Increases capacity by 2.2% through asset injection from parent (positive)
- Plans to acquire c.720MW of solar farms for c.Rmb680m from parent. Total capacity should increase by 2.2% vs Sep 2023
- Implied module price of c.Rmb0.944/watt is fair as it is close to the current spot solar module price.
- Acquisition reaffirms growth trajectory underpinned by capacity expansion.
- Reiterate BUY/HOLD recommendation with H/A target price of HK$10.8/Rmb17 target price. Share buyback could help cushion share price downside.
China Longyuan Power (CLYP) agreed to acquire c.720MW of new solar capacity for c.Rmb680m from parent. The assets comprise of seven solar farms. After the acquisition, CLYP’s total power capacity is set to increase to 33.53GW, up 2.2% from Sep-2023. This consists of 26.77GW/1.875GW/4.88GW of wind/coal/renewables. We estimate CLYP’s gearing (net debt/total equity) could increase modestly by c.0.8ppts/0.8ppts to 131%/134% including/excluding perpetual securities compared to Sep-2023 figures.
The transaction consideration of c.Rmb680m for c.720MW implies a unit price of c.Rmb0.944/watt, which is close to the current spot solar module price. The low module price should help CLYP achieve its >7% equity IRR target for its capacity expansion plan. We reckon the price is fair and the transaction should benefit CLYP’s long term growth trajectory. Gearing after the transaction of c.131% should remain manageable compared to the 5-year average of c.129%. Looking ahead we expect CLYP to achieve its capacity expansion plan both via its own CAPEX and further asset injection from parent. In our estimation, CLYP will need to develop a further c.20GW of new capacity in order to achieve its 30GW expansion target set for the 14th Five Year Period (14th FYP).
We continue to like CLYP as it offers a good combination of growth visibility and low valuation. CLYP is a key beneficiary of falling wind/solar supply chain prices and long-term earnings growth should be underpinned by its capacity expansion plan. CLYP H-shares trades at c.5.8/5.0x FY23/24F P/E, >1SD below the 5-year average of c.11.7x. Current valuation is attractive on both absolute terms and relative to its own trading history. Furthermore, in Oct-2023, CLYP proposed to buy back up to 10% of its outstanding H-shares. Share repurchases should help cushion the downside for the counter. We maintain our BUY/HOLD recommendation with H/A target price of HK$10.8/Rmb17 target price.