Company Reports

We cut our fair value estimates of China Longyuan and Datang Renewable by 23% and 15%, respectively, to HKD 7.60 and HKD 1.62 per share to account for their weak first half. Overall, we expect to see slower earnings growth due to rising curtailments and lower tariffs. Consequently, we reduce our 2024-26 earnings forecasts for Longyuan by 22%-30% and for DR by 6%-24%. After the revisions, we think DR is overvalued, given its poorer asset quality that will continue to see higher curtailment risk. Meanwhile, Longyuan is still undervalued—although we think its recent run of underperforming expectations could sideline investor interest in the near term. Progress on subsidy settlements remains slow, but we expect improved collection in the second half, in line with the historical trend.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed wind capacity of about 27.8 gigawatts, or GW, as of end-2023.

The year-to-date share price performance of China utilities under our coverage have generally staged a strong recovery since May, given improving sentiment in the Hong Kong equity market and their cheap valuations. In addition, the market is expecting more positive policy measures from the upcoming third plenary session in July. We have seen the National Energy Administration calling for increased investment in the national grid recently to avoid curtailment risk on the back of the significant rise in renewable energy capacity. While we are positive about this in the longer term, we caution that the concerns about slow subsidy settlements and falling tariffs will remain in the near term.

We cut Longyuan’s fair value estimate to HKD 9.90 per share from HKD 10.60, after disappointing first-quarter 2024 results that reveal lower average tariffs and utilization hours. We think weak tariffs will persist and our 2024-26 earnings forecasts are reduced by 3%-7%. While power output rose 8% year on year, first-quarter revenue was flat due to lower tariffs, with the average wind tariff falling 6%, mainly attributable to increasing grid parity projects and rising power trading volume. Although wind power capacity was 6% higher, wind power generation only increased by 1% on the back of poorer wind resources. This was offset by strong output growth from other renewable energy (mainly solar) and coal power. Trading at 0.5 times 2024 price/book, we think the firm remains undervalued, but ongoing concerns about declining tariffs and slow subsidy collections will continue to weigh on its share price performance.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed wind capacity of about 27.8 gigawatts, or GW, as of end-2023.

China Longyuan’s 2023 net profit rose 26% year on year to CNY 6.2 billion. However, this was below our expectation as it incurred CNY 2.1 billion of asset impairment losses, with CNY 1.5 billion related to projects to replace smaller-capacity wind turbines with larger ones for its old wind farms (capacity of 1.2 GW). While this doesn’t affect Longyuan’s cash flow, we think guidance from management would be welcomed by investors as a similar impairment (capacity of 356 MW) of CNY 590 million was made in 2022. We cut our fair value estimate to HKD 10.60 per share from HKD 12.00 after factoring in lower average tariffs. We reduced our 2024-26 earnings forecasts by 3%-8%. Trading at 5 times 2024 price/earnings, we believe Longyuan is undervalued. However, we think near-term concerns on more impairments and slow subsidy collections will continue to cap its share price performance.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed wind capacity of about 27.8 gigawatts, or GW, as of end-2023.

Year-to-date share price performance of China utilities under our coverage was generally lackluster, and we believe the market remains concerned about slow subsidy settlements and falling tariffs. We maintained our fair value estimates per share for CGN Power (HKD 2.24); China Longyuan (HKD 12.00); China Resources Power, or CR Power (HKD 25.00); China Suntien Green Energy (HKD 3.66); China Three Gorges Renewables, or CTGR (CNY 4.68); and Datang Renewable, or DR (HKD 2.94). Our preference among the renewable players is China Longyuan given its strong capacity growth and leadership position in the sector. Meanwhile, CR Power is our pick for investors who like exposure to coal-fired power, as the recovery in profitability for the thermal power segment should continue in 2024.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed wind capacity of about 26.2 gigawatts, or GW, as of end-2022.

Following Longyuan’s broadly in line third-quarter 2023 results, we maintain our fair value estimate of HKD 12. We believe Longyuan is attractive given the firm’s strong renewable energy capacity growth, with 2024 price/book at around 0.6 times. We lower Longyuan’s Morningstar Uncertainty Rating to High from Very High as we think the firm will benefit from the government's commitment to support the renewable energy industry.

