CGN Power Earnings: Slight Miss in Otherwise Solid Power Generation Growth; Shares Undervalued

We maintain our fair value estimate of HKD 2.24 for CGN Power 01816, despite a slight miss in its third-quarter 2023 results. Our earnings forecasts are largely unchanged, and we think the shares are attractive currently, trading at around 0.7 times price/book with about 6% dividend yield for 2024. We estimate CGN’s net profit to grow at a five-year CAGR of 7.2% over our explicit forecast period, underpinned by its stable nuclear power operations.

CGN’s cumulative nine months of revenue in 2023 rose 2.4% year on year to CNY 59.8 billion, while recurring net profit rose 13.0% to CNY 9.7 billion. Total on-grid power generation from subsidiaries was up 11.3%, driven by higher utilization hours and the commencement of Fangchenggang Unit 3 on March 25. Meanwhile, on-grid power generation from associates increased by 20.1%, due to the commencement of Hongyanhe Unit 6 in June 2022. Nonetheless, third-quarter recurring net profit was down by 4.3% year on year to CNY 2.7 billion. We think the weakness is attributable to: 1) a lower market-based tariff because of falling coal prices; 2) a drop in power generation from Hongyanhe nuclear power station due to outages for the quarter; and 3) a decrease in other gains on the back of slower collection of value-added tax rebate. On a positive note, CGN continues to benefit from lower domestic borrowing rates, with cumulative nine-month finance costs falling by 15.8% year on year.

In the longer term, we expect CGN to add another seven nuclear power-generating units during 2024-28, with Fangchenggang Unit 4 expected to commence operation in the first half of 2024. We think this pipeline indicates a stable capacity addition, which helps CGN’s earnings visibility. According to CGN, the newly approved Ningde Units 5 and 6 are currently in the preparation phase. The firm’s cumulative nine-month operating cash flow increased by 11.0% year on year to CNY 27.0 billion, and this should continue to support CGN’s capacity expansion, in our view.