Datang: potential value unlocking from coal chemistry business disposal
On 7 July 2014, Datang power announced that it has entered into the Reorganization Framework Agreement with China Reform Holdings Corporation (CRHC) for the proposed reorganization of the coal-to-chemical segment including 1) Duolun coal-to-chemical, 2) Keqi coal-to-gas, 3) Fuxin coal-to-gas, 4) Datang Fertiliser and 5) Xilinhaote Mining etc. Currently, there is no detail released on the terms of restructuring such as timing, price and stakes to be disposed. Nevertheless, on our preliminary thoughts, this could be positive news for the company on potential value unlocking, as the market has ascribed significant negative value to Datang's coal chemistry businesses (esp. Duolun) on prolonged project delay, capex overrun and lack of earnings visibility. For example, in 2013, Datang’s Duolun project incurs Rmb910m loss. As a result, Datang's share price has underperformed peers by 46%, 30% and 122% over the last 6, 12 and 36 months despite substantial earnings recovery for its power business. The disposal, if not at huge loss, could remove current value discount applied to Datang's power business and lead to NPV upside.
Coal chemistry – negative value implied by its share price
On our estimate, Datang's power business (including Ningde nuclear associate) will generate Rmb6.2bn net profit in 2015E. If we apply a 7x FY15E PE based on trading multiples of its IPP peers that have purer focus on power, Datang's NPV should be HKD4.2. Hence, the market price of HKD3.03 implies a negative value of HKD1.2 per share for Datang's non-power business, or a negative Rmb12.3bn equity value, versus Rmb13.7bn book equity value as disclosed in its FY13 annual report.
Scenario analysis on value unlocking
Given the pricing term unsettled, we have conducted some scenario analysis on the NPV impact from this potential disposal. Assuming the disposal is at 1) book value, 2) 0.5x book value and 3) free, we derive NPV per share of 1)HKD5.5, 2)HKD4.8 and 3)HKD4.2, respectively based on implied negative value by its current share price.
FY15E earnings and cashflow impact
Currently, we have incorporated earnings estimate of -Rmb0.69bn, Rmb0.55bn, and Rmb0.48bn for its Duolun, Keqi, Fuxin projects in 2015E, respectively. If the disposal is completed by end of 2014, our FY15E earnings would be reduced by 5.2ppt to Rmb6.2bn. However, trading multiple is likely to expand on the removal of coal chemistry project overhangs and clearer business focus on power. Also, capex in 2015 will come down by Rmb9.7bn, which would turn the company into a free cashflow positive position. Besides, potential asset injection of parent power business might be accelerated after the disposal. Here, we have not considered potential one-off non cash disposal loss related to this deal if these assets are sold at below appraised value.