China Resources Power Earnings: Strong Results Underpinned by Turnaround of Thermal Power Segment

China Resources Power’s 00836, or CR Power’s, first-half 2023 net profit rose 54% year on year to HKD 6.7 billion. The result beats our expectations largely due to a better performance from the thermal power segment, which delivered earnings of HKD 726 million, from a loss of HKD 1.4 billion, a year ago. We expect the thermal power segment to further improve in second-half 2023 on the back of weak coal prices. After incorporating the latest results in our model, we increase our 2023-25 earnings forecasts by 6%-13% and raise our fair value estimate to HKD 25 from HKD 22. We think CR Power is undervalued, with recovery in profitability and the pending listing of its renewable energy segment likely to support share price performance.

CR Power’s first-half 2023 net generation volume was largely in line with our expectations. Key positives of the results are management’s guidance for continual recovery of the thermal power segment and expectation for coal prices to remain low in second-half 2023. In addition, the firm believes the falling solar modules and wind turbine prices will continue to support returns of renewable energy projects despite the rising share of power trading volumes. We note that the average tariff for coal-fired power plants rose 1.8% year on year in first-half 2023, contrary to market concerns that tariffs would decline. Meanwhile, average unit fuel cost was down 8.1%.

The firm aims to add 7.0 gigawatts of renewable capacity in 2023 and we believe it is on track to achieve this. However, CR Power’s net gearing ratio, excluding perpetual capital, deteriorated to 171% as of end-June 2023 from 159% as of end-2022 due to high capital expenditure. That said, we are not overly concerned as the firm’s plan to spin off its renewable segment should help to improve its balance sheet. Furthermore, CR Power’s average borrowing cost remains well-managed and was flat at 3.18% in first-half 2023 versus a year ago.