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CH ENERGY ENG (3996.HK) - Exceed intended newly signed contracts, proportion of non-power business further increase

Tuesday, February 04, 2020 Views1208
Recommendation on  4 February 2020
Recommendation Accumulate
Price on Recommendation Date $0.910
Target Price $1.080

Newly Signed Contracts Updates in 2019

In 2019, the value of newly signed contracts of the company amounted to RMB520.398 billion, representing 108.3% of the value of the intended new contracts for the year with a YoY increase of 12.65%. Among them, in terms of geographical location, the value of newly signed domestic contracts amounted to RMB366.407 billion, accounting for approximately 70.41% of the total value of newly signed contracts with a YoY increase of 14.56%, whereas the value of newly signed overseas contracts is equivalent to RMB153.991 billion, accounting for approximately 29.59% of the total value of newly signed contracts with a YoY increase of 8.35%. Among them, in terms of business segments, the value of newly signed contracts of the power business amounted to RMB300.016 billion, accounting for approximately 57.65% of the total value of newly signed contracts with a YoY increase of 7.79%, whereas the value of newly signed contracts of nonpower business amounted to RMB220.381 billion, accounting for approximately 42.35% of the total value of newly signed contracts with a YoY increase of 20.02%. As a summary, the proportion of newly signed contracts for non-power business further increased, while the proportion of newly signed contracts for international business decreased slightly. We believe that it will benefit the performance of gross profit margin and further accelerate the transformation of domestic business to the non-power market.

In 2019, the subsidiaries of the company have obtained 1,424 licensed patents from National Intellectual Property Administration, increasing 144 patents compared with last year; among which, 204 are licensed invention patents, decreasing 25 patents compared with last year. As at the end of 2019, the company owns a total of 9,272 valid patents, among which, 1,717 are licensed invention patents. The number of valid patents in the company has increased significantly in the past four years, from 6,766 in 2016 to 9,272 in 2019, with an average annual growth rate of 11.07%. Among them, the number of valid invention patents has increased from 968 in 2016 to 1,717 in 2019, with an average annual growth rate of 21.05%. The company's continued increase in R&D investment and the application of effective patents can help the company continuously overcome technical difficulties, effectively occupying the industry's commanding heights, and continuing to bring significant economic and social benefits to the company.

According to the National Bureau of Statistics, the cumulative annual growth rate of China's fixed asset investment was 5.4% in December 2019, increasing 0.2% MoM, maintaining moderate growth. However, the current downward pressure on the economy is increasing, government is expected to continue introducing relevant policies to increase the infrastructure investment to drag the bottom of the economy. In addition, the monetary policy remains stable and loose, which will benefit the development of the infrastructure sector. We expect that the new contract value of the company will continue to grow steadily.

Signed strategic cooperation agreements with China National Nuclear Corporation to promote business transformation and development

In January 2019, the company and China National Nuclear Corporation have entered into a strategic cooperation framework agreement. Both parties unanimously agreed to establish a comprehensive strategic co-operative partnership in various aspects such as planning of power and nuclear power projects in China, optimization of the design of nuclear power, cooperation in international market, research, development and manufacturing of nuclear power equipment and relevant equipments, engineering construction of nuclear power and new energy projects, capital cooperation, technology consulting as well as human resources cooperation. The two parties would fully utilize their respective advantages in various aspects such as technology, capital, talents, management, market and resources, achieving a win-win situation with mutual benefits and joint development. Entering into the strategic cooperation framework agreement is beneficial to further strengthen the cooperation of both parties, broaden the scope of their cooperation and enhance the level of their cooperation, which will have a significant impact for the company to further explore new markets and enhance its high quality development.

China National Nuclear Corporation is mainly engaged in scientific research, development, construction, production and operation in the fields of nuclear military industry, nuclear power, nuclear fuel cycle, nuclear technology application, nuclear environmental protection engineering, and foreign economic cooperation and import and export business. It is the major investor in nuclear power construction, nuclear power technology development entity, and most important nuclear power design and engineering general contractor, nuclear power operation technology service provider, and nuclear power plant exporter, domestic nuclear fuel cycle franchise supplier, nuclear environmental protection engineering professional and backbone of nuclear technology applications.

Adjust TP to HKD 1.08, maintain "ACCUMULATE" rating

We adjusted target price to HKD 1.08, corresponding to FY19/FY20/FY21 6.45x/6.04x/5.72x PE, which was +18.68% higher than the current price (HKD 0.91 as of January 31, 2020), maintaining “ACCUMULATE” rating.


International business fails expectations; China infrastructure investment fails expectations; China electricity investment fails expectations; Policy risk.


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