What's changed
We reiterate Neutral ratings on Datang H-/A-shares. Our key concern remainsits chemical projects, which have been beset by repeated operational delaysdue to several reported negative technical surprises. On 2013 results, revisedforecasts in power and coal/chemical units, we raise 2014E EPS by 6%, finetune2015E EPS, and introduce 2016 estimates. We lower our 2014E target P/Emultiple for H-/A-shares to 9X/14X from 10X/16X to reflect higher carbon risksand prevailing shrinking A-share premium trend. We lower 12-month P/Ebasedtarget prices by 5%/8% to HK$3.8/Rmb4.6.
Implications
For 2014, we now assume the next potential coal-fired tariff cut to be 3%effective July 1 (formerly 1%, April 1). We expect unit coal costs to fall by 3%yoy (previously flat) and same-plant coal-fired utilization to rise by 1% yoy.
For Datang’s chemical unit, we expect more complications into 2015 beforemore steady operations and better economies of scale. For newly operationalprojects, greater full-year depreciation and interest costs (with less capitalizedinterests) would call for higher and more regular outputs to yield profits. 2013revenue almost doubled but the two aforementioned fixed costs rose by about15 times yoy, resulting in Rmb2.2bn segment loss (2012 profit: Rmb0.1bn). Wethink its Duolon project (coal to polypropylene, Rmb26bn invested) strives toraise output quality and quantity. The several reported incidents in its Keqiproject (coal to gas, Rmb26bn budget) could further delay full operations foritself and Fuxin project (coal to gas, Rmb32bn budget). For its coal unit, westill see difficulty arising from oversupply in China; 2013 segment profit fell by73% yoy with a much lower profit margin (to 11% from 28% in 2012). Hence,we think asset impairment is a potential downside risk to near-term profits.
Valuation
On our 2014 estimates, Datang (H) trades at 8X P/E (2013-2016E EPS CAGR:17%), 0.7X P/B (10% ROE, below peer average 14%), and 6% dividend yield.
Key risks
Higher-/lower-than-expected spark spread and coal/chemical profits.