Event: Keqi coal-to-gas price decided at Rmb2.75/cum, incl. VAT
The company announced that the gas selling price for its Keqi coal-to-gas project was decided at Rmb2.75/cum, incl. VAT, effective from 10 December 2013 until 31 December 2016. The announcement also mentioned that from 1 January 2017 onwards, the gas selling price can be adjusted according to the pricing and market conditions at that time.
Impact: Gas price in line with our estimates
We view this gas price announcement as positive because investors had been concerned about the profitability on its coal-to-gas projects in the past. The gas price was in line with our assumption of Rmb2.8/cum. At the Rmb2.75/cum gas selling price, we forecast the Keqi project to have a project IRR of 13%, and a net margin of 24% when it fully ramps up its production volume. We estimate the coal-to-gas businesses will account for 30% of Datang’s total earnings by 2016.
Action: Reiterate Buy; top pick in the IPP sector
Datang Power is our top pick in the Chinese IPP sector. We like its power business, because it will benefit from a benign coal price environment. We also think its coal-to-gas projects are profitable at the announced gas price, and the gas price announcement should be a positive catalyst because it removes the uncertainty on earnings visibility from its Keqi coal-to-gas project. Separately, we believe a coal-fired tariff cut could be a positive catalyst because it would improve earnings visibility.
Valuation: DCF-based price target of HK$4.8; Buy rating
Our price target is based on DCF, with explicit cash flow to 2017E, assuming a terminal growth rate of 5% at a terminal ROIC of 6.7%, discounted at 6.7% WACC.