China Resources Power 836 HK
March 22, 2010 - 9:48am EST by
wolffox
2010 2011
Price: 16.90 EPS $1.17 $1.70
Shares Out. (in M): 4,686 P/E 14.4x 9.9x
Market Cap (in M): 10,165 P/FCF 13.6x 8.0x
Net Debt (in M): 6,438 EBIT 955 1,155
TEV: 16,603 TEV/EBIT 17.4x 14.4x

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Description

China Resources Power (CRP) is an independent power producer in China and the best managed power generation company amongst its peers.   It has 17.5 GW of attributable capacity most of which are from its coal power plants.  It also has hydro and wind power assets, and coal mining assets.  What is misunderstood about the stock is its future contribution from coal assets which street analysts are not modelling in yet.

The investment thesis is simple.  Current stock price is HK$16.9 and 2009 EPS which has just been announced is HK$1.17.  Ignoring future earnings from its coal assets , you are paying 14x trailing EPS for a company which is growing its power earnings by 15% per year.  However, what has not been factored into analyst estimates are earnings from its coal assets which will start contributing meaningfully in 2010 (adding incremental EPS of HK$0.35) and ramp up even further in 2011 .  Factoring the coal earnings, you are paying 10x P/E for the best run power company in China. 

I think the stock is worth 15x 2010 P/E which is equivalent to 50% upside.

Coal assets

Luliang Mine (they have 51% share)

They expect to produce 9mil tonnes of coal from their Luliang mine in 2010 (of which 40% is coking coal, and 60% is thermal coal).  Based on ASP for coking and thermal coal of RMB 600/tonne and RMB 450/tonne, and all-in production costs of RMB 220/tonne (given by Management), and using a 25% tax rate, you'll get an additional RMB1billion worth of profits.

Calculation

Additional PBT = (40%*9mil*(600-220)) + (60%*9 (*(450-220)) = 1368+1242 = RMB2610mil.

After 25% tax, this is an additional 1975mil of profits.

Therefore, their 51% stake is equivalent to RMB998mil of profits or incremental EPS of HK$0.24 per share.

Jiangsu and Henan mine (most are 100% owned)

In addition to the Luliang coal production, they also have an additional 4.5mil tonnes  of thermal coal production from their Jiangsu and Henan mines.  Applying the same RMB450/tonne ASP for thermal coal and production cost of RMB 220/tonne, means they get RMB 230/tonne of profits.  Again, based on 25% tax rate, this is equivalent to an additional net profit of RMB450mil or EPS of HK$0.11

2010 EPS 

2009 EPS was HK$1.17.  Power earnings expected to go up 15% (driven by 20% capacity increase, utilisation rate increases in 2010 as 2009 utilisation rate was weighed down by 1H09 recession, offset by ebitda margin erosion from 10% higher fuel costs).

Therefore 2010 power EPS is HK1.17*1.15 = HK$1.35.

Add in the additional coal earnings of HK$0.24 (from Lulian) and HK$0.11 (from Jiangsu and Henan), and you get to 2010 EPS of HK1.70 (i.e. 9.9x 2010 P/E)

10x P/e is a very attractive valuation for the best power company in China run by one of the best management teams.  Just to share some statistics as to why this company is so much better than its peers. Consider that even in 2008 (when power demand collapsed and fuel prices were at a record high) CRP managed to generate 23% ebitda margins and net margins of 6% when its peers were loss making.  Also consider that in 2009, CRP's utilisation rate was 20% higher than the industry's.  This means that at whatever power tariff price, CRP is able to generate higher profits per MW of electricity sold. 

Further upside (currently not factored in)

 Further upside will come from tariff increases (which are not in the above numbers).  It is quite plausible that the govt will have to implement tariff increases since most of CRP's peers are still loss making (eventhough CRP is generating very good profits).  Tariff increases will flow right to the bottom line and result in even higher EPS growth (due to operating leverage).

How silly are street estimates?

Consensus mean estimate is HK$1.20 for 2010 implying only flat growth for 2010 vs 2009.  This is unrealistic given 1) capacity increases of 20%; 2) utilisation increases; and 3) ramping up of new plants that only started in 2009; and finally 4) the coal profit contribution.

 

Catalyst

- Analyst updating their numbers and incorporating coal profit contribution once they see that the coal assets are really ramping up production.

- Market starting to appreciate that this company is NOT just a boring power company (currently an unloved sector) but one whose power earnings are increasing and one that provides further exposoure to coking and thermal coal earnings.  

