China National Nuclear Power:Mediocre performance in H1amid falling nuclear utilization

H116 net profit up 1% YoY, well below installation growth

    CNNP released its H116 results: net profit was Rmb2.5bn (+1.0% YoY) and revenuewas Rmb14.13bn (+9.6% YoY). On a YoY basis, H1 revenue and net profit growthboth trailed the installation growth rate of 17.8%, which we mainly attribute to a YoYdrop in the utilization of nuclear units.

    Mediocre performance in H1 on lower utilization of nuclear units

    Data released earlier by CNNP showed total power generation volume was 40.4bn kWhin H116, up 10.2% YoY. However, given installation growth of 17.8% YoY, well abovepower generation growth, we believe the utilization of CNNP's nuclear units fell sharplyYoY. We estimate that excluding the impact of newly commissioned units, CNNPcontrollednuclear units had average utilization of 3,625 hours in H116, down 4.5%from H115's 3,795 hours. Meanwhile, national nuclear utilization hours averaged3,335, down 5.2% YoY (H115: 3,519). CNNP's gross margin contracted to 43.5% inH116 from 47.2% in H115, dragged by falling utilization.

    Overall nuclear utilization is likely to remain under pressure in H2

    We see a mixed impact from guaranteed nuclear utilization hours, with impliedguaranteed utilization hours lower than current actual operating hours in someprovinces, although a related policy could be implemented in the near future (see our10 Aug company note, Mixed impact likely from guaranteed nuclear utilization hours).Further, we believe the main factors driving nuclear utilization declines remain intact (apower demand slowdown, good water inflow for hydropower, faster new energyinstallation, etc.). Therefore, we expect nuclear utilization to remain under downwardpressure in H2. Based on our sensitivity analysis, a 5% drop in utilization hours wouldlead to respective 15%/14% declines in CNNP's 2016/17 net profit.

    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%).