China Longyuan Earnings: Negatives Largely Reflected in Share Price; Shares Remain Undervalued

China Longyuan’s 00916 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.

Longyuan management provided some key updates. First, the proposed assets injection from its parent is ongoing. Longyuan is working on the compliance and funding options for the potential acquisition, but given the size of the purchase, it could take longer to structure. Second, the target to add 5.5 GW to 6.5 GW of renewable capacity in 2023 remains unchanged. We think tit is achievable given falling costs of wind turbines and solar modules. Third, Longyuan collected CNY 527 million of subsidies it was owed in the first half, versus CNY 11.4 billion a year ago. As a result, operating cash flow declined to CNY 8.0 billion during the period from CNY 16.0 billion a year ago. Fourth, while there is no further news from the ongoing subsidy audit by the government, management expects limited impact going forward, as about 75% of its subsidized projects are included in the audited project list.

First-quarter 2023 revenue declined 8.4% year over year to CNY 19.8 billion, and net profit increased 19.2% to CNY 5.0 billion. The drop in revenue was mainly due to lower coal sales, but its overall power output is largely within our expectation. Notably, average tariffs for the overall power segment were down 4% to CNY 0.46 per kilowatt-hour due to increasing grid parity projects and rising power trading volume. That said, this was lower than Datang Renewable’s 6% drop.