Yangtze Power:Strong 3Q results;further upside from potential favorable VAT policy

类别:公司研究 机构:德意志银行 研究员:Michael Tong,Hanyu Zhang 日期:2017-11-07

Yangtze Power reported robust 3Q17results with net profit up by 11% toRmb9.7bn. As a result, 9M17net profit increased by 9% yoy to Rmb17.8bn,accounting for 90% of our previous full-year forecast (historically 79-83%). The3Q earnings growth are primarily driven by a 4% yoy increase in power output,a 87% yoy increase in investment income and a 11%/19% yoy drop in financial/operational cost. Consequently, we lift FY17/18earnings by 10/9% on the backof strong 3Q results. With 15% upside to our new target price of Rmb18.3, wereiterate Buy on Yangtze Power given 1) a high-quality hydro power assets withstable earnings, 2) an absolute DPS commitment at Rmb0.65/sh until 2020(4.0%yield) and >75% payout post 2020, 3) potential earnings upside if the favorableVAT rebate policy gets extended. Management will host a call at 9:00am on 1Nov (dial in: China: 95040123456; overseas: +865722760523).

    3Q17results boosted by higher output, investment income and cost savings

    In 3Q17, net profit was up by 11% yoy to Rmb9.7bn driven by 4% yoy increase innet output, a 87% yoy increase in investment income and a 11%/19% yoy drop infinancial/operational cost. Power generation growth recovered from a 4% declinein the first half to 4% yoy in 3Q17thanks to improving water flows in Three Gorges(output +6% yoy) and Gezhouba (output +11% yoy). While Chuanyun (Xiluoduand Xiangjiaba)’s power output growth remains stable with 1% improvement in3Q17.

    As a result, 9M17net profit was up 9% yoy to Rmb17.8bn. The 1% yoy decreasein net power output was well offset by 12%/24% yoy decrease in financial/operational cost and doubled investment income. 9M17results accounts for 90%of our previous full year estimates, ahead of the historical range of 79-83%.

    Further room for financial cost savings

    In 9M17, Yangtze's financial cost was lowered by 12% yoy to Rmb4.4bn withstable net gearing at 110%. Effective interest rate was lowered by 0.3ppt to 4.4%per our calculation. During the 1H17results conference call held in September,mgmt expects the debt to asset ratio to decrease gradually from 59% to 30%, afterwhich Yangtze may consider M&A and raise the debt to asset ratio again. We seefurther room for financial cost savings going forward as a result of deleveraging.

    Hydro VAT rebate could be extended, positive to Yangtze

    According to Energy News on 8Sep, the NDRC is soliciting feedbacks for thenotice of Reduce the Tax for Enterprises in Renewables Energy Sector. In thenotice, the NDRC proposes to reduce the VAT for hydro power units (with capacityabove 50MW) from 17% to 13% and to extend the VAT rebate period to 2020for those with capacity above 1GW. If passed, Yangtze Power would be the keybeneficiary and we estimate the extended VAT rebate would bring 9.6%/9.4%2018/19E earnings upside. See report Hydro VAT rebate could be extended,positive to Yangtze Power and SDIC, 8th Sep 2017for more details.

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