Bocom International - China Resources Power (836 HK)| Recent weakness in thermal coal will accelerate earnings recovery

1. Since the beginning of the year, more than 400 MW of wind power has been connected to the grid, and about 300 MW of wind power installed capacity has been completed.

2. We estimate that CR Power's fuel costs will decline by an average of 6% annually in 2023, and the thermal power segment will turn a loss to a profit of about HK $1 billion for the full year.

3. Valuation of the company's new energy business at 10x 2023 P/E, and raise the valuation of thermal power from 0.6x 2023 P/B to 0.75x, and raise the target price to HK $22.30

Operation has been in line with expectations since the beginning of the year. We recently spoke with the company about recent operations. Year-to-date operations are in line with expectations. Since April, thermal power generation has rebounded with the economy. Thanks to new installations, wind/PV capacity increased by 20%/44% year-on-year between January and April. According to our statistics, the company has added more than 400 MW of wind power to the grid so far this year, and about 300 MW of wind power installed capacity has been completed.

Thermal power sector earnings upward certainty stronger. We believe the recent decline in coastal coal prices was the biggest catalyst for the company in Q2. The port spot price of 5,500 kcal thermal coal has fallen from $1,000 per ton since mid-May to the current level of $790 per ton, mainly due to the surge in thermal coal imports so far this year, coal imports rose 89% year-on-year from January to April, coupled with the competitive price of imported coal, which is close to the port coal price. Therefore, we do not rule out the port coal prices in the short term back to the NDRC guidance range of 570 to 770 per ton. At the same time, we also expect that under the background of weak spot price of thermal coal, it will be beneficial to improve the performance rate of thermal coal chief executive Association. As a result, we estimate that CR Power's fuel costs will decline by an average of 6% annually in 2023, and the thermal power segment will turn a loss to a profit of about HK $1 billion for the full year.

In 2023-25, the new installed capacity will exceed 20 gigawatts. Looking ahead to new installations in 2023-25, we think the company will start to accelerate this year. We expect the company to add 6.5 GW of wind/light installations this year, and the proportion of PV will be slightly higher than wind. The company remains on track to add 40 GW of wind installations in the 145th Five-Year period, and we expect the company to add at least 7/8 GW of wind/light installations in 2024/25. Compared with the company's construction target/project record of more than 16/25 GW at the end of last year, our estimate of new installed capacity is still within a reasonable range.

Valuation uncertainty has been removed. Since the company's decision to spin off its wind and photovoltaic operations back to A in March, we believe the uncertainty limiting the company's valuation has eased. According to the segment valuation method, we re-valued the company's new energy business at 10 times the 2023 P/E ratio, and raised the thermal power valuation from 0.6 times the 2023 P/B ratio to 0.75 times to reflect the improved profitability of the sector. We raise our target price to HK $22.30 (from HK $18.12) and maintain our buy rating.