HNR, as we expected, was the best performing wind operators among major SOE peers in 1H19. HNR’s 1H19 earnings beat our estimates from better-than-expected cost control and significant improvement in finance costs. However, as there is still no clear solution from both the Company and government on subsidy receivables, we think HNR lack of catalyst to sustain further rerating. We cut TP to HK$2.47, downgrade HNR to HOLD rating.
- 1H19 results beat. Revenue was RMB7,139mn, up 13.0% YoY. Major expenses were remained in good control, with 1) repairs and maintenance costs down 13.0% YoY and 2) administrative costs down 13.2% YoY. Operating profit increased faster than topline, as a result, to RMB4,651mn. Finance expenses also experienced decline by 7.4% YoY. Mgmt. took active measure through issuing multiple ultra-short-term financing to improve finance costs. Net profit read RMB3,094mn, up 31.7% YoY. HNR’s robust 1H19 earnings revealed its strong operating leverage, and the bottom line was 5.0% higher than our estimates.
- Subsidy receivables increased RMB4.1bn during 1H19. Total subsidy receivables reached RMB12.8bn by 1H19. Mgmt. disclosed subsidy collection was ~RMB0.86bn in 7M19. Based on past subsidy collection history, HNR expects to collect ~RMB3-4bn subsidy in FY19. HNR plans to transfer receivables to Huaneng Group by RMB1bn per year in 2019-21 through ABN product to recycle subsidy receivables. Mgmt. disclosed reference rate would be 5% based on transfer terms, and arrangement fees will be charged in advance with a cap of RMB180mn per year. We believe ABN product can only be served as a short-term measure to slower receivable expansion pace, subsidy receivable will still increase as according to our estimates.
- Slightly adjusting capacity target. trimmed FY19 capacity addition target slightly from 1.6GW to 1.4GW, and maintained FY20 target unchanged at above 2.0GW. HNR’s strategic focus in short-term is to secure FiT projects as much as possible.
- Cut TP to HK$2.47, downgrade to HOLD. We raise FY19-21E EPS outlook by 2.5%/4.0%/9.1% based on 1H19 operating updates. However, as subsidy receivable issue was stalled and without a clear solution, we believe HNR’s cash flow will be dragged by subsidy receivables despite issuing ABN through parent Co., and market will still be cautious to wind operators. Our DCF TP is trimmed 11.8% from HK$2.80 to HK$2.47. Downgrade to HOLD.
