HDFX’s FY19 earnings surprisingly down 5.3% YoY, 22.3% lower than our estimates. Earnings miss was driven by asset provision of ~RMB790mn from gas distributed projects and wind projects. Market will be disappointed to FY19 earnings, while staying curious for whether HDFX will choose to go private at such a distressed valuation. Mgmt. didn’t respond to that directly, but leave all the options on the table depending on parent co.’s decision. Given extremely low valuation, we maintain BUY rating.
- Sanmen nuclear recorded loss. Nuclear investment return suffered a drag as Sanmen Nuclear Unit 2# experienced outage throughout most of the year. Sanmen nuclear brought a loss of ~RMB100mn to HDFX, which reduced overall share profit by 14.8% to RMB801mn. Fortunately, The outage was fixed by Dec 2019, and we expect HDFX’s nuclear investment profit to have significant growth in 2020.
- Hydro power resumed normal. Utilization hours rebounded from multi-year low of 2,311 in FY18 to 3,631 in FY19. Operating profit, as a result, rebounded 250% to RMB1,120mn. For 2020, mgmt. expect hydro power segment to have stable hydro output as usual year with an output target of 9.2TWh.
- Coal-fired power turned around. The segment experienced significant improvement in FY19, as segment operating profit surged 355.6% YoY to RMB757. Strong profit rebound was supported by coal costs decline, as we estimated unit coal fuel costs declined by 15.3% YoY. Given stable coal price outlook in 2020, we expect coal power segment to maintain stable performance while utilization hours may be squeezed due to COVID-19.
- Surprising asset provision. HDFX realized revenue of RMB19,776mn, up 7.9% YoY. Repair and maintenance and personnel costs increased 23.2% and 14.5% YoY, while administration expense declined 12.8%, offseting some costs increment. Other operating expenses came with surprise with a surge of 135.1% to RMB1,850mn, increased RMB1bn over FY18’s figure. Mgmt. disclosed it was due to asset provision of ~RMB790mn for 1) unprofitable gas distributed projects; 2) low efficient wind farm projects; and 3) some new wind farms subject to environmental constraints need to be relocated. Net profit, as a result devoured by those provision, was only RMB1,887mn, down 5.3% YoY, and 22.3% lower than our estimates.
- Wind power was flat in FY19. Other than flat wind power generation, HDFX installed only 91.7MW in 2019, missing the 400-500MW capacity addition guidance. Mgmt. explained the slow addition pace was due to tightened environmental approval from local governments. HDFX intends to accelerate capacity installation in 2020, and maintains overall 1.2GW new build target unchanged. Since COVID-19 had caused significant delay to wind farm project constructions, we believe the Company is now facing risks of project tariff cut if project constructions miss the 31 Dec cut off line.
- Project commissioning plan. Other than 1.2GW wind farm, mgmt. put 1) Shaowu phase III: 2 x 660MW, and 2) Zengcheng Gas Power: 1.2GW on commission list within 2020. According to mgmt., Zengcheng Gas Power will have two units commence operation in May and Jul 2020, and Shaowu Phase III’s commission will be subject to NDRC’s approval. For Zengcheng Gas Power, the Company expects the project to contribute RMB1bn/RMB50mn revenue/profit in 2020 respectively.
- Cut FY20/21E earnings outlook. Based on FY19 results and more conservative utilization hours outlook due to potential economy impacts due to COVID-19, we cut HDFX’s FY20/21E EPS by 19.4%/10.2% to RMB0.29/0.38. We also cut TP from HK$2.00 to HK$1.70 based on assumptions update and valuation roll over. Our TP reflects 5.4x FY20E PER. As HDFX is currently trading at extremely low valuation at only 3.8x/0.37x FY20E PER/PBR respectively, we maintain BUY on HDFX.
