CGN Power:Growth at a price

Earnings stability and growth are already priced in.

CGN Power offers what few companies in China do – earnings stability, a long term growth theme and an anti-pollution angle. Stock price, however, seems to have already priced in these positives. Rapid expansion of nuclear power capacity at a time of slowing power demand puts utilisation hours at risk. Earnings could also get cut if there are any further delays in the Taishan project or if it doesn’t get sufficient tariff compensation. We initiate with an U-PF call and target price of HK$3.25.

Earnings stability and growth

Fluctuations in uranium price (c.6% of tariffs) have little impact on CGN’s earnings. It also doesn’t face big swings in utilisation hours like wind or hydro power. Over 20GW nuclear power capacity that started construction in 2008- 10 will be commissioned in 2014-16. CGN’s attributable capacity would go up from 6.2GW to in 2013 to 13GW in 2016 driving 18% EPS cagr over FY14-17.

Risk of lower utilisation hours

China’s nuclear power capacity is likely to rise by 150% during 2013-17 but China’s power demand growth is at a multi-year low. Thus, despite priority of dispatch, utilisation hours of nuclear plants are likely to come under pressure.New plants in Fujian and Liaoning would have much lower utilisation. We factor in decline in utilisation of consolidated plants from 89% to 84% over next few years. Each 1ppt decline in utilisation hours leads to c.3% EPS cut.

Taishan project can be an overhang; growth slows from 2017

Per kW cost for Taishan project is c.70% higher than other projects of CGN.We assume tariff of 50fen/kwh for Taishan vs. 43fen/kwh for other projects in Guangdong. However, there is no guarantee that it will get higher tariff. Given their larger size, EPR reactors may also get lower dispatch. While CGN would add 3.3-5.6GW gross capacity each year over 2014-16, the additions fall to 1.1GW a year in 2017-19. Any construction starts now will be commissioned only after 2021 implying a much slower earnings growth post 2017.

Valuations prices in the positives

CGN is one of the most expensive power utilities in Asia and seems to have priced in the earnings stability and growth potential. Lower utilisation hours and delays or lower tariffs in Taishan pose a risk to earnings and valuations.Our DCF based target price, using 7% WACC and 3% terminal growth, is HK$3.25. With little upside from current valuations we rate the stock an U-PF.