CR Power:Free cash

1H15 growth drives CRP to positive free cashflow.

CR Power’s net profit climbed 12.4% YoY in 1H, as sales climbed 3% YoY(capacity expansion) and margins expanded, driving 40% YoY EBITgrowth. We are raising our 15CL/16CL net profit 6%/3% as better-thanexpectedutilization and cheaper-than-expected coal more than offsetlarger-than-expected impairments. We are raising our target price fromHK$25 to HK$25.6, as a slightly higher ROE boosts our target multiple to1.55x 15CL PB. Maintain BUY.

Net profit up sharply.

In 1H15, CR Power’s net profit was up 12.4% YoY to HK$6,813mn withrevenue up 3.1% YoY to HK$36.9bn. Net profit/revenue are 56.5%/53.7% ofour original full year estimates. Impairment charges of HK$1,167mn wererecorded in 1H15. This part is difficult to estimate. We have bumped up ouroriginal forecast of HK$500mn impairments for FY15 to HK$1.5bn.

Fuel costs trump utilization.

Excluding impairment charges, EBIT was up 24.2% YoY to 63.5% of our fullyear estimate. (Note – the impairment charges are geared more towardpower-gen rather than coal.) Fuel costs were down -19.5% YoY more thanoffsetting the -8.2% decline in utilization hours to 2,498 hours.

Still expanding at pace.

The company added 3.4 GW coal-fired capacity and 249 MW wind capacity in1H, with another 1.3 GW coal-fired capacity under construction and 1.2 GWwind under construction. In 2H, the company is also starting on 4 GW coalfiredcapacity. Ultra-low emissions is a key target, with the company planningon 22 plant retrofits in each 15CL and 16CL, or cumulative c.Rmb6b in capex.

Reiterate BUY.

After tweaking up our utilization, impairment and int rate forecasts, whiletweaking down our coal price forecast, 15CL/16CL net profit rises 6%/3%.

Under a scorched earth scenario, with 5% 4Q15 tariff cut and another 400hour (c.8%) cut in utilization, but no cut in coal prices, from base case, CRPower would be trading on 9.6x 16CL PE, with 12% ROE. These risks arehedged though (especially with cheaper coal), and we are raising our long-runROE assumption slightly to 14.2%, bumping up our target 15CL PB multipleto 1.55x (from 1.5x), and target price to HK$25.6 from HK$25. Buy.