China Resources Power’s 2022 Results Disappoint; Potential Listing of Renewable Segment a Positive

China Resources Power’s 00836, or CR Power’s, 2022 net profit rose significantly to HKD 7.0 billion from HKD 2.1 billion in 2021 on the back of lower loss from its thermal power segment. However, this is below our expectation due to higher-than-expected coal costs. We expect earnings from the thermal power segment to further improve in 2023 given falling coal prices and a higher volume sourced from long-term lower-priced coal contracts. After rolling forward our earnings forecasts and considering the stronger Chinese yuan, we raise our fair value estimate to HKD 22.00 from HKD 20.50. We think CR Power is undervalued, with recovery in profitability and the pending listing of its renewable energy segment likely to support share price performance.

CR Power’s 2022 key generation numbers were in line with our expectations. We think the key highlight is the firm’s plan to spin off its renewable segment (solar and wind) through China Resources New Energy Group, or CRNEG, in the A-share market. CRNEG will remain as a subsidiary of the firm. While limited details were given, we are positive on this proposal as it could help the firm to fund its aggressive expansion plans and take advantage of the higher valuations for renewable energy stocks in the A-share market.

CR Power’s net gearing ratio (excluding perpetual capital) deteriorated to 159% as of end-2022 from 142% a year ago due to high capital expenditure. In 2023, the firm plans to raise capital expenditure by 28% year on year to about HKD 45 billion (68% for renewable projects). Although 2022 grid-connected renewable capacity addition of 3.3 gigawatts was disappointing due to COVID-19 disruptions and higher solar module costs, the firm aims to add 7.0 GW in 2023. Hence, we think the proposed A-share listing is crucial for the firm, given the stretched balance sheet. On a positive note, CR Power’s average borrowing cost remains well-managed and was flat at 3.2% in 2022.