CR Power:Going gets tough,tough get…

Not immune to the coal bubble, but coping well

CR Power is adjusting sensibly to the ongoing glut in China’s coal-firedpower market - pushing back coal-fired capex, raising renewables andassuring dividend (DPS) growth supported by healthy free cashflow.However, it is still – at heart – a coal-fired power plant operator, and thusfaces falling utilisation (faster than expected) and rising regulatoryuncertainty. We are trimming 16CL/17CL earnings by 4%/9%, andcutting our target price from HK$18.10 to HK$17.70. Retain BUY.

Solid core earnings

Stripping out impairment charges of HK$4.4bn, CR Power’s FY15 core profitrose 8.8% YoY, 6% ahead of 15CL, as free cashflow jumped 4.5x toHK$16.9bn. Inclusive of impairments, net profit was up 9%, but 19% underCL. Revenues were up +1% (2% ahead of CLSA), while operating profit, eximpairment,was 6.5% ahead of expectations.

The good: Debt paydown, cash, capex shift, dividends

CR Power reduced total debt exposure by 12%; HKD/USD debt fell by -29%/-69% in 2H15 in a push to mitigate forex risk. While capex guidance is up+34% YoY in 16F, 69% of that is either renewable energy (biggest capexitem) or emissions control equipment. Renewables remain a focus goingforward, with the target raised from 800MW pa to 1.5GW pa new capacity.Ability to pay dividend remains, with management assuring steady growth inDPS, even if the payout ratio has to go up.

The bad: Utilisation, blurry impairment, (and the ugly) zombie market

Management guidance for 4,500 hours utilisation (-10% YoY) was below ourexpectations, and though it looks conservative, we are now building this in.There are no real signs of demand/supply balance in the sector, though theNEA is signalling that it will prevent some of the 169GW coal-fired capacityapproved in 15A. We are still awaiting something concrete.

Bringing down earnings slightly; retain BUY

Overall, 16CL/17CL net profit falls 4%/9%, driven by lower utilisation, slightlylower tariffs (direct sales) and lower RMB. This is partly offset by lowereffective interest expense and slower capex. Our new Gordon Growth–derivedtarget price of HK$17.70 (from HK$18.10), based on a 16CL PB multiple of1.1x, leaves 18% upside plus a 6% dividend yield. Retain BUY.