We hosted a post-results NDR call with CLY. Investors were curious about 1) CLY’s potential capital market actions in view of current extremely low valuation; 2) CLY’s CAPEX plan and possibility to reach positive free cash flow from 2021 onwards; and 3) CLY’s offshore wind farm development. Mgmt. said the Company will leave any possible capital market option on the table, and CHN Energy, CLY’s parent corporation will be the entities holding decision power. Following Huaneng Renewables and CGN New Energy’s privatization path, we think CLY’s odd is increasing for a potential capital market action. Maintain BUY with TP unchanged at HK$4.73.
- Actively evaluating any possible capital market action. Mgmt. expressed CLY itself does not hold decision power for potential capital market action in view of current low valuation, and it would be up to CHN Energy’s discretion. According to CLY, CHN Energy has been evaluating possible option not limited to share buyback and privatization. Mgmt. also revealed that CLY was ranking the third subsidiary in terms of revenue and profit contribution within CHN Energy Group, and should be deserved some priority as leading renewable development platform. CHN Energy Group has healthy balance sheet with no deleverage pressures, implying CLY will have strong financial supports for capital actions from Parent Corporation.
- Offshore wind will be a focus from 2020. CLY held 2GW offshore project pipeline in Zhejiang, Fujian and Guangdong by end-2019. Mgmt. intended to accelerate offshore wind development, and planned to add 400/600MW in 2020/21 for securing tariff subsidies (RMB0.85/kWh). For the remaining 1GW offshore project, it will subject to local tariff subsidies from Guangdong Province yet to be decided. CAPEX budget will remain high in FY21, as offshore projects require RMB1.7-1.8/watt CAPEX, implying relatively low possibility for free cash flow to turn positive in FY20/21E
- Subsidy shortfall solution is still uncertain. Mgmt. looked forward to a comprehensive solution for solving subsidy shortfall by 2020 before entering grid-parity, but admitted that COVID-19 could bring disruption to government’s plan. Combating COVID-19 and its associated economic impacts is now a top priority of China, and apparently government will have very limited effort to consider the subsidy delay issue
