Suntien’s 1H19 earnings missed due to higher tax expenses and minority distribution. We trim EPS estimated based on 1H results, but we are not too concerned about the EPS cut, as Suntien revealed possibility to achieve higher growth potential from gas distribution services in Hebei. We see A-share listing a catalyst in 2H19.
- 1H19 results slight missed. Revenue surged 31.5% YoY to RMB6,361mn. Revenue growth was driven by 14.8%/27.3% power generation and gas sales volume growth YoY, respectively. GPM declined 2.4ppt due to higher contribution from gas distribution segment. Major expenses were in line. Operating profit increased 32.6% YoY to RMB1,769mn, beating our est. by 7.5%. Income tax came with surprise and surged 102.6% YoY, which led to bottom line miss by 8.5%. Net profit was RMB936mn, up 15.4% YoY.
- Prudent capacity expansion plan. Suntien added 119.4MW wind farm during 1H19. Mgmt. maintained 400-500MW annual expansion target unchanged, and emphasized that Suntien had no intention to participate in installation rush as the Company has concerns on 1) WTG and construction pricing, 2) product delivery, and 3) WTG product quality. Given hurdle rate of levered IRR at 10%, Suntien would prefer grid-parity project to mitigate project risks from tariff and quality. Based on current ~600MW project under construction, mgmt. expects capacity growth in FY20E will trim to 300-400MW.
- Gas segment revealed potential to drive long-term growth. Though gas sales growth exhibited somewhat shuffle in 2Q19, Suntien maintained FY19 gas volume growth target at above 20%. Mgmt. reemphasized mid-stream pipeline investment target to capture future gas sales opportunities 1) from downstream industrial clients; 2) through enriching upstream gas sources to sustain stable gas dollar margin; and 3) by expanding service coverage to areas with high potential such as northern Hebei and Xiongan New District. We expect Suntien’s efforts in gas pipeline will be rewarded from end-2020.
- A-Share listing will be a strong catalyst in 2H19. Based on 1H19 results, we trim FY19-21E EPS by 12.2-13.9% to RMB0.36/0.40/0.44 respectively for effective tax rate and minority profit distribution. We are not concerned about the EPS cut, and in the opposite, we see long-term growth driver from gas business in 1H19 earnings. We expect Suntien’s A-share listing in 2H19 (ranking ~30 in pending approval list) will be a strong catalyst to trigger re-rating. Based on revised STOP valuation, we raise Suntien’s TP slightly to HK$2.74. Reiterate BUY.
