China Power:Hydro VAT rebate could be extended,positive to Yangtze Power and SDIC

类别:行业研究 机构:德意志银行 研究员:Michael Tong,Hanyu Zhang,Luka Zhu 日期:2017-10-11

According to Energy News (See link), the NDRC is solicitating 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. Yangtze Power (100% hydro) and SDIC (57%hydro capacity mix) are key beneficiaries and we estimate the extended VATrebate would bring 10.2%/9.8% 2018/19E earnings upside for Yangtze Power and6.4%/6.2% 2018/19E earnings upside for SDIC. Reiterate Buy on both names.

    More details about the hydro power VAT policy

    According to “the Notice on VAT Policy on Large-scale Hydro Companies”released in 2010, hydro plants with a capacity of over 1GW will enjoy a preferentialVAT treatment: During 2013-15, VAT proportions of over 8% (out of the 17%)will be refunded; during 2016-17, proportions of over 12% will be refunded. Thenotice issued by NDRC this time proposes to cut VAT from 17% to 13% and toextend the VAT rebate (proportions of over 12%) to 2018-20. Among IPPs underour coverage, Yangtze Power (100% hydro) and SDIC (57% hydro capacity mix) arekey beneficiaries. But, CPI (25% hydro) and Datang (17% hydro) can also benefitfrom the favorable VAT policy.

    We estimate a 10%/6% earnings boost for Yangtze/SDIC over 2018-19

    In our model we have conservatively assumed the VAT rebate to terminate at end2017and no rebate will occur afterwards. We estimate the extended hydro rebatewould bring 10.2%/9.8% 2018/19E earnings upside for Yangtze and 6.4%/6.2%2018/19E earnings upside for SDIC. Besides, the benchmark VAT was lowered to13% from 17%, which is also positive to long term earnings outlook. We reiterateBuy on Yangtze and SDIC. Besides the VAT rebate policy, both names may alsobenefit from a potentially higher hydro tariff for their inter-provincial power salesfollowing the thermal tariff hikes.

    Valuation and risks

    We value Yangtze/SDIC using DCF with WACC of 7.3%/7.0% and zero TCR.Key risks: water flow uncertainties, volatility in associates’ earnings/investmentincome.

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