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Research Report: Stock code:
  21-10-2014 (二)    China Suntien Green Energy (956.HK) - The short-term bad situation cannot stop the long-term development
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China Suntien Green Energy(0956)
21-10-14
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Recommendation on   21-10-14 
Recommendation Buy
Price on Recommendation Date $ 1.930
Suggested purchase price N/A
Target Price $ 2.330
Weekly Special - 670 China Eastern Airlines
Written by: Research Team
Tel:
+852 2277 6751

Email:
research@phillip.com.hk

China Suntien Green Energy (956.HK) - The short-term bad situation cannot stop the long-term development

-The Company gained the revenue of RMB2.568 billion in 1H2014, up 16.4% y-y, and net profit attributable to the shareholders of the Company amounted to RMB186 million, dropped 43.45% y-y largely, equivalent to the EPS of RMB0.05. The Company’s incomes continued to increase, but profits declined largely due to the decrease of the incomes from wind power operation and the growth of expenses.

-The Company’s sales volume of natural gas amounted to 772 million cubic meters, up 6.3% y-y, and the revenue achieved to RMB1.917 billion, increased by 30.5% y-y, but the operating expense grew largely 38.1% and caused the operating profit to decrease by 1.9% y-y. The gross margin was only 16.3%, down 5.6ppts y-y, besides the impact of the increase in the unit price of the gas, and the gross margin of the gas also dropped, the Company’s cantango mechanism after the increase of the price of natural gas did not protect the stability of the unit gross margin effectively.

-The Company realized a power generation of 1,414 million kWh, down 12.17% y-y, and the utilization hours amounted to 1,047 hours, decreased by 265 hours compared with the same period of last year, which was because the bad situation of wind resources in 1H nationwide, and it should be better in 4Q as expected. Additionally, we expect the Company’s new projects with the installed capacity of 230-250 MW would be put into operation in 4Q, the Company’s wind power generation this year would close to the level of last year.

-The Company’s share price declined from HK$3.5 at the beginning of this year to HK$1.9 currently, down almost 50%. This was mainly because the valuation of wind power continued to go down in the wind power industry, investors concern about the deterioration of power constraints due to the scramble of installation of wind power farms in regions, and the negative impact of the decrease of price per unit of wind power generated by the National Energy Administration, and the Company’s interim results was lower than expectation. Currently all negative impacts are reflected in the share price, and the safety of purchasing is quite high.

Profits declined sharply

The Company gained the revenue of RMB2.568 billion in 1H2014, up 16.4% y-y, and net profit attributable to the shareholders of the Company amounted to RMB186 million, dropped 43.45% y-y largely, equivalent to the EPS of RMB0.05. The Company’s incomes continued to increase, but profits declined largely due to the decrease of the incomes from wind power operation and the growth of expenses.

Cantango mechanism did not protect gains effectively

The Company’s sales volume of natural gas amounted to 772 million cubic meters, up 6.3% y-y, and the revenue achieved to RMB1.917 billion, increased by 30.5% y-y, but the operating expense grew largely 38.1% and caused the operating profit to decrease by 1.9% y-y. The gross margin was only 16.3%, down 5.6ppts y-y, besides the impact of the increase in the unit price of the gas, and the gross margin of the gas also dropped, the Company’s cantango mechanism after the increase of the price of natural gas did not protect the stability of the unit gross margin effectively. The Company expects the sales volume of natural gas would increase by 10% this year.

The continued expansion of the demand and supply

The Company started to import other gas resources, such as coal-based gas of Datang, and coalbed methane (CMB) in Shanxi to solve the problem of shortage of supply of natural gas in future. According to the demand, the Company continued to construct natural gas pipelines. The construction of the project in Shanxin Licheng has started besides Hebei Province, and the Company will acquire Linxi Xinneng Natural Gas Engineering Co., Ltd, and its pipeline will be spread out to Shandong Province, the Company will spread out the pipelines in surrounding areas from Hebei Province in order to increase the sales volume of natural gas in future.

The generation of winder power decreased

The Company realized a power generation of 1,414 million kWh, down 12.17% y-y, and the utilization hours amounted to 1,047 hours, decreased by 265 hours compared with the same period of last year, which was because the bad situation of wind resources in 1H nationwide, and it should be better in 4Q as expected. Additionally, we expect the Company’s new projects with the installed capacity of 230-250 MW would be put into operation in 4Q, the Company’s wind power generation this year would close to the level of last year, and the generation should increase by over 20% under the good situation of wind in 2015.

Share price dropped almost in half

The Company’s share price declined from HK$3.5 at the beginning of this year to HK$1.9 currently, down almost 50%. This was mainly because the valuation of wind power continued to go down in the wind power industry, investors concern about the deterioration of power constraints due to the scramble of installation of wind power farms in regions, and the negative impact of the decrease of price per unit of wind power generated by the National Energy Administration, and the Company’s interim results was lower than expectation. Currently all negative impacts are reflected in the share price, and the safety of purchasing is quite high.

Risk

The serious problems of wind curtailments and power constraints;

Cantango mechanism does not achieve the desired result.

Valuation

The Company’s operation conditions has not deteriorated although its interim results dropped largely, the price adjustment of natural gas and wind resources will not affect the Company’s performance continually. There are lots of wind power projects under construction this year, and the installed capacity is expected to double in the next three years and the price of natural gas will also not be adjusted after it locates at a reasonable price range. We cut the Company’s target price to HK$2.33, equivalent to 17xP/E2015E, recommend Buy rating.

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