China National Nuclear Power:Mixed impact likely from guaranteed nuclear utilization hours

Guaranteed utilization hours policy to be implemented for nuclear power

    The National Energy Administration recently issued the Measures for Administration ofGuaranteed Sales for Nuclear Power (Draft for Comments), according to an 8 Augreport in the National Business Daily. Based on the draft: 1) Nuclear units' guaranteedutilization hours will be set as the average utilization hours for 6MW+ power units inthe relevant province, adjusted by a multiplier. 2) The multiplier will be set as thenationwide ratio of average nuclear utilization hours to average utilization hours for6MW+ power units over the past three years.

    Mixed impact likely from new policy

    Based on our estimates, we calculate a 1.78 value for the multiplier using nationwideaverage utilization hours for nuclear units and 6MW+ power units. Multiplying thisfigure by average 2015 utilization hours for 6MW+ power units in the provinces wherenuclear units are located, we arrive at a 6,665-8,736 range for implied guaranteednuclear utilization hours in 2016. That includes the following: 1) In provinces wherenuclear utilization hours were previously low, such as Liaoning, implied guaranteedutilization hours represent a visible increase over actual 2015 operating hours. 2) Inprovinces where nuclear utilization hours were previously high, such as Zhejiang andGuangdong, implied guaranteed utilization hours are lower than 2015 actual hours.

    Overall, we estimate nationwide average guaranteed nuclear utilization hours of 7,065in 2016, 3% lower than average utilization in 2015 (7,279).

    We expect pressure on nuclear utilization to continue in H2

    Although the guaranteed nuclear utilization hour policy is likely be implemented in thenear future, we believe the factors driving nuclear utilization declines in certainprovinces remain intact (power demand slowdown, good water inflow for hydropower,faster new energy installation, etc.). Therefore, we expect continued pressure onnuclear utilization in H2. We estimate CNNP's 2016 net profit could drop 14% for each5% fall in utilization hours.

    Valuation: Maintain Neutral rating and Rmb7.9 price target

    With long-term growth potential and downside risk to utilization hours fully priced in,in our view, we maintain our Neutral rating and Rmb7.9 price target (based on DCF,WACC 5.5%).