China wind operators have different development trends after announcing 1H19 results. We think overall sentiment is still sluggish due to long standing renewable subsidy delay and newly added tariff uncertainties from policy revise, and most wind operators read soft 3Q19 operating performance. HNR’s privatization had boosted market focus in short term, however, but we don’t expect privatization would be a trend for the sector. Our sector top pick is Suntien (956 HK) for its outstanding operating performance, increasing gas business focus, and pending A-share listing.
- Sluggish 3Q19 operating performance, except Suntien. Wind operators encountered bad season in 3Q19, as leading operators read YoY wind power generation decline range by 5.0% to 13.3% due to unsatisfactory wind resources in North China. Suntien (956 HK) was an exception in our coverage list, posting YoY 14.0% wind power generation growth during the period. YTD, CLY (916 HK), HNR(958 HK) and HDFX(816 HK)’s wind outputs were slower than our estimates, while Suntien was slightly leading ahead.
- Subsidy and policy overhang remain. We observed valuation pressures on China wind operators after disappointed resolution disclosed during interim results briefing for the rapid expanding renewable subsidy delay and funding shortfall. State Council’s executive meeting(国常会) decided to cancel the benchmark tariff for coal-fired power and replace with a market-based benchmark had raised more market concerns on wind operators, since market anticipated potential future tariff cut will lead to 1) harder to reach grid-parity, and 2) further enlarge the subsidy gap. We see those valuation pressures marked by CLY (leading wind operator,)’s valuation tumble.
- Privatization would be a short-lived boost but not a market trend. HNR’s surprising privatization offer at ~1x P/B had altered market sentiment since early Sep. According to our communication with wind operators, we believe privatization decision is highly based on corporate strategy and mgmt. style, but with no direct guidance from SASAC(国资委). HNR’s privatization will be a single case for renewables assets restructuring, but not a common trend for deep discounted renewable SOE listcos, in our view.
- Suntien is our sector top pick. Suntien’s share price has rebounded 20.2% since interim results announcement, ranked 2nd after HNR’s surprising privatization. Given relatively strong operating results, increasing gas business exposure, and more importantly, A-Share listing is coming close, we believe re-rating catalysts remain. Our TP for Suntien is HK$2.74, representing 17.6% upside.
