Summary. CLY’s flat 1H19 earnings was well expected by the market, and rapidly expanding subsidy receivables still suppressed market interest on the Company. By 1H19, subsidy receivable balance grew to above RMB18bn, but neither the government nor CLY mgmt. had effective measures to solve the problem. Downgrade to HOLD, TP cut to HK$5.0.
- Net income was flat as expected. Revenue increased 5.0% YoY to RMB14,038mn. Revenue was slightly higher than our est. due to higher than expected coal trading. Major expenses were largely in line, while financial expenses increased 5.5% YoY and was 5.1% higher than our estimates due to higher bank and service charges from bond issuance and structural product financing. Net profit realized was RMB3,087mn, up 0.5% YoY. We believe CLY’s flat 1H19 earnings was well expected by the market.
- Subsidy receivable is the key market concern. Account receivables increased 71.5% to above RMB18bn, and mgmt. disclosed subsidy receivables was amount to RMB18.3bn, of which ~RMB2.9bn was recycled through factoring and ABN products. CLY collected ~RMB250mn subsidy in 1H19, and mgmt. disclosed collection pace accelerated in Jul and Aug. By far, CLY collected RMB1.41bn subsidy. Cash flow issue has become key market concern as 1/3 of questions in analyst briefing were in relation to subsidy receivables. Although CLY intends to recycle subsidy receivables through ~RMB5bn factoring, ABN and ABS products, we expect market is not satisfied, as overall receivable balance is still expanding at rapid pace.
- Capacity expansion will further raise cash flow concern. CLY installed 90MW wind farm during 1H19. Mgmt. maintained 1.2-1.5GW/2.6G grid connection/ new construction targets unchanged in FY19. Most of the projects in the pipeline are FIT eligible projects, of which ~1GW are off-shore wind farm. Given tight project time line set by NEA, CLY had turned prudent in project selection adding grid-parity return requirement for some of the on shore projects constructing under potential tariff risks. Mgmt. disclosed levered equity IRR difference for project w/o subsidy could reach 10ppt.
- Undemanding valuation but lack of re-rating catalyst. Trading at FY19/20E 6.8x/6.2x and 0.7x/0.6x, we believe valuation is undemanding, but we also believe the Company is lacking in short-term re-rating catalyst. Downgrade to HOLD, TP cut to HK$5.0.