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    Description

    China Resources Power (CRP) is an independent power producer in China and the best managed power generation company amongst its peers.   It has 17.5 GW of attributable capacity most of which are from its coal power plants.  It also has hydro and wind power assets, and coal mining assets.  What is misunderstood about the stock is its future contribution from coal assets which street analysts are not modelling in yet.

    The investment thesis is simple.  Current stock price is HK$16.9 and 2009 EPS which has just been announced is HK$1.17.  Ignoring future earnings from its coal assets , you are paying 14x trailing EPS for a company which is growing its power earnings by 15% per year.  However, what has not been factored into analyst estimates are earnings from its coal assets which will start contributing meaningfully in 2010 (adding incremental EPS of HK$0.35) and ramp up even further in 2011 .  Factoring the coal earnings, you are paying 10x P/E for the best run power company in China. 

    I think the stock is worth 15x 2010 P/E which is equivalent to 50% upside.

    Coal assets

    Luliang Mine (they have 51% share)

    They expect to produce 9mil tonnes of coal from their Luliang mine in 2010 (of which 40% is coking coal, and 60% is thermal coal).  Based on ASP for coking and thermal coal of RMB 600/tonne and RMB 450/tonne, and all-in production costs of RMB 220/tonne (given by Management), and using a 25% tax rate, you'll get an additional RMB1billion worth of profits.

    Calculation

    Additional PBT = (40%*9mil*(600-220)) + (60%*9 (*(450-220)) = 1368+1242 = RMB2610mil.

    After 25% tax, this is an additional 1975mil of profits.

    Therefore, their 51% stake is equivalent to RMB998mil of profits or incremental EPS of HK$0.24 per share.

    Jiangsu and Henan mine (most are 100% owned)

    In addition to the Luliang coal production, they also have an additional 4.5mil tonnes  of thermal coal production from their Jiangsu and Henan mines.  Applying the same RMB450/tonne ASP for thermal coal and production cost of RMB 220/tonne, means they get RMB 230/tonne of profits.  Again, based on 25% tax rate, this is equivalent to an additional net profit of RMB450mil or EPS of HK$0.11

    2010 EPS 

    2009 EPS was HK$1.17.  Power earnings expected to go up 15% (driven by 20% capacity increase, utilisation rate increases in 2010 as 2009 utilisation rate was weighed down by 1H09 recession, offset by ebitda margin erosion from 10% higher fuel costs).

    Therefore 2010 power EPS is HK1.17*1.15 = HK$1.35.

    Add in the additional coal earnings of HK$0.24 (from Lulian) and HK$0.11 (from Jiangsu and Henan), and you get to 2010 EPS of HK1.70 (i.e. 9.9x 2010 P/E)

    10x P/e is a very attractive valuation for the best power company in China run by one of the best management teams.  Just to share some statistics as to why this company is so much better than its peers. Consider that even in 2008 (when power demand collapsed and fuel prices were at a record high) CRP managed to generate 23% ebitda margins and net margins of 6% when its peers were loss making.  Also consider that in 2009, CRP's utilisation rate was 20% higher than the industry's.  This means that at whatever power tariff price, CRP is able to generate higher profits per MW of electricity sold. 

    Further upside (currently not factored in)

     Further upside will come from tariff increases (which are not in the above numbers).  It is quite plausible that the govt will have to implement tariff increases since most of CRP's peers are still loss making (eventhough CRP is generating very good profits).  Tariff increases will flow right to the bottom line and result in even higher EPS growth (due to operating leverage).

    How silly are street estimates?

    Consensus mean estimate is HK$1.20 for 2010 implying only flat growth for 2010 vs 2009.  This is unrealistic given 1) capacity increases of 20%; 2) utilisation increases; and 3) ramping up of new plants that only started in 2009; and finally 4) the coal profit contribution.

     

    Catalyst

    - Analyst updating their numbers and incorporating coal profit contribution once they see that the coal assets are really ramping up production.

    - Market starting to appreciate that this company is NOT just a boring power company (currently an unloved sector) but one whose power earnings are increasing and one that provides further exposoure to coking and thermal coal earnings.  

    Messages


    SubjectRE: Interesting
    Entry05/10/2010 09:01 AM
    Memberwolffox
    thanks for your question.  Yes, they get paid the same tariffs as their peers and labour and coal costs are similar but their real source of their margin advantage is in managing their utilisation to be at a higher rate than peers consistently, and managing their non-fuel costs (eg. maintenance costs). 
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