approved the construction of new units for 3 years since 2016. This dilemma took a turn in 2019. Nuclear power equipment companies with a countercyclical layout at the bottom of the industry are expected to be the biggest beneficiaries of this new cycle of nuclear power construction. The business of Taihai Nuclear Power has covered all seven major equipment from a single main channel to the nuclear island, from front-end construction to back-end processing, and is involved in offshore nuclear power plants. Combining the above factors, we expect net profit for 2018/19/20 to be $34/69/ 1.04 billion. The company entered a period of performance recovery, and the countercyclical layout significantly enhanced the company's competitiveness in the nuclear power industry. It gave 25 times PE valuation in 2019, with a target price of 19.8 yuan, maintaining the “buy” rating.

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