Longyuan Power has been trailing behind HSCEI YTD, as multiple concerns weigh on investor sentiment. We note that the divergent renewable tariff schemes across provinces are not helping to reduce end-user electricity costs, and certainly not ideal for China’s renewable ambitions. Other negatives for renewable operators, such as REF deficit and repowering impairments, are largely in the price as Longyuan is trading at -1.4SD P/E and -1.5SD P/B - both near historical trough. We cut LYP’s 2024-25 earnings forecasts by 11-14%, and lower DCF-based TP to HK$10.80, but believe the stock is becoming attractive and worth revisiting. Reiterate BUY rating.
　　Key Factors for Rating
　　Fundamental woes sufficiently priced in. The three major drivers behind LYP’s underperformance are 1) subsidy delay; 2) tariff and curtailment pressure; 3) impairment from repowering works. We reckon that 1) China’s faster-than- expected power demand growth bodes well for REF income; 2) tariff and curtailment concerns are real in short-term, but could be alleviated by policy support and construction of UHV lines and new demand centres in the norther region; 3) the RMB1.5bn repowering impairment are provisions for 2024-25 period, thus reducing risks of further impairment. The benefits of repowering will help to enhance LYP’s profitability in the long run.
　　Understanding the realities behind tariff pressure. The nationwide average 5M24 grid-agent power tariff, a proxy of blended on-grid tariff, is down 3.7% or RMB15.6/MWh compared to 2023 level, which is smaller than the RMB20-25/MWh capacity tariff introduced in 2024. It appears the vast increase in grid-parity project and decline in renewable tariff have not been fully benefiting downstream consumers, and policy response is needed to address this issue, in our view.
　　Repowering to bring long-term benefits. As discussed in our previous report in Oct 2022, repowering will enhance LYP’s long-term ROEs despite short- term impairments from dismantling old turbines. According to the management, the Dabancheng repowering project’s utlisation hour reached 3,700, meeting our prior case study estimates and reinforces the importance of proceeding the repowering work for LYP, in our view.
　　Valuation
　　Maintain BUY rating with a new TP of HK$10.80. We cut LYP’s 2024-25E earnings by 11-14% to reflect lower capacity addition and tariff assumptions. LYP is curfrently trading at 6x P/E and 0.6x adjusted P/B - close to historical trough when sentiment was most adverse for renewable operators in 2015 and 2020. We believe its risk-reward profile is attractive as further downside risks are limited, reiterate BUY rating.