CLY released detail plan to merger Pingzhuang Energy (PZE, 000780 CH) and had a briefing thereafter. The Company planned to issue 342mn A-share to merge PZE aiming for back door listing, and to have assets swap for PZE’s existing coal mining assets with CHN Energy’s renewables assets at the same time. The merger plan is subject to various approvals from SASAC, CSRC and SGM for both shareholders. CLY mgmt. expects the transaction will be closed by Dec 2021. Post-merger, CLY will become an A+H dual listing platform with substantially enhanced financing capabilities. We think the merger will enhance CLY’s leading position and release Company value. We lift TP by 103% to HK$15.00 to reflect earnings acceleration. Maintain BUY.
- Fair plan to both sides. CLY offered to issue 342mn A-share at RMB11.42 in exchange for all shares of PZE. Exchange rate will be 1:0.3771, reflecting RMB3.80 for each PZE share and 10% premium of PZE’s 20-day average closing price before trading halt. For CLY, the total consideration would be RMB3.9bn, non-cash, and reflects only 7.5% premium vs. PZE’s book value by Sep 2020. Considering that PZE had made net loss for two consecutive years in 2018-19 and CLY is eager to obtain an onshore equity financing channel, we think the offer is fair to both sides with few shareholder objections.
- High quality asset injection of 2.04GW. The second and third arm of the transaction will be disposal of PZE’s existing coal mining assets and swap for renewables assets from CHN Energy’s other subsidiaries. Assets swap will be in cash basis, and CLY mgmt. had identified 2.04GW wind farm asset from 9 subsidiaries from CHN Energy. Mgmt. disclosed pending injection assets had net profit of ~RMB560mn in 9M20 with annualized ROE of 16.8%, significantly higher than CLY’s ~9% ROE in recent years. Valuation for PZE’s assets and 2.04GW wind farm has not been finalized yet. We expect valuation will not deviate much from 1.0x P/B for both asset types.
- A-share platform to enhance leading position. We are optimistic on the absorption and merger, as the transaction will open financing channel in A-share market, and more importantly will facilitate CHN Energy’s future renewables assets injection. By end-2019, CHN Energy had 41.26/1.34GW wind/solar farm assets. Deducting CLY’s ~20GW operating wind farms, 2GW from the transaction, and ~6GW from GD Power (600795 CH, NR), we expect CLY will have potential to acquire 13-15GW wind projects from CHN Energy.
- Lift capacity addition pace. CHN Energy had raised renewables capacity addition outlook in 14th FYP period, and CLY will be the most important renewables energy platform to fulfill ~20GW capacity plan in the coming five years. We expect CLY will accelerate its capacity addition pace with average 2GW wind and 2GW solar projects for each year. We also expect CAPEX level to be boosted to above RMB20bn in view of accelerating expansion pace.
- Subsidy collecting expectation still in play. CLY’s share price surged more than 45% YTD. We think strong performance not only reflects market optimism on the absorption and merger, but more importantly reflects market expectation for accelerating subsidy receivables collection. By end-2020, we expect CLY to accumulate more than RMB25bn tariff subsidy receivables. CLY collected RMB5bn subsidies during 2020, higher than mgmt. guidance of RMB3.5bn earlier in 2020. In 2021E, to promote renewables energy development, we expect MoF and NEA to roll out special measures such as subsidy-related green bond issuance to fix the enlarging subsidy shortfall. We expect potential measures to further boost CLY’s valuation.
- Raise TP by 103% to HK$15.00; maintain BUY. We had slight adjustment on 2020-22E EPS by -2.5%/0.9%/-2.1% based on operating updates and revised assumptions. Our DCF valuation is revised mainly on 1) terminal growth boosted from 2% to 3%; 2) updating HK$/RMB FX assumption from 0.90 to 0.83; and 3) adding solar farm component in our valuation. In view of long approval time frame and potential transaction uncertainties, we did not factor in potential absorption and merger impact in our valuation model. Our TP is raised by 103% from HK$7.38 to HK$15.00, and our TP reflects FY21E 17.2x/1.8x PER/PBR. We think CLY’s re-rating is not yet done, and we expect China’s 14th FYP for renewables energy development and subsidy solution will be short-term catalyst to boost valuation upward. Maintain BUY recommendation.
