Shenhua:Powering up

Asset injection is ~3% EPS accretive

Shenhua’s investment in power continues, with the purchase of threeplants from its parent for Rmb5.4bn. The valuation appear reasonable; weestimate it adds 11% to Shenhua’s attributable capacity and is ~3% EPSaccretive in 16-17CL. Separately, Shenhua’s 3Q15 earnings were ~20%above our estimate, but lagged consensus. We raise our earnings forecastby 4-6%, but maintain our target price of HK$15.50. A power tariff cut isa risk, but the stock is relatively well-positioned; Outperform.

Results in a nutshell

Shenhua’s 3Q15 IFRS earnings fell 38% YoY to Rmb5.3bn, accounting for75% of our 2H15CL forecast, but only 46% of the 2H15 consensus estimate.Ebit fell 26% YoY to Rmb10.8bn, with the Ebit margin 5.7% ahead of 2H15CLon lower production costs and SG&A expenses. FCF was positive beforefinancing, but net debt increased 20% QoQ with the dividend distribution.

Mixed tracking to guidance

The company warned the decline in full year earnings “may reach or exceed50%”. Similar to the interim results, we regard this as a blanket warningrather than actual guidance, and note a 50% decline implies 4Q15 earningsfall ~80% QoQ to Rmb1.0bn. Relative to Shenhua’s 2015 business targets, itwould significantly miss its revenue and cost guidance, would be slightlylower on implied gross profit, but be higher on implied EBT, in our view.

Asset injection done

Shenhua plans to acquire three power plants (3.1GW attributable capacity)from its parent for cash of Rmb5.4bn. This represents an 11% increase inattributable capacity and is EPS accretive by ~3% in 16-17CL. Thetransaction multiples look reasonable at an 8.8x 2014 PE and a 1.4x PB,which represents a 22% PE discount but a 11% PB premium to peer groupvaluations. Consideration per GW appears cheap at 1.7bn, relative our toreplacement cost estimate of ~Rmb4bn (subject to debt assumed).

Small earnings upgrade。

Incorporating the asset injection and a small decrease in minority interest in15CL translates to a 4-6% increase in earnings. We do not assume a powertariff cut, but note a 5% reduction lowers our 16CL EPS ~8%. We maintainour blended target price of HK$15.50, based on mix of 1x NPV (HK$16.52),12x 16CL PE, and 6x 16CL EV/Ebitda. This implies a TSR of 17%.