Maintain "Buy" but lower TP to HK$3.10. Given Datang Renewable's ("DTR" or the "Company") better-than-expected improvement in operational stats in 1H23, we raise our 2023-2025 EPS forecasts to RMB0.41 (+17.3%)/ RMB0.51 (+10.4%)/ RMB0.65 (+10.9%). We lower our TP from HK$3.40 to HK$3.10 (based on 7.0x 2023 PER), mainly reflecting the current prevailing valuation for renewable plays and our latest HKD/ RMB forecast of 0.92 for 2023 (previously 0.87).
Solid 1H23 results underpinned by operational improvement. In 1H23, DTR's revenue increased by 12.1% yoy to RMB6,976 mn. Shareholders' profit in 1H23 grew 2.8% yoy to RMB2,093 mn (if excluding the one-off gain in 1H22 related to the reversal of receivables impairment, the earnings growth in 1H23 would be approx. 11.5% yoy based on our calculation). DTR's solid 1H23 results were driven by considerable operational improvement. In 1H23, DTR's wind utilisation hours reached 1,258, up 97 hours yoy, with the curtailment rate dropping 1.83 ppt to 3.88%; solar utilisation hours reached 781, up 99 hours yoy, with the curtailment rate staying flat yoy at 2.81%; total power generation was 17,123,574 MWh, up 19.2% yoy, driven by both higher utilisation hours and a capacity addition of 1,158 MW (wind: 685 MW; solar: 473 MW) during the period. The strong operational improvement more than offset the decline in tariffs. DTR's 1H23 average tariff declined by RMB27.63/ MWh (or down 5.5%) yoy to RMB470.39/ MWh.
DTR's ongoing operational optimisation is a key driver for earnings growth, especially considering the room for improvement. Driven by ongoing operational optimisation, which involves whole process generation management and technical transformation, DTR's wind utilisation hours have been steadily improving since 2016. In 2022, while peers experienced considerable decline in wind utilisation hours due to prevailing poorer wind conditions, DTR managed to maintain its wind utilisation hours at 2,262 (flat vs. the historical high of 2,266 hours recorded in 2021). In 1H23, DTR's wind utilisation hours further improved by 97 hours to 1,258. Meanwhile, the room for operational improvement via repowering is considerable as DTR should have around 4.0 GW of wind capacity suitable for repowering by the end of 2025. Wind repowering, on average, can more than double the generation capacity and triple the power output of a repowered site.
What could be overlooked regarding DTR's capacity growth outlook? We believe DTR's capacity growth prior to 2022 was largely constrained by overly high IRR requirements as well as limited power delegated by China Datang Corporation when it comes to project development. These limiting factors are largely resolved under the parent group's new strategy of "Secondary Entrepreneurship", which is in line with China's dual carbon goals. In this lens, we believe DTR's 2023 capacity installation target of 1.5-2.0GW is rather conservative and its capacity growth could accelerate from 2023 onwards, especially considering the Company's improved cash flow and lower gearing.
Downside risks: Lower-than-expected power demand; higher-than-expected raw material costs; unfavourable changes of regulations and policies for IPPs; extreme weather conditions.