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<Research> BofAS Upgrades CGN POWER (01816.HK) to Buy, Keeps Underperform on HUANENG POWER (00902.HK), HUADIAN POWER (01071.HK) and CHINA LONGYUAN (00916.HK)
Recommend 3 Positive 8 Negative 3 |
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BofAS published a report noting that higher energy prices, the El Nino phenomenon and direct power supply models have driven the performance of independent power producers (IPPs). Over the past month, related H-shares have risen by about 15% on average, led by thermal power stocks. However, the bank believes the impact of rising coal costs will outweigh potential tariff hikes, leading to a decline in thermal power earnings, while current valuations already reflect expectations of flat or mildly rising tariffs. The scale of direct supply of green electricity remains too small and its economic benefits are uncertain, making it difficult to support earnings. Therefore, the bank maintained Underperform ratings on HUANENG POWER (00902.HK), HUADIAN POWER (01071.HK) and CHINA LONGYUAN (00916.HK). The bank is more confident about the recovery in nuclear power earnings. Based on policy support for tariffs, controllable fuel costs and attractive valuations, it upgraded the investment rating of CGN POWER (01816.HK) A-shares and H-shares from Underperform to Buy in one move, raising the H-share TP from HKD3 to HKD3.9. The TP for CGN (003816.SZ) A-shares was lifted from RMB3.7 to RMB5. In an earlier report, the bank cited the National Meteorological Administration as saying that the El Nino phenomenon may lead to higher-than-usual temperatures nationwide, although current weather forecasts for June to July remain below average. Rainfall in June is projected to decline YoY. A hot and dry summer could support electricity demand, particularly for thermal power. Since April, higher energy prices and weather factors have pushed up spot power tariffs, mainly in South China. However, these tariffs are moderating, and nationwide trends remain divergent. After a coal mine accident in Shanxi, elevated coal prices may persist for longer, potentially pushing up monthly tariffs and possibly 2027 annual contract tariffs. Nevertheless, the bank expects thermal power earnings to decline, as combined spot and contract tariffs are still falling, while coal prices are rising and coal inventories remain below average. The bank believes the current price-to-book ratios of 0.9 to 1.4 times for thermal IPPs are too optimistic in pricing in returns on equity, implying flat or mildly rising tariffs this year. The market has also turned more optimistic on direct power supply opportunities for data centers and large power users. While the bank agrees that AI poses upside risks to electricity demand, it believes direct supply mainly benefits new (rather than existing) renewable energy projects and is only viable when tariffs are lower than grid-connected tariffs. The bank sees no significant cost savings in regions with low tariffs, which usually have more surplus green power. BofAS said it is more confident about the recovery in nuclear power earnings. Recent policies have effectively set a floor for nuclear tariffs in two provinces for 2026, and this is likely to expand to other provinces next year. CGN POWER management is relatively optimistic on fuel costs, indicating a 10% to 15% increase over the next five years. The bank's 2027 net profit forecast is 8% above market consensus, with upside risks from annual contracts. At around 12 times forecast 2027 price-to-earnings, the risk-reward profile is attractive in the bank's view. Compared with other H-share IPPs, the valuation premium is broadly in line with the historical average of 46%, lower than the previous premium of over 100%. The bank also sees upside risks to the approval pace of nuclear projects.(da/u) Auto-translated by AI This article was automatically translated by AI, the original language version should be considered the authoritative version. AASTOCKS.com Limited does not guarantee its accuracy or completeness and accepts no liability for any damages or losses arising from the use of this translation. More Details
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