Marketized solution proposed for overdue renewable subsidies
- China’s two major electric grid companies reportedly proposed to form dedicated corporate entities to resolve overdue subsidy payments owed
- Should help resolve pressure on balance sheets of renewable power companies which have accounted for overdue subsidy payments as receivables
- Positive to renewable power companies such as China Longyuan (916.HK)
China’s two major electric grid companies, namely State Grid and China Southern Power Grid, have reportedly proposed to form new corporate entities to resolve overdue renewable subsidy payments. According to Chinese media, China Southern Power Grid reportedly applied to form a new company named Guangzhou Renewable Development Settlement Services Co (GZ Renewable). State Grid is also reportedly considering forming a similarly named company Beijing Renewable Development Settlement Service Co (BJ Renewable).
While the exact ownership structure is not clear, GZ Renewable and BJ Renewable will reportedly engage in auditing and management of outstanding renewable subsidies. These companies will operate separately from the grid companies with their own separate financial statements. Furthermore, it is reported that they will be allowed to raise their own debt (including bond issuance) and use the proceeds to resolve overdue payments. The key benefit of the proposal is to “ring fence” the financials of the grid companies from the overdue payments. This means the grid companies will not need to increase their debt burdens.
China Longyuan Power (CLYP, 916.HK) stands to directly benefit should the proposal prove workable. As at Dec-21, CLYP had trade and bill receivables of c.Rmb27bn, which accounted for c.14% of total assets. These receivables are mostly related to overdue subsidy payments. Resolution of these overdue payments should improve CLYP’s cash flow hence net gearing. Assuming all of the subsidy can be repaid in 2023, net debt-total equity ratio could be improved from 126% to 89%. We currently rate BUY on CLYP with HK$22 target price.