China Suntien Green Energy:Positive profit alert on wind,dollar margin risk in gas emerges

What's changed

Suntien announced its reported 2016net profit will increase by over 190%yoy to Rmb487mn, vs. our previous estimate of Rmb407mn. We believethe earnings beat is mainly attributable to the following:(1) Robust windpower generation, wind power generation up over 30% yoy to 4,100GWh,as installed capacity in operation increased from 2.1GW to 2.8GW in 2016and utilization rate improved from 1,887hours in 2015to 2,170hours in2016. Suntien also indicated a low curtailment rate of 6.5% in 2016, vs.industry average of 20% in 1H16.(2) Limited impairment of accountsreceivables from gas customers to be booked as the company indicates ithas collected 130mn aging accounts receivables in 2016, and reduces thetotal outstanding balance to Rmb650mn vs. Rmb760mn in the end of 2015.(3) Gas sales growth resumed in 2H16(yoy flat in 2016), especially in Nov-Dec, due to strong demand from coal to gas conversions.

Implications

Although we expect Suntien’s wind division’s operation will remain solidin 2017, we still have concerns regarding the company’s dollar margin riskin retail gas sales. In order to compete with coal tar in glass manufacturingcustomers, Suntien has lowered its retail gas sales price from Rmb2.45/m3to Rmb1.9/m3through sourcing alternative gas supply since Nov 2016andgenerates Rmb0.05/m3dollar margin on the sales. We believe this willmaterially affect its gas division’s dollar margin in 2017-18. On the positiveside, the company is requesting pre-payment for industrial customers toavoid further aging receivables.

Valuation

We revise up our 2016/17/18core net profit estimates by 30%/8%/2%,mainly to factor in higher wind installed capacity (reported net profitrevisions differ mainly due to impairment of receivables). Our P/B vs. ROEbased 12m TP rises to HK$1.10from HK$1.01as a result. Maintain Neutral.