Yesterday, SPT Energy announced the establishment of a joint venture （JV） with state-owned XinjiangEnergy Group to cooperate on geothermal energy, coalbed methane, and oil & gas fields in XinjiangProvince, before expanding nationwide. SPT Energy contributed Rmb24.5m, representing 49% of theregistered capital of the JV. Given state backing, an improving order inflow, and our expectation of astrengthened financial position in the near future, we reiterate our positive view on the company. Assuch, we maintain our diluted EPS forecasts of Rmb0.06 in 18E, Rmb0.13 in 19E （+117% YoY）， andRmb0.17 in 20E （+30.8% YoY）。 We maintain our target price of HK$1.64, representing 22.0x 18E PEand 10.0x 19E PE. With 88.5% upside, we maintain our BUY recommendation.
Promising collaboration. Wholly state-owned Xinjiang Energy Group is primarily responsible forbiding for block exploration rights, while SPT Energy enjoys exclusivity for exploration contracts in theblocks Xinjiang Energy has access to. The business model of the JV combines the advantages of statebacking with the superior operational efficiency of a private company, enhancing the JV’scompetitiveness in public auctions for oil & gas blocks in Xinjiang Province, amid the efficiencyorientedupstream liberalisation reform. Thanks to its local connections, state-backed Xinjiang EnergyGroup has secured exploration rights for one block in public bidding in 2018, while we expect moreblocks to be open for auction under the current reform push. With more block exploration rightssecured, we see increasing domestic order inflow for SPT Energy.
Concrete move. We view the collaboration as a concrete move for SPT Energy to realise its expansioninto the state-owned enterprise （SOE）-dominated geothermal market. We forecast an annualinvestment of Rmb5.3bn to reach the targeted 15GW of hot dry rock （HDR） geothermal powergeneration capacity by 2050. With improved market access, facilitated by the collaboration withXinjiang Energy Group, combined with SPT’s technological advantages in HDR thermal wellcompletion, we believe SPT Energy will strongly benefit from the potential large Capex investment.
Financial benefits. Thanks to SOE backing, we believe a gradual decrease in borrowing cost ispossible. The borrowing cost of SOEs in renminbi can be as low as 4.5%, vs 6% for SPT Energy.According to our estimates, a 1ppt decrease in the firm’s average interest rate would increase our18E and 19E EPS forecasts by 2.5% and 1.3%, respectively, strengthening the company’s financialposition.
Maintain BUY. Given state backing, an improving order inflow, and our expectation of a strengthenedfinancial position in the near future, we reiterate our positive view on the company. As such, wemaintain our diluted EPS forecasts of Rmb0.06 in 18E, Rmb0.13 in 19E （+117% YoY）， and Rmb0.17 in20E （+30.8% YoY）。 We maintain our target price of HK$1.64, representing 22.0x 18E PE and 10.0x 19EPE. With 88.5% upside, we maintain our BUY recommendation.