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China Resources Power (836): Capacity growth enhanced by acquisitions

Thursday, June 7, 2007

5187

China Resources Power(836)

Recommendation on 7 June 2007
Recommendation	Buy
Price on Recommendation Date	$15.700
Suggested purchase price	$15.500
Target Price	$17.400

Weekly Special - 000157.SZ Zoomlion

Yangzhou acquisition enhances the growth

China Resources Power (836) (CRP) announced 2 acquisitions within a week. Last week, CRP acquired 45% interest of Yangzhou No.2 power plant that is located in Jiangsu Province and consists of two 600MW coal-fired generation units. The attributable installed capacity of CRP would be increased by 540MW from this acquisition. The profit after taxation and extraordinary items were RMB170 million and RMB109 million in 2005 and 2006 respectively. The acquisition price is RMB1,806 million and the acquisition price-to-earning ratio (P/E) is 36.7x. The management is confident to increase the earning of Yangzhou No.2 significantly to RMB400 million in 2007. This acquisition would enhance the capacity and earning growth.

Low acquisition price for Xingtai

Two days ago, CRP acquired 44.7% interest of Xingtai. Xingtai power plant is located in Hebei Province and consists of six 220MW coal-fired generation units. The attributable installed capcity of CRP would be increased by 590MW from this acquisition. The profit after taxation and extraordinary items were RMB18 million and RMB98 million in 2005 and 2006 respectively. The acquisition price is RMB530 million and the acquisition price-to-earning ratio (P/E) is 12.7x. The acquisition price is low. However, it is worth noting that the generation units are old and small. They started commercial operation from 1985 to 1992. As a result, the average coal consumption would probably higher than average of CRP.

Healthy debt ratio

The acquisitions would be mostly funded by bank debt. Therefore, we expect the net debt to equity ratio would be increased from 90.3% in 2006 to 120% in 2007. The debt ratio is still healthy and lower than the peers’ average.

Net generation rose significantly

The net generation of CRP increased 60.8% in first 4 months of 2007. The rapid growth was driven by the new power plants and the power shortage in some provinces. The power shortage in Guangdong reduced the utilization decline rate of CRP. The net generation of Shajiao C power plants located in Guangdong rose by 26.6% in the first 4 months in 2007. We expect the utilization rate of CRP would be at the trough in 2007.

Conclusion

Although the 07 P/E of CRP is 20x that is not low, the capacity growth and earning growth would be rapid in the coming years. We maintain “Buy” rating.

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