China Suntien Green Energy: Initiating Coverage With HKD 3.92 Fair Value Estimate; Shares Undervalued

We are initiating coverage of China Suntien Green Energy 00956 with no-moat and stable moat trend ratings and a fair value estimate of HKD 3.92 per share. Trading at 2023 price/earnings of around 5 times, we think the shares are attractive currently, supported by decent five-year net profit CAGR of 9.6% and more than 6% dividend yield. As only about 10% of its subsidized renewable projects have yet to be included in the audited project list, we believe the impact from the ongoing subsidy audit should be limited. Meanwhile, given that the firm’s gas transmission tariff was cut in June 2022, we think further downside is unlikely in the near term.

We believe China’s goal to reduce pollution by increasing gas usage to 15% of the country’s energy sources by 2030, from below 10% in 2020, will support long-term demand growth for gas. Meanwhile, renewable energy should continue to receive support from the government, given China’s decarbonization goal. As such, Suntien plans to realize renewable installed capacity of 10 GW and natural gas transmission volume of 8.3 billion cubic meters by the end of the 14th Five Year Plan in 2025. We think the firm will be able to achieve its renewable capacity goal, as it still has 2.6 GW of approved renewable energy projects that haven’t commenced construction as of end-2022. We also expect the Tangshan LNG phase I project and supporting gas transmission pipeline projects to help Suntien increase its transmission volume.

As of the end of 2022, Suntien’s net gearing ratio was 156%, with net debt/EBITDA coverage of 4.8 times. We expect the firm’s financial leverage to remain high given the continuous investment in renewable energy projects, pipeline expansion, and the Tangshan LNG phase II project, but we think funding would not be an issue, given Suntien’s state-owned enterprise status.