类别:公司 机构:中信证券股份有限公司 研究员:LI Xiang 日期:2023-09-14

Huaneng Lancang River Hydropower (Huaneng Hydropower) plans to acquire 100% equity of Huaneng Sichuan Energy Development at a full cash price of Rmb8.579bn. The target company is primarily engaged in hydropower development, construction, and operation in Sichuan, with installations in operation/ under construction at 2.7GW/2.6GW. Upon completion of the transaction, the Company's installed capacity may grow by 11%. The early date of commissioning for targetco power plants led to a significant increase in the valuation of targetco assets. But considering replacement costs and the upcoming commissioning of capacity under construction, we believe the consideration is reasonable. After the transaction is completed, the Company will smoothly expand into Sichuan to accelerate clean energy development, driving continued earnings growth. Considering the transaction is subject to approval at the Company's shareholder meeting, we maintain our 2023E/24E/25E EPS forecasts of Rmb0.42/0.44/0.45 and reiterate the "BUY" rating with a target price of Rmb8.50.

    Event: The Company has announced its intention to acquire, through a private agreement, 100% equity of Huaneng Sichuan Energy Development (Huaneng Sichuan) held by China Huaneng Group and Huaneng Power Int'l for a total of Rmb8.579bn. The agreement is currently pending approval at the Company's shareholder meeting.

    With the targetco engaged in clean energy development, the transaction will be accretive to the Company's installed capacity. Huaneng Sichuan is primarily engaged in clean energy projects such as hydropower development, construction, production, and operation in Sichuan Province, with its hydropower stations located in various river basins, including the Minjiang River, the Jialing River, the Fujiang River, the Dadu River, etc. The target company's assets are mainly hydropower plants. According to the targetco website, as of Jul 2023, Huaneng Sichuan has 22/3 power stations in operation/under construction, with a combined installed capacity of 2.7GW/2.6GW, with hydropower installations in operation/under construction totaling 2.65GW/1.12GW, respectively; the targetco recorded operating revenue/attributable net profit (ANP) of Rmb2,439mn/433mn in 2022. Based on the Company's installed capacity at the end of 2022 and its 2022 ANP, we estimate that the transaction, if completed, will expand the Company's total installed capacity by 11.1% and shore up its ANP by 6.4%.

    Despite a significant increase in asset value using the asset-based approach, the transaction price remains reasonable. The target company's equity is valued at Rmb8.579bn under the asset-based approach, resulting in a value increase of 134.76%. This substantial increase is primarily attributed to the fact that several of the targetco's power stations were commissioned between 1990 and 2010. As a result, some assets have been significantly or fully depreciated, but they still have a substantial remaining useful life from the perspective of asset-based valuation. Based on the 2022 consolidated ANP and net assets attributable to the parentco, the targetco valuation corresponds to a P/E ratio and a P/B ratio of 19.8x and 2.1x. Considering the substantial increase in the replacement cost of hydropower stations and resettlement costs, the imminent earnings contribution from power stations under construction, and the potential for financial cost optimization after targetco assets are brought under the Company's management, we believe that the transaction price is reasonable.

    Utilizing the target company's resources, the Company will expand into Sichuan Province and accelerate clean energy development. This acquisition, if successfully completed, will further address the longstanding issue of horizontal competition between the Company and its controlling shareholder. Moreover, it will facilitate the Company's expansion into Sichuan, enabling it to secure more high-quality clean energy project resources. In the future, the Company will continue to serve as China Huaneng Group's primary hydropower asset operating platform. With the backing of resources and funding from the Group, the Company plans to expedite the development and construction of clean energy projects in the southwestern region, including hydropower and integrated hydro-wind-solar power bases in river basins, thereby driving sustained earnings growth.

    Potential risks: Electricity output being lower than expected; power trading prices being lower than expected; fluctuations in construction costs for new projects; asset acquisition progress being slower than expected.

    Investment recommendation: Considering that the transaction is pending approval at the Company's shareholder meeting, we will not adjust our operating and financial data assumptions for the moment and maintain our 2023E/24E/25E ANP forecast of Rmb7,553mn/7,924mn/8,162mn, corresponding to EPS forecast of Rmb0.42/0.44/0.45 and 17x/17x/16x 2022E/23E/24E PE. Based on the Company's historical PB average over the past three years, we assign 2.1x 2024E PB to derive a target price of Rmb8.50 and reiterate the “BUY” rating.