China Longyuan’s first-quarter 2023 results were broadly in line with our expectations, but we cut our fair value estimate to HKD 12.00 from HKD 14.00 to factor in depreciation of the Chinese yuan and higher midcycle accounts receivable days, given the slow subsidy collection. However, we think the risk of lower tariffs and slow subsidy collection are largely reflected in the current share price. Trading at 2023 price/book of around 0.6 times, we believe Longyuan is attractive given the firm’s strong renewable energy capacity growth. We estimate Longyuan’s net profit to grow at a CAGR of 27.7% during 2022-27.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed wind capacity of about 26.2 gigawatts, or GW, as of end-2022.

Following Longyuan’s broadly in line first-quarter 2023 results, we keep our fair value estimate of HKD 14. We think the weak 2022 results and subsidy audit concerns have been largely reflected in the current share price. We believe Longyuan is attractive given the firm’s strong renewable energy capacity growth, with 2023 price/book of around 0.8 times.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed wind capacity of about 26.2 gigawatts, or GW, as of end-2022.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed wind capacity of about 26.2 gigawatts, or GW, as of end-2022.

We keep China Longyuan’s fair value estimate at HKD 14, and we think the shares are attractive currently given the firm’s strong renewable energy capacity growth, with 2023 price/earnings of around 9.6 times. While Longyuan’s 32% year-on-year fall in 2022 net profit to CNY 4.9 billion was disappointing, this was in line with its preliminary earnings guidance. The weak earnings were mainly attributable to CNY 2.0 billion of impairment losses, but they don't affect Longyuan’s cash flow. In fact, Longyuan’s 2022 operating cash flow rose to CNY 29.6 billion from CNY 18.1 billion in 2021, due to collection of CNY 20.8 billion of subsidies owed by the government. With the kitchen-sinking exercises done in 2022, we think impact from the ongoing subsidy audit should be limited.

China Longyuan guided that 2022 net profit will decrease by 30%-40% year on year (on a restated basis) to between CNY 4.45 billion and CNY 5.20 billion, under People's Republic of China accounting standards, largely due to impairment losses. We will issue an update pending more detailed information from the firm’s final results in late March. The guidance is disappointing and unexpected, and we see near-term pressure on its share price performance. That said, we keep our fair value estimate of HKD 14 unchanged as the one-off impairments do not affect cash flow, and we think the firm remains undervalued. We believe any pullback on Longyuan’s share price will present an opportunity to accumulate the stock, as we expect the firm to benefit from its robust renewable energy capacity growth target of 18.3% CAGR between 2020 and 2025. We think the falling wind turbine and solar panel costs should help the firm to achieve its plan.

Founded in 1993, Longyuan is a pioneer in China’s wind power development. This first-mover advantage, coupled with a capable management team, enabled the firm to secure better wind farm locations, which helps to maximize wind farm utilization rates. Longyuan’s annual wind power utilization hours have consistently outperformed the industry average in China by more than 50 hours during the past decade. Longyuan is the world’s largest wind power producer with consolidated installed capacity of about 23.67 gigawatts, or GW, as of end-2021.

We are transferring coverage of China Longyuan with no-moat and stable moat trend ratings, and a fair value estimate of HKD 14. We estimate Longyuan’s net profit to grow at a five-year CAGR of 21.6% over our explicit forecast period, with operating margin rising to 40.3% in 2026 from the three-year historical average of 33.1%. We think the shares are attractive currently given the firm’s strong renewable energy capacity growth, with 2023 price/earnings of around 9 times.

China Longyuan’s decent third-quarter 2022 results were expected, as wind resources improved during the period. According to the China Electricity Council, the nationwide wind power utilization rate rose 34 hours year over year in the third quarter, compared with a drop of 58 hours in the first half, indicating better wind resources during the quarter. We expect fourth-quarter power demand to grow steadily, and normalized wind resources should continue to support favorable growth for wind power operators. We think Longyuan’s good-quality assets, and its digitalized management platform should also help to optimize resources and improve operating efficiency through a reduced failure time of wind turbines.