Yangtze Power:A high-yield hydro play with upside from thermal tariff hike

类别:公司研究 机构:德意志银行 研究员:Michael Tong,Hanyu Zhang 日期:2017-09-12

Yangtze reported in-line 1H17 results with net profit up 7% yoy. Yangtze will enjoya higher tariff for its inter-provincial power sales in 2H17 thanks to a thermal tariffhike in July. Furthermore, it may also benefit from another round of thermal tariffhikes at year end. The company also has further room for financial cost savingsas the mgmt aim to lower their debt/asset ratio to 30%. We maintain Buy onYangtze due to its unique dividend commitment supported by highly predictablecash flows which generate a an attractive 4.3% 2017E yield.

    1H17 results in line.

    Yangtze's net profit was up 7% yoy to Rmb8.1bn in 1H17, in line with our forecast.

    The growth is mainly driven by cost savings (SG&A -18% yoy; financial cost -13%yoy) and investment gains (+82% yoy), partially offset by weaker net output (-4%yoy). Generation declined in Three gorges (-11%) and Gezhouba (-4%) due to weakwater flows and slightly increased in Xiluodu and Xiangjiaba (+4%). Free cashflow reached Rmb10bn in 1H17.

    Key takeaways from conference call.

    Tariff: Mgmt expect a higher tariff in second half for their inter-provincial powersold by Xiluodu and Xiangjiaba to Shanghai and Guangdong thanks to the thermaltariff hike on 1 July. There is further room for tariff hikes if the fuel cost passthroughfor thermal plants is executed at year end.

    Power output: Mgmt expect full-year output to reach 191-200 bn kwh. Thegeneration was impacted by a typhoon in July-Aug but has started to recover inSept. Market-based volume is expected to rise over the next few years.

    Capital structure and financial cost: Mgmt plan to use cash flow for debtrepayment as they do not have major M&A plans currently. Mgmt expect thedebt to asset ratio to decrease from the current 59% to 30%, after which Yangtzemay consider M&A and raise the debt to asset ratio to 60% again. Mgmt arecomfortable with a debt ratio of 42-55% . In 1H17, the average interest rate was4.2% and mgmt expect it to increase mildly to 4.35% in 2H17.

    Capex: Yangtze does not have a major M&A target for now but expects to acquiresome hydro/power retail assets related to its core business. Mgmt are also lookingfor potential targets overseas and the company has gained experience via a 288MW wind power acquisition in Germany. Over 2018-19, the company hasbudgeted for Rmb10bn capex each year.

    Other key takeaways: Yangtze will continue to use investment income to smooththe earnings volatility driven by water flows fluctuations.

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