Bottom line suffered from FX loss. GNE’s solar farm assets continued to havestable performance in FY18. Solar power generation surged 45.2% YoY to7,611GWh with utilization hours remained stable at 1,290 hours, leading topline growth with 42.9% YoY. Other expenses exhibited a surge to RMB353mn,due to RMB405mn non-cash FX loss from US$500mn bond issuance in Jan 2018. The FX loss was substantially higher than our estimates, which led to a drag onGNE’s bottom line. Net profit declined by 44.2% to RMB470mn, as a result. Ifthe FX drag was reverted, we estimate core earnings would be RMB875mn,representing a core earnings growth of 14.5% YoY.
Mgmt. maintained deleveraging at top priority. GNE had enforced solar farmassets disposal as core strategy in 2018. The execution was somewhat set backdue to government’s sudden policy break through “5.31” policy. In 2018, GNEmanaged to sell 333MW solar farm assets, of which 160MW was sold to CGNgroup and 140MW was sold to Three Gorges New Energy. GNE emphasized itssolar farm assets quality, and mgmt. expressed that GNE’s sizable asset packagewould be attractive in the market comparing with other small scale PV farmasset pending for sale. The Company had 7,043MW consolidated solar farmassets by 2018, and mgmt. is seeking to sell 3-5GW assets to SOE partners. GNEintended to reduce liability to asset gearing from 84.1% by end-2018 to below70% by end-2019.
Reshaping business model to asset light development. As GNE’sdeleveraging is still on going, we expect GNE will cease new projectdevelopment, and mgmt. expressed the Company will twist projectdevelopment mode from holding assets to holding minority shares plusproviding services to SOE partners through grid-parity project development aswell as existing project management. Looking forward, GNE will generate lesspower generation income, but have more assets management fee. Givenincreasing requirement for project scale and funding cost from grid-paritypressures, we believe GNE’s transformation is to cater future developmenttrend. The change will bring along some uncertainties, however, as we estimateGNE’s power generation revenue to decline with assets disposal, while its pathsfrom management income and joint project development are not yet clear.
Waiting for change in balance sheet. Based on assumption that GNE willmove 1.5GW assets off balance sheet p.a. in 2019-21E, we estimate gearing willdecline from 84.1% by end-2018 to 69.9% by end-2021. We also expect GNEwill have lower interest costs and total borrowing scale, but bottom line mayalso exhibit shuffle due to less capacity consolidation. We trim FY19/20E EPSby 23.0/32.7% to RMB4.7/4.0 cents. Our revised DCF valuation suggests a TP ofHK$0.36 per share. Maintain HOLD.